CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The central concern of every government in all climes remains an improved standard

of living of the people and this depends on state of the economy, how it is structured (Al-faki,

2006; Yap, 2016; and Ezebeikwe, 2021). Nigerian which is one of the developing countries in

the world has a strong affinity for further development like every other countries, Nigeria has

a financial framework responsible for regulating the financial aspects of its economy

(Alile,1991 and Osifo and Abusonmwan, 2023). The major aim of such financial system is to

mobilize and channel funds efficiently from lenders to borrowers and to transfer resources from

savers to investors. It performs the important functions of providing the needed finance for

provisions of essential goods and services to bring about economic growth and development

through the interplay of individuals, institutions and instruments (Adekanya, 1986 and Tan

and Shafi, 2021).

The financial framework of an economy is of two types, namely, the market and the

capital market (Anyanmu, 1993). While the money market provides finance on short term basis

to individuals, businesses, the capital market on other the hand, provides finance to co-operate

bodies, governments and their agencies on medium to long term basis. In other words, the

capital market shoulders the responsibility of generating funds for long term finance. It is a

market for issuance and trading in long term securities and claims such as bonds debentures

and equity stock (Eyiuche,1999; Nkikii and Nzomoi, 2023).

The emergence of such capital market is owned to the development of market-oriented

economy which is required as an alternative source of funds to money market for the purpose

of funding economic projects. The capital market can be defined as the network of specialized

financial institutions, series of mechanism, process and infrastructure that in various ways

1
facilitate, the bringing together of suppliers and users of medium to long term capital for

investment in socio-economic development project (Ogieva and Igbinosa, 2023). According

to (Ali-Faki 2006) the capital market embraces all the arrangement that facilitate the buying

and selling of securities.

The Nigerian capital market has been and still is a major source of finance to both

government and firm in the country (Ekundayo, 2002). It has several functions which includes;

provision of market mechanism to cater for the market dynamics of the capital market as

compared to the administrative or political mechanism of public sector cooperation, the

provision of market measures of returns on capital for the improvement of the efficiency of

capital to mention but two (Ekiran,1998; Eneisil, Ogbonnaya and Onuoha,2023). It also

promotes and provides the means to improve corporate governance and the mobilization

functions mentioned above, as well as facilitates the transmission and implementation of

macroeconomic policies (Anyanwu,1993). This goes to show why the public authorities that

are responsible for economic policies and private sectors agents who are active in the capital

market are both efficient and stable. Economist and researcher unanimously believe their

operations have in no small measure helped to push their host Economist further on the path of

economist growth (Owa,2011).

As supported by the Pakistan prime minister after series of research, vibrant capital

market after series of research, vibrant capital market, good governance and effective role of

regulatory bodies are key to promoting growth in the economic sector. The major focus of this

research is to empirically assess with the use of facts and figures the impact of capital market

activities on economic growth of Nigeria. These researches will also critically evaluate the

major achievements and contribution of the Nigeria capital market.

2
1.2 STATEMENT OF THE PROBLEM

Expected faults or short comings which need to be addressed are referred to as the

research problem in the work of Anyiwe, Idohosa and Ibeh (2006); it is usually developed from

observations of the going on with issues raised by the research topics. Even with a population

of more than 200 million people in Nigeria, the basic problem of the Nigeria capital market is

that a large proportion of the population, is still ignorant of the nature and benefits of the capital

market. Its roles and prospects are still matters of blink-secret. As such there is large scale

unawareness of the impact of capital market activities on economic growth in Nigeria. This has

resulted to a lot of mixed opinions. Another problem is that the market float or turnover is still

very low. With regard to the above, in order to address the research problems for this study, the

following are the research questions:

1. What is the impact of capital market on the economic growth of Nigeria?

2. What other monetary policy variable determine economic growth in Nigeria?

3. What other socio economic variable impact economic growth in Nigeria?

1.3 OBJECTIVE OF THE STUDY BROAD OBJECTIVE.

The broad objective of the study examined the Impact of capital market on economic

growth in Nigeria.

