An Evaluation Of Capital Market Reform And Its Impact On The Performance Of The Nigerian Stock Exchange

An Evaluation Of Capital Market Reform And Its Impact On The Performance Of The Nigerian Stock Exchange

First Part

Introduction

1.1 Context Of The Study

According to the literature (World Bank 1986), economic reforms, particularly what became known as the Structural Adjustment Programme (SAP), have almost always been implemented in response to national financial distress that can be traced back to macroeconomic distortions. While severe economic deterioration (stagflation and massive external debt) is the most common manifestation of such distress, distortions can also be observed in the pursuit of unsustainable fiscal, monetary, and exchange rate policies, as well as widespread government intervention in businesses that are best managed by the private sector. Several analysts believe that economic maladjustment is associated with policy pursuits that deviate from free market pricing policies (Chiber et al., 1986; Ray, 1986). Thus, economic reforms are viewed as pursuits of fiscal reforms and market liberalizations, with the government’s role limited to facilitating private sector-led growth through extensive privatization of state-owned enterprises and liberalization of financial and foreign exchange markets.

Literature affirms that the core of economic reform is the requirement to address two tasks: restructuring or correcting policy incentives and restructuring key implementation institutions. Financial sector reforms are a subset of economic reforms that emphasize reorganizing financial sector institutions (regulators and operators) via institutional and policy changes. Since the inception of SAP, other economic reforms have been implemented. The first is the 1986–1993 financial system reforms, which resulted in the deregulation of the banking industry, which was formerly dominated by indigenous institutions, resulting in over 60% Federal and State government stakes. During this time period, both the federal and state administrations made substantial investments in industry, particularly in the agro-and-allied, electricity, and petroleum refining sectors. Additionally, interest rate and foreign exchange policy reforms occurred during this time period. The second phase lasted from late 1993 until 1998, when regulations were reintroduced. During this period, the financial sector experienced significant distress, necessitating yet another round of reforms to address it. In 1999, the third phase began with the restoration of civilian democracy, the liberalization of the financial sectors, and the implementation of distress resolution programs. The fourth phase, which began in 2004 and is ongoing, is directed by the Nigerian monetary authorities, who assert that the financial system is plagued by structural and operational flaws and that their catalytic role in promoting private-sector-led growth could be enhanced through more pragmatic reform.

The Nigerian capital market is an integral component of the nation’s financial system. According to Anyanwu (1993), the financial market is a complex mechanism comprised of procedures, instruments, and institutions that bring together efficient economic units (i.e. government, corporate bodies) and surplus economic units (i.e. providers of funds/savings) to conduct business. According to Nzotta (2004), the capital market is a venue where lenders offer long-term funds in exchange for borrowers’ financial assets or where extant negotiable debt instruments are exchanged. Despite the existence of capital market research (Arestis, Demetriades, and Luintel, 2001; Fase and Abma, 2003; Iimi, 2003; Khan, Qayyum, and Sheikh, 2003), information on financial reforms and capital market growth in Nigeria is limited. Consequently, this research would constitute existing literature.

1.2 DESCRIPTION OF THE PROBLEM

Due to the global economic collapse, the Nigerian capital market is presently performing poorly. Despite dedicated efforts to power the Nigerian economy through various reforms – the Nigerian Capital Market – to achieve accelerated grassroots economic development, the market’s performance, rate of national economic growth, and development appear to be hampered by a number of factors.

The Nigerian Stock Exchange would have performed better if not for issues such as high cost of raising funds, low awareness among Nigerians regarding the importance of investing in the stock market, strict conditions for listing companies, stockbroker fraud, lengthy periods of clearing/verification of certificates, overtrading, insecurity of invested funds, etc. The effect of these reforms, specifically the electronic reforms, on the performance of the Nigerian capital market will be analyzed.

1.3 PURPOSE OF THE STUDY PURPOSE

The purpose of this study is to evaluate the capital market reform and its effect on the performance of the Nigerian stock exchange, as well as to investigate the relationship between the stock exchange and the capital market.

1.4 Research Hypotheses

The following null hypotheses are tested in this study:.

The impact of capital market reform on the performance of the Nigerian stock exchange is negligible.

There is no connection between the stock market and the capital market, according to H02.

1.5 Importance of the Research

The findings of the study will be beneficial to Nigerian policymakers because they will be incorporated into the decision-making process. Consequently, it will help the government formulate new policies.

The operators will use the study’s findings to determine their flaws and the expectations of the public and government. The research will serve as a guide for operators in determining the need to maximize reform potential in order to generate more funds for socioeconomic development and growth.

The research will ultimately serve as a benchmark or reference for future studies on the same or similar topics.

1.6 Radius Of Study

This investigation will be limited to the regulatory function of the Nigerian stock exchange (NSE) in the capital market, with an emphasis on the Nigerian stock exchange. Due to the fact that the (NSE) is a capital market vegetable organ, this is the case.

1.7 Limitation Of Study

It is normal for humans to encounter obstacles or challenges when pursuing specific objectives. As a result, we faced numerous obstacles in completing this mission. The issue may be traced back to a lack of funds for appropriate information gathering from other firms, which may have delayed the project. There are also difficulties in contacting crucial personnel within the organization who could provide the necessary financial data for the research. In addition, management was prohibited from disclosing additional information.

1.8 Definition Of Terms

Reform of the capital market: The capital market is a market where purchasers and sellers trade financial securities such as bonds, stocks, etc. Participants such as individuals and institutions engage in the purchasing and selling.

Nigerian stock exchange: An organized and regulated financial market where brokers and traders can purchase and sell stocks, bonds, and other financial instruments. In 1960, the Nigerian Stock Exchange (NSE) was founded as the Lagos Stock Exchange.