Impact of Nigerian Capital Market Capitalisation on the...

Proceedings of the Second Middle East Conference on Global Business, Economics, Finance and Banking (ME15Dubai Conference) ISBN: 978-1-941505-26-7

Dubai-UAE, 22-24 May, 2015 Paper ID: D543

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www.globalbizresearch.org

Impact of Nigerian Capital Market Capitalisation on the Growth of

the Nigerian Economy

Zainab Dabo,

Faculty of Social and Management Sciences,

Department of Business Admistration,

Kaduna State University, Nigeria.

E-mail: [email protected]

___________________________________________________________________________

Abstract

The study examines the impact of capitalization of the Nigerian capital market and it’s on the

growth of the Nigerian economy. The paper employs annual time series data from 2001 to

2012(12 year period) collected from various issues of Central Bank of Nigeria’s Statistical

Bulletin and Annual Report and statements of Accounts of Nigeria Stock Exchange. A

regression analysis was adopted in computing the interaction between the capitalization of

the Nigerian capital market and Nigeria’s economic growth. The empirical results showed

that, there was unidirectional causality between capitalization of the stock market and

economic growth, which ran from economic growth (GDP) to capitalization of the stock

market (MCAP) at 5 percent significant level. The paper concludes that the Nigerian capital

market needs to create more confidence to investors, especially in terms of transparency and

accountability, for sustainable and increasing capitalization necessary for sustainable

economic growth in the country. Furthermore, the paper recommends expansion of the

Nigerian Stock Market by the government creating an enabling investable environment, that

will increase both the volume of transactions and number of stocks traded in the market. This

will improve their ability to mobilize resources and efficiently allocate them to the most

productive sectors of the economy.

___________________________________________________________________________

Keywords: Capitalisation, Economy, Growth, Stock Market, Sustainable.

mailto:[email protected]



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1. Introduction

Financial system has long been recognized to play an important role globally in bringing

about bringing about economic development of different countries. This recognition dates

back to the period of the 1950s. For instance, researchers such as Goldsmith (1955), Cameron

(1967), Mckinnon (1973) and Shaw (1973), have demonstrated that financial system could be

a catalyst of economic growth and sustainable development if it is well harnessed and

developed. On the other hand Fergusson (2006) views financial markets as the single sector

most important market in which many economic institutions exist. This is because of the

financial link and contract in the sector which has the channels of short and long term sources

of fund which gives rise to a better consolidated financial market.

Reforms (including banking sector consolidation) are predicated upon the need for

reorientation and repositioning of an existing status quo in order to attain an effective and

efficient level of operation. There could be fundamental bottlenecks that may inhibit the

functioning of institutions for growth and the achievement of core objectives in the drive

towards enhancing and sustaining the economic and social imperatives of human endeavour

(Ajayi, 2005).

Soludo (2004) considers the main objective of banking sector reforms, for instance, as

guaranteeing an efficient and sound financial system. The reforms are designed to enable the

banking system develop the required flexibility that is needed to support the economic

development of the nation by efficiently performing its functions as the pivot of financial

intermediation. Lemo (2005) opines that banking sector reforms were to ensure a diversified,

strong and reliable banking industry where there is safety of depositors’ money and position

banks to play active developmental roles in the Nigerian economy.

Soludo,(2004) poised on the Nigeria’s banks reformation programme to be the

transformation exercise of which among others the minimum requirement for capital base of

banks to be N25 billion with a deadline mark to be end of December, 2005. In line with this,

consolidation of banking institutions, especially through mergers and acquisitions was

required, which apparently used the Nigerian Capital market as the platform for the

recapitalization activities of the banks which ultimately increase the capitalization level of the

Nigerian Stock Exchange itself.

This development necessitated banks to consider ways through which they could achieve

the stated objective of increasing their capital base to the authority’s requirement. In their

effort they embarked on different strategies which included the increase in capital base by

initial public offer (IPO), sale of their assets, Mergers and Acquisitions and reducing their

stake in other investments. This is done by adopting two or more of the above stated



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strategies. This reformation programme on banks with a link to the impact of the Nigeria

capital market sustained capitalization on the Nigeria’s economic growth is the main issue of

discussion in this paper.

Many researchers have focused on financial sector reforms and economic growth,

towards improving the body of knowledge but this paper is focusing on the capitalisation of

Nigerian capital market and the overall economic growth. It is at this back drop that research

seeks to evaluate the impact of the Nigerian capital market capitalisation strategy on the

growth the economy. The paper tests the impact of capitalisation of the capital market on the

Nigerian economy via the Nigerian Stock Market as motivated by the consolidation exercises

that were conducted in the banking, insurance and some other businesses in the recent past in

Nigeria. The study covers a period of 10 years (2000-2010). This period is the period when

the entire financial system (banking, insurance, etc) witnesses transformation in the form of

financial and institutional restructuring, policy, and regulatory and legal frameworks.

The paper is divided into five sections with the introduction above as section one. The second

section of the paper reviews literature on consolidation of banks and financial intermediaries

across the world. The third section is on the methodology. Section four presents and discusses

the results obtained, while section five concludes the paper.

2. Literature Review

In developing countries, particularly in Sub-Saharan Africa, financial markets are

dominated by commercial banks, which have not been reliable sources of long-term financing

and also non-bank sources of medium and long-term financing are generally underdeveloped.

The short-term nature of commercial banks’ assets and liabilities as well as regulatory reserve

requirements in many countries render the (banks) incapable of supplying long-term capital

(Edward, 2004). Therefore, the need becomes necessary to inject funds through different

forms of capital formation. This type of financial sector reforms is adhered by many countries

when faced with banking liquidity and other related problems.

The Nigerian financial sector reform encompasses all facets of the Nigerian economic

system that deals with the funding of the economy. The broad objectives of the financial

sector reforms are to promote financial savings, reliable payment system, increase the level of

domestic investment by providing effective intermediation between lenders and borrowers

and diversifying risk. In order to achieve these objectives, measures that were adopted include

the reform of the financial structure, monetary policy reform, foreign exchange market

reforms, liberalization of capital movement, and capital market reforms. The capital market

institutions in particular are in the position to encourage investment, as investors are able to



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borrow funds and invest more than they would have done without such institutions Babalola

and Adegbite,(2000).

The reform in the Nigerian Financial sector facilitated to develop a reliable sector that

will revolve around to emerge an enabling environment which will allow competition to

flourish. Ajayi (2005) considers the banking sector reforms to be spurred by the requirement

to deepen the financial sector and reposition it for growth, at the same time integrating it into

the global financial architecture. This will evolve a banking sector that is consistent with

regional integration basics which fits into best international practices of banking system.

Deccan (2004) views reforms in the banking industry to be aimed at addressing issues such as

governance, risk management and operational inefficiencies, with the vortex of the reforms to

be around in forming up capitalisation. This had gone in line of reformation programme

which the banking system in Nigeria witness in the last decade. Capitalization is an important

component of reforms in the Nigeria financial sector, owing to the fact that effect is both on

banks and the Nigerian Stock Market. This necessitated banks a strong capital base that will

have the ability to absolve losses arising from non performing liabilities which will save

guard against banks becoming distress. Attaining the capitalization requirements may be

achieved through consolidation of existing banks or raising additional funds through the

capital market (Adegbaju and Olokoyo 2008). In views of Pat and James,(2010) they

identified capital market to be an institute that contributes to the socio-economic growth and

development of emerging economies, this is in line with Nigeria’s urge to build a capital

market that will participate in accelerating the growth of the economy. Alile,(1997) posits on

the development of capital market to be made possible through some of the vital roles played

such as channelling resources, promoting reforms to modernize the financial sectors, financial

intermediation capacity to link deficit to the surplus sector and a veritable tool in mobilization

and allocation savings among competitive uses which are critical to the growth and efficiency

of the economy.

Soludo (2004) posits on banking sector reforms as an action which was done as due to

low capitalization of the banks that made them less able to finance the economy, and more

prone to unethical and unprofessional practices. These practices include, poor loan quality, of

up to 21% of shareholders’ funds which when compared with the 1%–2% in Europe and

America (as at that time), and this had made Nigerian banks prone to have liquidity problems.

In addition also to the practices are overtrading in banking business by abandoning the true

function of banking to focus on quick profit ventures such as trading in foreign exchange

dealings and tilting their funding support in favour of import-export trade instead of



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manufacturing, heavily relaying on unstable public sector funds for their deposit base among

others.