SPECIFIC OBJECTIVES

The specific objective of the study is as follows:

1. To Measure the impact of capital market on the economic growth of Nigeria..

2. To examine the impact of monetary policy on economic growth of Nigeria.

3. To examine the impact of socio-economic variables on the economic.

3
 1.4 RESEARCH QUESTIONS.

The research was guided by the following research questions.

1. How statistically significant is the impact of capital market on economic growth of

Nigeria?

2. How statistically significant is the impact of monetary policy variable on economic

growth?

3. How statistically significant could socio-economic policy variables be in determining

economic growth in Nigeria?

1.5 HYPOTHESIS OF THE STUDY.

The hypothesis of the study is as follows;

a) The impact of capital market on economic growth in Nigeria is not statistically different

from zero.

b) The impact of monetary policy variable on economic growth in Nigeria is not

statistically different from zero.

c) The impact of socio-economic policy variable on economic growth in Nigeria is not

statistically different from zero.

1.6 SIGNIFICANCE OF THE STUDY.

The justification or significance of this study cannot be over emphasized or doubted

especially since it deals with such sensitive subsector of finance sector, as the capital market.

This study is very important as it would provide suggestions of how policy makers can

develope and adjust policies on trade, foreign private investment, exchange rate, public debt,

inflation and interest rate to benefit the Nigeria capital market. This study provides

opportunities for government to finance projects aimed at providing essential amenities for

socio-economic growth and development. This study examines the extent to which, the Nigeria

capital market has contributed to economic growth. It will also enumerate the challenge of the

4
Nigeria capital market for improvement which will pave way for constructive reforms in the

system because; it has been shown in Osifo, (2023) that capital market reforms helps to boost

economic growth.

This research will be beneficial to individual investors, both existing and intending

shareholders, various levels of government as well as members of the general public to educate

and enlighten them on the workings and benefits of capital market as well as how they can

participate in it. The government and stock market regulator like Securities and Exchange

Commission (SEC) and the Nigerian stock exchange (NSE) would find the research work

handy especially in the areas of policy formulation and stimulation.

This study would also add to the existing body of knowledge and serve as a reference

to future researchers for subsequent write ups and it is also expected to stimulate further

researches on the subject matter of capital market and its all-encompassing role as an engine

of economic growth.

1.7 SCOPE OF THE STUDY.

In this study the impact of capital market on the economic growth of Nigeria is

examined with monetary policy and socio-economic variables being controlled for. The time

frame of study lapse between 1980 and 2022 because this period covers the policy space by

government in her attempt to develop the finance sector both for the development of the

agriculture and industry sectors of Nigeria for the improvement of the Gross Domestic Product

of Nigeria at large. Time series variables from central bank of Nigeria were adopted for

econometrics analysis.

1.8 LIMITATION OF THE STUDY.

This research work cannot hope to clear up all the issues relating to the impact of capital

market on economic growth in Nigeria. This is as a result of some constraints which are

inevitable in an organized effort towards providing solutions to perceived problems. These

5
constraints are; inadequate data for the study and ambiguity of regression output. In order to

overcome this, the difficulties of unit root feature of the time series was corrected by the

Augmented Dickey Fuller devices while the unclearness of unit readings of the results of the

regression was handled by converting the variable values to their logarithmic version.

6
 CHAPTER TWO

LITERATURE REVIEW

2.1 CONCEPTUAL FRAMEWORK

Capital market is defined as the market where medium to long terms finance for

investment can be raised. The capital market is the market for dealing (that is lending and

borrowing) in long term loanable funds (Anyanwu, 1993). Substantial academic literature and

government strategies -support the finance led growth hypothesis, based on an observation first

made almost a century ago by Joseph Schumpeter that financial market significantly boost real

economic growth and development. Schumpeter asserted that financial markets had a positive

impact on economic growth as a result of its effect on productivity growth and technological

change. As early as 1989 the World Bank also endorsed the view that financial deepening

matters for economic growth “by improving the productivity of investment" (Wikipedia, 2011).

Mbat (2001) described it as a forum through which long term funds are made available

by the surplus to deficit economic units. It must however, be noted that although all surplus

economic units have access to it.

The restriction on the part of the borrowers is meant to enforce the security of the funds

provided by lenders. In order to ensure that lenders are not subjected to undue risks the

borrowers in the capital market need to satisfy certain basic requirement (Aiguh, 2013). It has

very profound implication for the socio-economic growth and development of any nation.

In the works of the prime minister of Pakistan, Shaukat Aziz announced on January 14,

2006 that a vibrant capital market, good government and effective role of regulatory bodies

were keys to it promoting growth in the economic sector. Thriving capital markets are often

closely associated with strong economic growth and vibrant private sector development

(Sethness,1988)

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 Osaze (1991) viewed the capital market in an economy as the fulcrum on which the

fortunes of that economy turn. That is, it provides the where withal for its growth and

development programmes and serves as an indicator of the economy's liquidity and

performance. On the contrary, Calamati (1983) argued that the capital market increases

economic fluctuations, distorts wealth allocation and ultimately hinders economic growth but

(Engberg, 1975) said there is need for less developed economics to have capital market as it

raise the level of domestic savings among competing users since such competition increases

the efficiency with which capital market is used with direct positive effects on the growth rate

of the economy.

Alile (1991) viewed the capital market in three ways firstly, in a broad definition, it is

market which include the entire financial system, the commercial banks and other financial

institutions providing short, medium and long term loans to finance both consumption and

investment sectors. Secondly, an intermediate definition, it is a market which would include

not only those institutions which are concerned with providing long term credits but also the

users of such credits. Finally, in the narrowest sense, capital market involves the problems and

prospects of equity invested, these include the issuing and marketing of shares rather than

bonds and decently using services of brokers, dealers and individuals. Also the capital market

is described as not really market in the traditional sense, but merely a network of the institution

that performs guidance that described as capital market activities (Odife,1991).

In summary, according to Adegbite (1994) who agreed that the capital market is in

essence forum where financial instruments such as debits, commercial papers or note, bankers’

acceptance, treasury bonds, bills or certificates, repurchases agreement, debenture and

development stock) hybrid or derivative instruments are used to raise medium and long-term

funds, while Osaze (2001) depicts the capital market as the prime motor, which drives any

8
economy on its path to growth and development. This makes clearer the assertion that a vibrant

capital market is a key to economic growth in any economy which it exists.

2.2 REVIEW OF RELATED CONCEPTS

2.2.1 CAPITAL MARKET AND ECONOMIC GROWTH

In principle, the capital (stock) market is expected to accelerate economic growth, by

providing a boost to domestic savings and increasing the quantity and the quality of investment

(Aiguh, 2013). The market is expected to encourage savings by providing individuals with an

additional financial instrument that may better meet their risk preferences and liquidity needs.

Better savings mobilization may increase the savings rate. The capital market also provides an

avenue for growing companies to raise capital at lowest cost. In addition, companies in

countries with developed stock market are less dependent on bank financing which can reduces

the risk of a credit crunch. The capital market therefore is able to positively influence economic

growth through encouraging savings among individuals and providing avenues for firm

financing (Charles and Charles, 2007).

Capital market offers access to a variety of financial instruments that enable economic

agents to pool, price and exchange. Through assets with attractive yields liquidity and risk

characteristics, it encourage saving in financial form. This is very essential for government and

other institutions in need of levy term funds and supplies of long-term funds. Companies can

finance their operation by raising funds through issuing equity (Ownership) or debenture/bond

borrowed as securities. Equity have perpetual life while debenture/bond issues are structured

to mature in periods of years varying from the medium to long-term of usually between five

and twenty five years (Mbat,2001)

Based on the performance of capital market in accelerating economic growth,

government of most nations tends to have keen interest in its performance. The concern is for

sustained confidence in the market and for a strong investor's protection arrangement.

9
Economic growth is generally agreed to indicate development in an economy because it

transforms a country from a five percent saver to a fifteen percent saver. This it is argued that

for capital market to contribute or impact on the economic growth in Nigeria, it must operate

efficiently (Aiguh, 2013). Most often, where the market operate, efficiently, confidence will be

generated in the minds of the public and investors will be willing to part with hard earned funds

and invest them in securities with the hope that in future they will recoup their investment

(Ewahet al,2009).

The theoretical explanation on the nexus between capital market and economic growth

is further exanimated using Efficient Market Hypothesis (EMH) developed by Fama in 1965.

According to EMH, financial markets are efficient or prices on traded assets that have already

reflected all known information and therefore are unbiased because they represent the

collective beliefs of all investors about future prospects.

Previous test of the EMH have relied on long-range dependence of equity returns. It

shows that past information has been found to be useful in improving predicative accuracy.

This assertion tends to invalidate the EMH in most developing countries.

Equity prices would tend to exhibit long memory or long-range dependence, because

of the narrowness of their market arising from immature regulatory and institutional

arrangement. They noted that, where the market is highly and unreasonably speculative,

investors will be discouraged from parting with their funds for fear of incurring financial losses.

In situations like the one mentioned above, has detrimental effect on economic growth of any

country meaning investors will refuse to invest in financial assets. The implication is that

companies cannot raise additional capital for expansion. Thus, it suffices to say that efficiency

of the capital market is a necessary condition for growth in Nigeria (Nyong, 2003).

10
 Ariyo and Adelegan (2005) Contend that, the liberalization of capital market

contributes to the growth of the Nigeria capital market, yet its impact at the macro-economy is

quite negligible.

In another exposition, Gabriel (2002) as enunciated by Nyong, (2003) lay emphasize

on the Romanian capital market and conclude that the market is inefficient and hence it has not

contributed to economic growth in Romanian.

Ekundayo (2002) argues that a nation acquires a lot of local and foreign investments to

attain sustained economic growth and development. The capital market provides a means

through which this was made possible.

Ewahet al (2009) capital market provides the opportunities for the purchase and sales

of existing securities among investors thereby encouraging the populace to invest in securities

fostering economic growth.

2.2.2 DEFINITION OF CAPITAL MARKET

The literature involves citing different contribution on what capital market is all about

and what means. It means to follow in having a strong viable and reliable market.

Jhingan (2004) the capital market is a market which deals in long terms loans. It

supplies industries with fixed and working capital and finance medium term and long term

borrowings of the central, state and local governments. Thus the capital market comprises the

complex of institutions and mechanisms through which medium term funds and long term

funds are pooled and made available to individual business and governments.

The capital market has been identified as an institution that contributes to the socio-

economic growth and development of emerging and developed economies. This is made

possible through some vital roles played, such as channelling resources, promoting reforms to

modernized the financial sectors, financial intermediation capacity to link deficit to surplus

sector of the economy, and a veritable tool for in the mobilization and allocation of savings

11
among competitive uses which are critical to the growth and efficiency of the economy (Pat

and James, 2010).

2.2.3 OVERVIEW OF THE NIGERIAN CAPITAL MARKET.

The capital market is the cornerstone of every financial system since it provides the

funds needed for financing not only business and other economic institutions, but also the

programme of government as whole. The capital market is essentially a market for long term

securities that is stock, debenture and bonds lasting for usually longer than three years

(Aiguh,2013). The proper functioning of the capital market was not set up until the

establishment of the central Bank in 1959 and launching of the Lagos stock exchange in 1961

even though securities were floated as far back as 1946.

The needs to have an organized stock exchange came up and committee was set up by

the government under the chairmanship of Prof. R.W. Barbock to consider the feasibility of

having indigenous forum for the purchase and sales of shares and stocks. The Nigeria capital

market was established for the following reasons below:

1. To overcome difficulties of selling government stock

2. To provide local opportunities and lending for long term purpose.

3. To enable authorities mobilized long term capital for economic growth and

development

4. To enable the foreign business the chance of offering their shares to interested Nigerians

to invest and participate in the ownership of these foreign business. In view of the above

the major participants in capital market are as follows (Alile, 1991).

Government, Quoted companies (Listed companies) stock Brokers, Central Bank of

Nigeria (C.B.N), Banking and non-Banking financial institutions, Nigerian stock Exchange,

Nigerian securities and Exchange Commission.

