AN ASSESSMENT OF THE CAPITAL MARKET AND THE CHALLENGES OF REAL SECTOR FINANCING IN NIGERIA. ( A STUDY OF THE PERIOD 2000-2009)

CHAPTER ONE

INTRODUCTION

1.1 Background Of Study

Any economy's economic stability, long-term growth, and progress are all dependent on the capital market. The viability of the productive sector is directly related to the economy's long-term growth and development. To do this, the capital market must mobilize and allocate funds to meet the productive sector's funding needs through the use of financial instruments. The Nigerian Stock Exchange is the country's capital market trading institution (NSE). As a result, the NSE should establish a variety of financial instruments capable of providing a variety of investment channels and opportunities for both investors and borrowers. The Nigerian economy has recently faced the challenges of a shrinking productive sector as a result of the industry's failure to obtain appropriate cash to meet its needs from both the money and capital markets. The lack of a diversity of investment tools, low investor savings capacity for the market, and market capitalization that is significantly above 50% in favor of the services sector of the economy (banks, insurance businesses, etc.) have all been challenges for the capital market. Following the preceding assumption, the purpose of this research is to look into the impact of the capital market on the economy's productive sector: A study of the Nigerian Stock Exchange and Selected Quoted Stocks from 2000 to 2009. Equities, Debentures, Preference Shares, and Development Stocks should be the instruments of research.

1.2 Statement Of Problem

The Nigerian capital market, which before now was described as one of the fastest growing stock markets in Africa, witnessed serious crises and loss of value following price crashes, especially in the banking sector equities that constituted more than 50% of the market capitalization. As a result of this, the market capitalization, which in 2008 was about N12.5 trillion, is presently at N5.5 billion (source: Stock Exchange weekly activities summary 19/2/2010). The confidence of the investing public dropped, especially as it relates to investing in equity financial instruments. Thus, there exists the need to create a variety of financial instruments that can assist the market in providing:

(1) Investment windows for market participants, such as;

(a) Equity investment tools 

(b) Fixed debt investment tool (corporate bodies)

(c) FG Development Stock 

(d) State Government Development Stock 

(e) Local Government/Municipal Stock

(f) Mortgage Based Financial Tools 

(g) Derivative Financial Tools

(2) The availability of these financial instruments will help deepen the market and attract additional investment funds from both local and foreign private investors. 

(3) Create the required choice for firms who want to raise money from the market.

(4) Create a viable, productive sector of the economy. This research is concerned with the slow growth in the productive sector of the economy and how the capital market can be used to facilitate growth, especially in the productive sectors of brewing, food and beverages, as well as the construction sectors. The problem of the research is to find how best to analyze, examine and proffer solutions to the factors that affect the capital market, especially market instability, low productive sector activities, and declining market capitalization. These factors of market instability, low productive sector activities and declining market capitalization impact sometimes positively or negatively on the economic development of Nigeria. Also, to investigate the impact of inadequate operational tools in the Nigerian Capital Market, inadequate savings for investment, lack of market transparency, political and economic instability, as well as infrastructure deficiency, is to be undertaken.

1.3 Objective Of Study

The following are primary objective of this study:

1. To find out the extent to which the capital market has contributed to the development of the productive sector of the Nigerian economy. 

2. To find out the various financial instruments employed by the capital market for selected companies in the productive sectors of the economy and how these instruments have contributed to their growth and that of the economy. 

3. To examine the depth of equity financial instruments in the market and their contribution to economic development.

1.4 Research Question

The following research question guides this study:

1. To what extent has the capital market contributed to the development of the productive sector of the Nigerian economy?

2. What are the various financial instruments employed by the capital market for selected companies in the productive sector of the economy and how have these instruments contributed to their growth and that of the economy?

3. What is the depth of equity financial instruments in the market and their contribution to economic development?

1.5 Significance Of Study

In any economy, the capital market is a primary source of long-term savings mobilization. The real sector of the economy must be actively engaged in the production of goods and services for any economy to grow. As a result of this viewpoint, a functioning real sector in any economy is a pre-requisite for economic growth and development. As a result, all players in the Nigerian economy, including the Manufacturers Association of Nigeria, industrialists, bankers, stockbrokers, financial sector regulators, political managers, investors, consumers, and the entire Nigerian society, require research of this sort.

In addition, the findings of this study will push the boundaries of existing knowledge and literature, and serve as a reference material for scholars, researchers, and students who may want to carry out further research on this topic or related areas in the future. It will serve as a resource for investment, policy making, and decision-making.

1.6 Scope Of Study

This study aims at assessing the capital market and the challenges of the real sector financing in Nigeria from 2000-2009. The study is however delimited to finding out the extent to which the capital market has contributed to the development of the productive sector of the Nigerian economy; finding out the various financial instruments employed by the capital market for selected companies in the productive sectors of the economy and how these instruments have contributed to their growth and that of the economy. And examining the depth of equity financial instruments in the market and their contribution to economic development. Hence, the study will be limited to Nigerian Stock Exchange (NSE) as the only capital market institution under study.

1.7 Limitation Of Study

Finance,inadequate materials and time constraint were the challenges the researchers encountered during the course of the study.

1.8 Definition Of Terms

Capital Market:  A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold.