The study investigated the impact of Nigerian Stock Exchange on economic development in Nigeria. The descriptive survey design was used in the study. The target population comprised employees in the employment of financial institutions in Lagos metropolis. A sample of 200 senior management employees was randomly selected from ten financial institutions in the metropolis.  A 20-item self-developed questionnaire with Likert scale was used in the study. Pearson product moment correlation co-efficient statistical method was used to test hypotheses, and the results of the analysis revealed that:

1.           There is a significant relationship between Nigerian Stock Exchange and economic growth in Nigeria. 2.           Activities in the Nigerian Stock Exchange have a significant impact on economic growth in Nigeria. 3.           The performance of the stock market has a significant impetus for economic growth and development.

From the findings of this study, it can be concluded that the stock market promotes economic growth is not in doubt. Hence, there is the need to restore confidence to the market by regulatory authorities’ activities that portray transparency, fair trading transactions and dealings in the stock exchange



TITLE PAGE                                                                          i

CERTIFICATION                                                                    ii

DEDICATION                                                                            iii                                                        

ACKNOWLEDGEMENT                                                               iv                                     

ABSRACT                                                                                vi

TABLE OF CONTENTS                                                               vii                                                                                                                                                                                


INTRODUCTION                                                                 1

1.1        Background to the Study                                             1

1.2    Statement of the Problem                                            7

1.3    Objectives of the Study                                               8

1.4    Research Questions                                                     10

1.5    Research Hypotheses                                                  10

1.6    Significance of the Study                                             10

1.7    Scope of the Study                                                     11

1.8    Definition of Terms                                                     11


LITERATURE REVIEW                                                          13

2.0        Introduction                                                                13

2.1        Notion and Concept of Capital Market as Related to Economic Development                                                      14

2.2        Theoretical Framework on Capital Market Impact on Economic Development                                                      20

2.3        Historical Background of Capital Market in Nigeria             26

2.4        Empirical Studies on the Relationship Between Capital Market and Economic Development                                41

2.5        The Nigeria Capital Market Reforms                                48

2.6        Summary of the Review                                                54


RESEARCH METHODOLOGY                                                  59

3.0 Introduction                                                                 59

3.1 Research Design                                                           59

3.2 Population and Sample                                                   59

3.3 Research Instrument                                                     60

3.4 Validity and Reliability of the Research Instrument              60

3.5 Method of Data Collection                                               61

3.6 Method of Data Analysis                                                 62


RESULTS AND DISCUSSION                                                 63

4.0    Introduction                                                              63

4.1    Hypotheses Testing                                                     63

4.3    Summary of the Findings                                             65



5.0    Introduction                                                              69

5.1    Summary of the Study                                                69

5.2    Conclusion                                                                 70

5.3    Recommendation                                                       71

REFERENCES                                                                     72

APPENDIX                                                                         77



1.1       Background to the Study

Nigerian Stock Exchange is an engine of economic growth and development globally; Nigeria inclusive is made up of markets and institutions which facilitate the issuance and secondary trading of long-term financial instrument. The history of Nigerian Stock Exchange could be traced to 1946 when the British colonial administration floated a N600, 000 local loan stock bearing interest at 3.% for the financing of developmental projects under the Ten Years Plan Local Ordinance. The loan stock, which had a maturity of 10-15 years, was oversubscribed by more than N1 million, yet local participation of the issued was terribly poor. An as result of poor local participation federal government established several economic programmes with hope to foster economic and financial development, such Structural Adjustment Programme (SAP) 1986, Vision 2010, Vision 2020, Millennium Development Goal (MDGs), National Economic Empowerment Development Strategy (NEEDS), State Economic Empowerment Development Strategy (SEEDS), and other development plans.

Recently, Nigerian Stock Exchange has experienced unprecedented growth which was attributed to the banking sector reform of 2004-2005. (Nwankwo, 1991) says that Nigerian Stock Exchange has helped government and corporate entities to raise long term capital for financing new projects, and expanding and modernizing industrial and commercial concerns. Pedro and Erwan (2004) assert that financial market development raises output by increasing the capital used in production and by ensuring that capital is put into best uses. Beckaert et al (2005) analyze that Nigerian Stock Exchange development would lead to financial liberalization, which will lead to a 1% increase in annual real economic growth.

 Studying the link between domestic stock market development and internationalization, Laessens et al., (2006) using a panel data technique concluded that domestic stock market development as well as stock market internationalization are positively influenced by the log of GDP per capita, the stock market liberalization, the capital account liberalization and the country growth opportunities and negatively influenced by the government deficit/GDP ratio. Ekundayo (2002) argues that a nation requires a lot of local and foreign investments to attain sustainable economic growth and development. The Nigerian Stock Exchange provides a means through which this is made possible. It is on the premises that this research paper wishes to examine the impact of the Nigerian Stock Exchange on Economic Growth and Development from 1990 to 2011.