In a study developed by Nyong,(1997) in adopting the use of aggregate index of Stock

market measurement variables to determine the of the market in relation to economic growth

in the long-run in Nigeria. The study employed a time series data from 1970 to 1994. Four

measures of capital market development-ratio of market capitalization to GDP (in %), ratio of

total value of transactions on the main stock exchange to GDP (in %), the value of equities

transactions relative to GDP and listing were used. The four measures were combined into

one overall composite index of capital market development using principal component

analysis. It was found that the capital market development is negatively and significantly

correlated with the long-run growth in Nigeria. Also a study conducted by Ewan et al. (2009)

appraised the impact of the capital market efficiency on the economic growth of Nigeria using

time series data from 1961 to 2004.They found that the capital market in Nigeria has the

potential of growth inducing but it has not contributed meaningfully to the economic growth

of Nigeria because of low market capitalization, low absorptive capitalization, illiquidity,

misappropriation of funds among others.

On the other hand the examination conducted by Levine and Zervos (1996) on whether

there is a strong empirical association between stock market and long run economic growth

development. The study used pooled cross-country time-series regression of forty-one

countries from 1976 to 1993 to evaluate this association. The study goes in line with that of

Demirgüç-Kunt and Levine (1996) by conglomerating measures such as stock market size,

liquidity, and integration with world markets, into index of stock market development. The

finding indicates an existence of a strong correlation between the overall stock market

development and long-run economic growth. This means that the result is consistent with the

theories that imply a positive relationship between stock market development and economic

growth.

Demirguc-kunt and Levine (2003) argument on the recapitalization banks through

mergers and acquisitions as a motive which increases banks’ concentration, Stock market

performance and these goes hand-in- hand with efficiency and improvements in the financial

system. But Boyd and Runkle (1993), and Imala (2005) buttressed this argument. They

stressed further that consolidated banking system enhances profits efficiency, and lower bank

fragility not only efficiency. More importantly, high profits arising from this provides a buffer

against adverse shocks and increases the franchise value of the banks. Turning to the

effectiveness of recapitalization and its overall economic implications, Schumpter (1934),

Bayraktar and Wang (2006), King and Levine (1993) have examined relationship between



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banking sector and economic growth or financial sector development and economic growth,

in which these views had contention among the economist.

For Schumpter (1934) views the banking sector to be a stimulant in economic growth as

the banks have the way they play the role between of those who wish to form new

combinations and the possessors of productive means. While Bayraktar and Wang (2006)

posits on banking sector and economic growth to have direct and in direct effect on the

economy through the combination of improving access to financial services and the efficiency

of the financial intermediaries. He based these as both views have a lowering a cost of finance

in which is a stimulant on capital and economic growth.

Raghbendra,(2003) assessed the theory which maintains that financial development as

determinant of economic growth. According to the proposition of the school of thoughts he

followed, making an argument that financial development is a precondition for economic

growth while another argument was on the financial system that is so sophisticated which

helps to strengthen the atmosphere for rapid economic growth provided that there are no other

hindrance to economic development. The theoretical expositions done so far indicate that the

role of financial sector reform or development in stimulating economic growth is

controversial. Because, the role of finance in economic growth is an empirical one and also

the reform of the financial sector as an attempt to achieve financial development may attract

cost. Literalised views focus on financial sector reforms and economic growth, but towards

improving the body of knowledge this paper is focusing on capital market ecapitalisation and

economic growth in Nigeria. This was motivated by the need to provide a study on the link

between the recapitalization of banks in Nigeria, which led to activities in the capital market

and therefore leading to activity in the economy. Since the two players of financial sector are

involved.

Aurangzeb (2012) investigates the contributions of banking sector in the economy of

Pakistan by using ordinary least square and granger causality test. The use of the test confirms

the bidirectional causal relationship of deposits, advances and profitability with economic

growth. In the views of Bakare,(2000) he defines capitalization rate as the discount rate used

to determine the present value of future earnings. It is one of the major determinants of the

market size of any stock exchange. The size of the market capitalization and its growth rate

pose a major influence on the growth and development of the economy. Moreover

consolidation recreated the Nigerian capital market by stimulating activities in both primary

and secondary through increase in aggregate market capitalisation and new issues of bank

stocks.



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Bitzenis and Misic(2008) investigated and made some evaluation on the banking reforms

in Serbia by using surveyed data results. The study uses the approach of pre and post -

performance through many factors which are relevant to reformation of banking systems. The

study concludes the different problems and challenges faced by the system but reforms in the

industry are positive with growth of the economy. Contrary to this, Malik(2010) posits that

banking industry of Pakistan has challenges which hinders it’s growth. Malik’s conclusion

was based on an increase on cost of borrowings, high risk of investment local currency

depreciation(Rupees) and low return on investment all as a result of financial crisis that affect

the global economy. A similar study conducted by Nzue(2006) who investigated the

relationship between the development of Ivorian Stock Market and the country’s economic

performance. He employed the stock market control variables which the results reveal that

there is a long-run relationship between the Gross domestic product and stock market with a

uni-directional causality running from the market development and economic growth.

