Capital Market Reform and the Performance of the Nigerian Stock Exchange: An Impact Evaluation

Chapter one

Introduction

Background of the study

Economic growth has historically been focused on mobilizing resources for national development. Funds must be properly mobilized and appropriately allocated to enable businesses and national economies to harness their people and material resources for optimal output (Tokunbo, 2002).

The capital market is an economic entity that improves resource allocation and capital formation efficiency. It helps both corporations and governments to raise long-term money for new project finance, as well as project expansion and modernisation (Onosode, 1990).

According to Alabede (2004), the stock market’s importance in a country’s economic growth and development is widely acknowledged around the world over. Long-term assets are not only mobilized, but also channeled for beneficial investments through this position.

The stock market serves as the pivot for capital market activity and is frequently described as a barometer of corporate direction. According to Obadan (1998), an active stock market can be used to predict changes in general economic activity as reflected by the stock market index.

The capital market’s vital nature in every economy stems from the two fundamental services it performs: mobilizing and diverting long-term investible funds from the surplus sector to the deficit sector, and Usman, (1998).

As a result of this function, governments place a premium on capital market regulation and oversight in general, and the stock market in particular. In recent years, there has been rising worry about the stock market’s role in economic growth, and so the market has been the attention of economists and policymakers.

According to Anyanwu (1993), the financial market is a complex process comprised of procedures, tools, and institutions that bring together deficit and excess economic units to transact business with one another. Ibenta (2000) defined the financial market in his own contribution as a network of institutional arrangements through which financial resources accumulated by savers of funds are transferred to ultimate users, who may be individuals or households, corporate bodies or governments, for investment in economic activities such as the production and distribution of goods and services.

Since government policy began to shift toward restricting the role of the public sector in commercial activity, capital market reform has become a crucial necessity for developing a sustainable private sector. The need to promote balanced financial intermediation in a system severely lacking in long-term funds was a strong indicator that Nigeria’s domestic capital market was poised for big change (Uzor, 2007).

The money and capital markets are the two key segments of the financial market. According to Ekoko (2007), the financial market is a “market where institutions exchange financial assets and liabilities through a process known as intermediation.”

The securities market is divided into two parts: the primary market and the secondary market. The primary market deals with fresh issues such as IPOs, rights offerings, private placements, and offers for sale. The secondary market, on the other hand, allows for the trading of existing securities, that is, securities that were already issued in the primary market.

Prior until 1998, activities in these two markets were carried out by hand. Manual share allotment was carried out by issuing houses in the primary market, subject to SEC clearance, whereas dealings in the secondary market were characterized by auction/open outcry by stockbrokers on the Nigerian Stock Exchange floor.

The Federal Government of Nigeria began reforming many sectors of the Nigerian economy, including the Nigerian capital market, in 1998.

The introduction of automated stock market trading in 1999 represented a turning point in the growth of Nigeria’s capital market. In that year, the Nigerian Stock Exchange formed a subsidiary firm named the Central Security Clearing System (CSCS) to manage stock market clearing and settlement. The exchange then began electronic securities transactions the following year.

The Automated Trading System (ATS) and the CSCS trading engine have now decreased the transaction timeframe to T+3 (transaction day plus three days) from an average of three months prior to the implementation of these measures. This entails debiting the buyer’s account three days after the transaction, while the seller can collect his/her cheque within the same time frame (T+3)

With the development of computerized transaction processes in an effort to improve service delivery to investors, the primary market has also matured. In the market, e-Dividend and e-Bonus payment systems are already in use.
The Securities and Exchange Commission is presently using e-allocation to alleviate the issues associated with manual allocation, such as certificate issuing delays.

As previously indicated, these reforms were intended to address the delays associated with completing security market transactions and to match the market with current worldwide best practices, where major information technology transformations in security transactions have already occurred. The effects/impacts of these reforms, both individually and collectively, must be explored, which is why this research is required

Statement of the problem

Due to the worldwide economic catastrophe, the performance of the Nigerian capital market is currently (September 2009) at a low ebb. Despite dedicated efforts to power the Nigerian economy through different reforms – Nigerian Capital Market – to achieve rapid grass roots economic development, the Market appears to be confronted with a number of challenges. Constraints that impede its performance, rate of national economic growth, and development.

The Nigerian Stock Exchange would have done better if not for issues such as high costs of raising funds, low awareness among Nigerians of the importance of investing in the stock market, stringent conditions for listing companies, stockbroker fraud, long periods of clearing/verification of certificates, overtrading, insecurity of invested funds, and so on.

To address these issues, Nigerian economic regulators have embarked on a series of measures aimed at resolving issues in the Nigerian capital market. The impact of these technological innovations on the performance of the Nigerian capital market will be examined.

Objective of the Study

The broad objective of this study is to determine the impact of capital market reforms on the performance of the Nigerian Stock Exchange;

This study specifically designed:

To compare the pre and post reform performance of the stock market using the market capitalization.
To compare the pre and post reform performance of the stock market using the trading volume.
To compare the pre and post reform performance of the stock market using the value of stocks.
To compare the pre and post reform performance of the stock market using the share market index

Based on the findings, to make policy recommendations on how to improve the overall performance of the Nigerian Stock Exchange

Significance of the Study

It is envisaged that this study would be extremely beneficial in a variety of ways. The study’s findings will be useful to Nigerian policymakers since they would be used in the decision-making process. As a result, it will assist the government in establishing new policies.

The study’s findings will be used by the operators to identify their deficiencies and what the public and government expect of them. The study will act as a benchmark for operators to determine the requirement for reform potentials to be realized in order to earn more money for socioeconomic growth and development.

Finally, the research will serve as a yardstick/guide for future research on the same and similar themes.

Research Questions

The research will be tailored to provide answers to the following questions.

Of what effect is the reform on the market capitalization of the Nigerian Capital Market?
Of what effect is the reform on the trading volume of stocks in the Nigerian Capital Market?
Of what effect is the reform on the value of stocks in the Nigerian Capital Market?
Of what effect is the reform on the stock market index of the Nigerian Capital Market?

Research Hypotheses

The following hypotheses are formulated in null form for this study;

There is no significant difference between the stock exchange market capitalization before and after the reforms.
There is no significant difference in the trading volume of stocks in the exchange before and after the reforms.
There is no significant difference in the value of stocks in the stock exchange market before and after the reforms.
There is no significant difference in stock market index before and after the reforms