The Nigerian Stock Exchange is a network of financial institutions and infrastructure that interact to mobilize and allocate long-term funds in the economy. The market affords business firms and governments the opportunity to sell stocks and bonds, to raise long-term finds from the savings of other economic agents. The Nigerian Stock Exchange is a highly specialized and organized financial market and indeed an essential agent of economic growth because of its ability to facilitate and mobilize saving and investment. The sourcing of long-term finance through the Nigerian Stock Exchange is essential for self-sustained economic growth, which is consistent with external adjustment and rapid economic growth (Iyola, 2004).

The Nigerian Stock Exchange effectively started operations in Nigeria on 5th June, 1961 under the provision of the Lagos Stock Exchange Act 1961, which transformed into the Nigerian Stock Exchange in December 1977 as a result of the review of the Nigerian financial system (CBN, 2007). The Securities and Exchange Commission (SEC) was established in 1979 through the SEC Act 1979, to regulate the capital market, but it commenced actual operation in 1980. It took over regulatory functions from Capital Issues Commission, which was established in 1973. Since then, various forms of financial instruments have been issued in the Nigerian Stock Exchange by new and existing business to finance product development, new projects or general business expansion.

The capital market, no doubt, is pivotal to the level of growth and development of the economy. Chinwuba and Amos (2011) note that Nigerian Stock Exchange is one of the major institutions that acts in propelling a prostrate economy for growth and development. Nyong (1997), sees it as a complex institution imbued with inherent Mechanism through which long-term funds of the surplus sectors of the economy are mobilized, harnessed and made available to deficit sectors of the economy.

Osaze and Anao (1999), assert that Nigerian Stock Exchange is the cornerstone of any financial system since it provides the funds needed for financing, not only business and other economic institutions, but also the programs of government as a whole. Ilaboya and Ibrahim (2004), stress that Nigerian Stock Exchange functions as an economic barometer for galvanizing economic activities.

The journey to the present democratic experience in Nigeria commenced on May 29, 1999, when the military government returned power to civilian administration. The agitation for the exit of the military was embarked upon because of the popular belief among the stakeholders in the economy that, democracy, among other things, promotes economic growth. Supporters of democracy also argue that the motivation of citizens to work and invest, the effective allocation of resources in the market place, and profit-maximizing private activity can all be maintained in a climate of liberty, free-flowing information and secured control of property (North, 1990). In the light of the above background, the question that would readily come to mind is whether or not Nigerian Stock Exchange has significantly impacted on the growth of the Nigerian economy, given the enabling environment provided by the supportive democratic structure. Indeed, this is one question that past related empirical work have failed to answer. This study is therefore undertaken to satisfy this “curiosity” and hence fill the existing gap.

Saving, capital formation and economic growth have been central to the economic development debate for several decades. The links between these issues, on the one hand and direction of causality on the other, still remain subject to further analysis across countries. Accepting that the relationship is unidirectional (i.e. moving from savings to investment and hence to economic growth) may be misleading. (Ben, 1999), stressed that Nigerian Stock Exchange provides arrangement through which households, firms, and government that intend to invest more than they can bid for the funds of other spending unit who have surplus funds, and this is necessary for economic growth. Capital markets are the complex of institutions and mechanisms through which long –term funds with maturity of 5years and above are pooled and made available to business, governments, individual, and instruments already outstanding are transferred. As in the case of the money market, the capital markets are local, regional, and national in scope, (Bekaert, 1993).

Mobilization of resources for national development has long been the central focus of development economists. As a result of this, the centrality of savings and the investment in economic growth has been given considerable attention in the literature Rostow (1960), Malinvaud (1997), Soyode (1990), Aigbokan (1995), Samuel (1996), Demirguc-Kunt and Roos (1996), for sustainable growth and development, funds must be effectively mobilized and allocated to enable business and the economy harnessed their human, material, and management resources for optimal output.