While a model which was also specified by Balogun, (2007) was more expansive and

included money supply, minimum rediscount rates, private sector credit, ratio of banking

sector credit to government, ratio of stock market capitalization to credit to the private sector,

and exchange rates.

Adegbaju, and Olokoyo, (2008) poised on the issue of capitalization to be a major reform

objective; and defining capitalization literarily to mean increase on the amount of long term

finances used in financing the organization. They reviewed the capitalization process to entail

an increase in the debt stock of the company or issuing additional shares through existing

shareholders or new shareholders or a combination of the two. It could even take the form of

merger and acquisition or foreign direct investment. Whichever form it takes the end result is

that the long term capital stock of the organization is increased substantially to sustain the

current economy trend in the global world. Asedionlen (2004) opines on recapitalization as an

issue which may raise liquidity in short term but will not guaranty a conducive

macroeconomic environment required to ensure high asset quality and good profitability’’

Ezrim and Muoghahi,(2004) examined the effect of financial sector reforms on commercial

banks operations in Nigeria by making a comparison of two decades. All literatures covered

use financial sector which comprises of banks and other financial institutions including

insurance companies. This paper examines the Capital Market capitalisation as a result of

recapitalisation exercise of banks in 2005 and its impact of growth on the economy.

3. Methodology

The population of this study is the Nigerian financial system with its contribution to

Nigerian economy. Although, the financial system comprises of money market and the capital



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market, but the population covers the deposit money banks and the capital market. Therefore

the research is focusing on deposit money banks and the Nigerian Stock Exchange with its

contribution to Nigerian economy after the recapitalisation exercise of banks. The paper

obtained data from several sources; this included the annual statistical Bulletin of the Central

Bank of Nigeria, the Stock market quarterly and annual report of the consolidated banks. It

should be noted that the recapitalisation exercise of banks had affected the banks to the extent

that it has reduced their number from 89 banks to 25 mega banks on the Nigerian capital

market. Along the period covered by the paper, a merger between Stanbic bank and IBTC

took place. This brought the total number of banks under the period of review to be 21 in

number. The data collected for a period of 12 years from 2001 to 2012.

The model specifies on the socio-economic development of the economy by using the proxy

of gross domestic product which significantly influenced by capital market indices (market

capitalisation, new issues, value of transaction and banks total assets). In other words

economic growth proxied by GDP is significantly influenced by the capital and money

market indices which are proxied by the market capitalisation, new issues, value of

transactions and banks total assets. Also the use of Granger test was to show the causal

relationship.

GDP = Gross Domestic Product (Dependent Variable), MCAP = Market capitalization,

(Independent Variable), TNI = Total New Issues (Independent Variable), VLS = Total value

of transactions (Independent Variable), BTA = Bank Total Assets, µ = Disturbance Term, a =

Intercept, a1 – a4 = coefficient of the independent variables.

4. Results and Discussions

The empirical analysis is presented in this section with the presentation of the unit root

tests of the variables used in the analysis. In the first table, the estimates of the ADF are

presented. The result confirmed that all the variable (market capitalization, Total new issues,

Value of transactions, listed equities and government stock) were stationary at levels, except

Bank total asset and gross domestic product that became stationary after first difference since

the series here integrated of order one i.e. I (1). The optimal lag leg length, which is a guide

for model selection are reported in column two and where selected on the basis of Schwardz

criterion, which provides a basis for the test for co-integration relationships among the

stationery series.



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Table: 1

Variable Lag ADF

stationery

Level 1st Diff. Order of

stationery

Remark

GDP 1 -5.9352 -3.0263 -3.0613 1(1) Stationery

MCAP 1 -4.8154 -3.0416 - 1(0) Stationery

TNI 0 -4.6322 -3.0211 - 1(0) Stationery

VLS 0 -5.5213 -2.0403 - 1(0) Stationery

BTA 0 -5.6312 -2.0403 - (1) Stationery

LEGS 0 -3.5312 -3.0213 -3.0341 1(0) Stationery

For the causality test reported in table two, both market capitalization and total new issues

have a unidirectional causal relationship with GDP. It should be noted that the causality runs

from GDP to the two variables at 5 percent level of significant. Although, a weak

unidirectional causality was found between value of transaction and GDP, running from GDP

to value of transaction at 10 percent level of significant. Also bank total asset was found to

granger cause market capitalization which is very strong at 5 percent significant level, while a

bi-directional causality exists between value of transaction and total new issue that is very

strong at 5 percent significant level.