The existing literature clearly shows that developed economies had explored the two channels through which resources mobilization affects economic growth, and development – money and Nigerian Stock Exchange (Demirguc-Kunt and Roos, 1996; Samuel, 1996). This is however, not the case in developing economies where emphasis was placed on money market with little consideration for Nigerian Stock Exchange(Nyong, 1997),

Since the introduction of structural adjustment programme (SAP) in Nigeria the stock market has grown very significantly. Alile (1996), Soyode (1990). This is as a result of deregulation of the financial sector and privatization exercise which exposed investors and companies to the significance of the stock market. Equity financing became one of the cheapest and flexible sources of finance from the Nigerian Stock Exchange and remain a critical element in the sustainable development of the economy (Okereke, 2000).  The line between the stock market performance and economic growth has often generated strong controversy among analysts based on their study of developed and emerging markets Samuel (1996); Demirguc-Kunt and Roos (1996); Akinifesi (1987); Levine and Sara (1996); Obadan (1998); Onosode (1998); Emenuga (1998); Osinubi (1998); According to Nyong (1997) the financial structure of a firm, that is, the mix of debt and equity financing, changes as economies develop, the tilt is however, more towards equity financing through the stock market.

As economies develop, more funds are needed to meet the rapid expansion. The stock market serves as a veritable tool in the mobilization and allocation of savings among competing users, which are critical to the growth and efficiency of the economy (Alile, 1984).

The determination of the overall growth of an economy depends on how efficiently the stock market performs its allocative functions of capital. As the stock market mobilizes savings, concurrently it allocates a larger proportion of it to the firms with relatively high prospects as indicated by its rate of returns and level of risk. The importance of this function is that capital resources are channelled by the mechanism of the forces of demand and supply to those firms with relatively high and increasing productivity, thus enhancing economic expansion and growth (Alile, 1997).

The role of the financial system in promoting economic growth (and development) cannot be over emphasized. The financial system comprises of the central bank, commercial banks, mutual funds, brokerage firms, discount houses, and stock exchange, to mention just few. These institutions trade in financial instruments such as domestic currency, foreign currency, stocks, bonds, derivatives and so on, and in the process mobilize funds from surplus unit (savers) to deficit unit (investors). This helps business corporations to increase investment and expand production, and ultimately accelerate economic growth.

The controversies surrounding the role of financial system in the economy started with Schumpeter (1912) who argued that in a well functioning financial system, banks help to facilitate economic growth by enhancing technological innovation through identification and funding of entrepreneurs with the best chance of successfully implementing innovative products as well as production process. Supporting this view, Bagehot (1873) and Hicks (1969) asserted that the development of the financial sector helped to trigger industrialization in England by increasing the access of the people to funds, which in turn they used to finance and execute capital projects. Recently, Levine (1991) argued that developed stock market reduces both liquidity shock and productivity shock of businesses. Similarly, Levine and Zervos (1998), and Khan and Senhadji (2000) stressed that the establishment of stock market has played a significant role in the development of banking institutions, particularly in emerging market economies. Thus, the authors believe that the development of the financial sector (and stock market) contribute meaningfully to economic growth. Contrary to the views of Bagehot, Schumpeter and Hicks, some scholars argue that financial system does not really matter in the growth of the economy. For instance, Nobel laureates like Gerald Meier and Dudley Seers (1984) and Stern (1989) did not accord any role to finance (or financial system) in their discussion of development. Moreover, Stiglitz (1993) argued that stock market liquidity does not provide incentives for acquiring information concerning firms or improving corporate governance. Besides, Shliefer and Summers (1988) asserted that stock market development may hinder economic growth by promoting counter-productive corporate takeovers. Furthermore, Singh (1997) argued that stock market may not be important in attaining higher economic growth.

1.2 Statement of the Problem

There is argument amongst researchers and economists as to the relevance of the financial system in economic growth and development. The literature is awash with the views of many influential economists like Robinson (1952), Meier and Seers (1984), Lucas (1988), and Stern (1989) who believed that finance plays an in consequential (if any) role in economic growth and development of nations.

A contrary view is however held by another group of researchers and economists to the effect that financial system of a country plays an important role in economic growth. Those that have demonstrated this line of thinking in their research work included Schumpeter (1932), Bagehot (1962), Cameron (1967), Goldsmith (1969), Mckinnon (1973), Shaw (1973) and Ojo (1984).

Building on this line of thinking, Gelb (1989), Ghani (1992), King and Levine (1993a, 1993b) and De Grogorio and Guidotti (1995) demonstrated how measures of banking development are strongly correlated with economic growth in a cross section of countries.  Besides evaluating the general importance of the financial system in economic development, other researchers had stressed empirically the specific role of Nigerian Stock Exchange (stock and bond markets) in economic growth.

Despite the popular belief that democracy promotes economic activities which in turn engenders economic growth, the growth of the Nigerian Stock Exchange in Nigeria is still very small in relation to the size of the economy. CBN (2007) has it that a comparative analysis of equity market capitalization of the Nigerian Stock Exchange with some countries in North and South America, Asia, Europe and Africa shows that the Nigerian market is relatively very small. Worse still are the attendant ugly consequences of the Nigerian Stock Exchange meltdown, characterized by the crash of the market capitalization from a high record of N13.5 trillion in early 2008 to less than N4.5 trillion in the corresponding period of 2009. This development necessitated an investigation by the House of Representatives, through its committee on Nigerian capital market, of the circumstances surrounding the 2009 crash of the Nigerian capital market, and this investigation is otherwise known as the Nigerian Stock Exchange probes.

However, given these scenario, one begin to wonder if the Nigerian Stock Exchange has really fared well in terms of its impact on the growth of the Nigerian economy since the return to civilian administration in Nigeria. Suffice it to re-state here that no past focused on this very important period (beginning from 1999), which this study intend to cover. What is seen in other related works is a combination, in varying degrees, of periods of military and civilian rule. Given these conflicting views, it is left to empirical investigation to determine whether or not stock market (financial system) development accelerates economic growth, particularly in Nigeria.

 Therefore, there has been a concern by individuals and even corporate bodies alike as to whether the Nigerian Stock Exchange is actually achieving this laudable goal of capital market-led-development. To this end, the following research problems were poised:

What is the impact of Nigerian Stock Exchange on economic development in Nigeria? What is the direction of causality between Nigerian Stock Exchange performance and economic development in Nigeria? What is the transmission mechanism between Nigerian Stock Exchange performance and economic development in Nigeria?

1.3 Objectives of the Study

The broad objective of this study is to assess the impact of Nigerian Stock Exchange on economic growth in Nigeria. To achieve this, the specific objectives of this study are to:

Investigate the relationship between Nigerian Stock Exchange and economic growth in Nigeria. Examine whether the activities in the Nigerian Stock Exchange impact positively on the economy. Determine if the performance of the stock market is an impetus for economic growth and development.

1.4 Research Questions

Is there any relationship between Nigerian Stock Exchange and economic growth in Nigeria? Do the activities in the Nigerian Stock Exchange impact positively on the economy? Do the performance of the stock market is an impetus for economic growth and development?

1.5 Research Hypotheses

There is no significant relationship between Nigerian Stock Exchange and economic growth in Nigeria. Activities in the Nigerian Stock Exchange have no significant impact on economic growth in Nigeria. The performance of the stock market has no significant impetus for economic growth and development.

1.6 Significance of the Study

The study will be useful to scholars of financial discipline, the government of this nation, participants or operators in the Nigerian Stock Exchange and other stakeholders as it will provide policy recommendations on the basis of its findings. The stock market has helped government and corporate entities to raise long term capital for financing new projects, and expanding and modernizing industrial / commercial concerns.

The outcome of this study is significant in that it is intended to contribute to the growing body of literature on quality of project financing management in both public and private sectors in general, and at the same time contribute to the conceptual treatment of market capital applications to development processes in project finance specifically. Second, there is a potential for other public agencies to benefit from this study. Additionally, this study will focus on the departments/groups which are sub-units of organizations, illuminating how departments/groups can benefit from components of project financing.

1.7 Scope of the Study

The researcher intends to review the structure and relevant aspects of operations and developments in the Nigerian capital market, with main focus on the determination of the impact of Nigerian Stock Exchange on economic development in Nigeria. Therefore, the study is not to compare the Nigerian capital with those of other countries, because theoretically and practically, Nigerian Stock Exchange are basically the same but may differ in their levels of developments.

The study will be restricted to a period of twenty four years from 2000 to 2012. The choice of the timeframe is predicated by the fact that the Nigerian Stock Exchange witnessed a lot of changes with the introduction of the 1986 SAP and its obvious implication. The major limitation in this study is that it will rely only on secondary data generated from the publications of Nigerian Stock Exchange (NSE), Securities and Exchange Commission (SEC), Central Bank of Nigeria (CBN) and National Bureau of Statistics (NBS) as well as other materials relevant to the study as access to these materials is difficult.

1.8 Definition of Terms

The operational definition of terms used in the study is as follows:

Capital Market: It is defined as a collection of financial institutions set up for the granting of medium and long - term loans. It is a market for government securities, for corporate bonds, for the mobilization and utilization of long term funds for development; the long term end of the financial system.

Commercialization: This is defined as the reorganization of enterprises wholly or partly owned by the federal government in which such commercial enterprises shall operate as profit making commercial ventures without any intervention from the federal government.

Liquidity of a Stock Market: This relates to the degree of access, which investors have in buying, and selling of stocks in such a market. The more liquid a stock market is, the more investors will be interested in trading in the market.




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