The granger causality result is presented in table two below. It shows that there is

bidirectional causation between GDP and bank total assets BTA and a unidirectional between

the GDP and the market capitalization. All other variables have no significant causation with

the GDP except for listed equities and government stock that has a reverse relationship.

Table 2: Granger Causality test

Null Hypothesis Obs F-statistics probability

MCAP does not Granger Cause GDP

GDP does not Granger Cause MCAP

TNI does not Granger Cause GDP

GDP does not Granger Cause TNI

VLS does not Granger Cause GDP

GDP does not Granger Cause VLS

BTA does not Granger Cause GDP

GDP does not Granger Cause BTA

LEGS does not Granger Cause GDP

GDP does not Granger Cause LEGS

21 2.82021 0.05070

1.74312 0.12301

21 0.00127 0. 05210

0.53280 0. 53401

21 0.21761 0.23910

0.32132 0.05421

21 2.53101 0.03421

3.03250 0.53401

21 2.31291 0.05231

0.24911 0.58761

The regression result reveals that there is strong systematic variation in the dependent

variable as explained by the five independent variables i.e. Market Capitalization ( MCAP),

total New issues ( TNI), Value of transaction (VLT), Bank total asset (BTA) and Listed

Equities and Government Stocks (LEGS) . The F –value is significant at 5% level of

significance showing that there is a linear relationship between GDP and five independent

variables.



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What one could deduced from this discussion is that, the economy responds favorably to

measure taken to increase total listing of equity and government stock in the Nigerian Stock

market. The result is a true reflection of the Nigerian economy and the performance of the

Nigerian stock exchange. During the banking consolidation in 2005, a huge amount capital

were mobilizes into the economy through initial public offering (IPO) by most banks.

Unfortunately, these funds were not properly channeled into the productive sector and most

international protocol in investor divested their funds as soon as return of investment

collapsed due to the financial meltdown.

Again, the negative impact of value of transactions (VLT) could be attributed to the

shallow nature of Nigerian stock exchange. The market is yet to be attractive to big-ticket

local and international institutional investors. That will inject substantial fund into the stock

market. Therefore, the study or findings agree with Ariyo and Adelegun (2005) and Ewah et

al (2009) who found that the capital market in Nigeria has not contributed meaningfully to the

economic growth of Nigeria due to low market capitalization, small market size, few listed

Securities and low volume of transactions, low absorptive capacity, Liquidity etc. Also our

result supports Demirgue- kunt (1996) and Harris (1997) who found no hard evidence and

strong positive relationship between stock market and economic growth.

5. Conclusion

This paper evaluated the impact of the capital market capitalisation strategy on the growth

and development of the Nigerian Economy. The paper tested the significance of

recapitalisation of capital market and the impact on the Nigerian economy. The study covers

the period of 12years (2001-2012). This period was the period when the entire financial

system witness transformation in the form of financial and institutional restructuring, policy,

and regulatory and legal framework. The evidence provided in this study based on the

empirical findings, showed that stock market has positive effect on economic growth in

Nigeria. The Nigerian stock market is no exception to other developing countries which are

working towards reforming and deepening their financial systems through the expansion of its

stock markets in order to improve their ability to mobilize resources and efficiently allocate

them to the most productive sectors of the economy so as to enhance economic growth.

Although, during the period of study the market had faced exogenous and endogenous

problems that some were controlled and others weren’t, then there is the need for strict

compliance with the regulatory and supervisory framework governing the markets. A number

of indicators like the size of the Stock market, volumes of trade, market capitalization, banks’

total assets, and above all the GDP are used to show how the market has grown over the time.



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As indicated by the current trends, the market seems to be saddled with low liquidity and

slow growth in listings. The market is seen as facing a lot of challenge in its development and

growth so it is crucial that the policies related to the market should be given a serious and

accelerated attention. The paper concludes that the Nigerian capital market needs to create

more confidence to investors, especially in terms of transparency and accountability, for

sustainable and increasing capitalization necessary for sustainable economic growth in the

country. Furthermore, the paper recommends expansion of the Nigerian Stock Market by the

government creating an enabling investable environment, that will increase both the volume

of transactions and number of stocks traded in the market. This will improve their ability to

mobilize resources and efficiently allocate them to the most productive sectors of the

economy

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