12
Functions of the Capital Market

According to Ekiran (1987) the following are the function of the capital market.

1. The promotion of rapid capital.

2. It is machinery for mobilizing long-term financial resources for industrial development.

3. The provision of an alternative source of fund other than taxation for government

4. The mobilization of savings from numerous economic unit for growth and development

5. The provision of liquidity for any investor or growth of investors.

6. The broadening of the ownership base of assets and the creation of a healthy private

sector.

7. It is an avenue for effecting payment of debts

8. The encouragement of a more efficient allocation of new investment through the pricing

mechanism.

9. The creation of a built in operational and allocation efficiency within the financial

system to ensure that resources are optimally utilized at relatively little cost.

10. It is a necessary liquidity mechanism for investors through a formal market for debt and

equity securities.

2.2.4 THE NIGERIAN SECURITY AND EXCHANGE COMMISSION

The Nigerian security and exchange commission (NSEC) is the apex institution for the

regulation and monitoring of the Nigeria capital market (Louis, 2013). The commission was

established under the security and exchange commission decree 1979, operating

retrospectively from 1st April [Link] to the SEC,two bodies had in succession been

responsible for the monitoring of capital market activities in Nigeria. The first was capital

issues committees, which operated between 1962 and 1972. It could not be seen as the

sperintendent of the capital market because its functions were more or less advisory without

the forces of instruction even, through its functions included the co-ordination of capital market

13
activities. The next body was the capital market issues commission (CIC)which came into

being in March 1973. The CIC, unlike its predecessor, had full powers to determine the price,

timing and volume of security to be issued. Despite the wider power, the CIC could not be seen

as the apex of capital market because it concerned itself with public companies alone and its

activities did not cover the stock exchange and government securities (Aiguh, 2013).

The enabling Act of the Securities and Exchange Commission’s specifies its overriding

objectives as investor's protection and development while its functions were divided into two

regulatory and development.

The functions of the commission are extensively spent out in Nigeria Securities and

Exchange Commission Decree (Decree No29) of 1983 and the Nigerian, Enterprises promotion

Decree 1990. According to section (6)subsection (9) to (10) the commission is charged with

the following duties and functions (Louis, 2013)

1. Determining the amount of price and time when securities of companies are to be sold

to the public whether through offer for sale or subscription.

2. Registering all securities proposed to be offered for sale to or for subscription by public

3. Maintaining surveillance over the securities market to ensure orderly, fair and equitable

dealing in securities

4. Protecting the integrity of the security market against any abuses arising from the

practice of insider trading

5. Acting as regulatory apex organization for the Nigerian capital market including the

Nigerian stock Exchange and its branches to which it would be at liberty to delegated

power.

6. Creating the necessary atmosphere for the orderly growth and development of the

capital market.

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 7. Reviewing, approving and regulating merger acquisition and all forms of business

combination.

8. Registering stock Exchange or their branches, registers investment advisers, securities

dealers and their agents and controlling and supervising their activities with a view to

maintaining proper standards of conduct and professionalism in the securities business.

Undertaking such other activities as are necessary or expedient for giving fall effect to

the provision of this decree.

2.2.5 THE NIGERIAN STOCK EXCHANGE.

As one of the constituencies of the capital market, the exchange is a private, nonprofit

making organization, limited by guarantee (Aiguh, 2013).It was incorporated via the

inspiration and support of businessmen and federal government. But owned by about 300

members. The membership includes financial institution, stockbrokers and individual

Nigerians of high integrity, who have contributed to the development of the stock market and

Nigerian economy. The Nigerian stock exchange started with incorporation of the then Lagos

stock exchange in 1960. Trading commenced on the exchange in 1961 after the enactment of

the Lagos stock exchange Act of 1961,the self regulatory organization was subsequently

reorganized and renewed the Nigerian stock exchange 197, based on the report and

recommendation of Pius Okigbo financial system review commission (Luois,2013). The stock

exchange is thus an institution of capital market, which provides trading floors where all the

branches function principally as trading floor.

Functions of Nigerian Stock Exchange

The following are the functions of the Nigerian Stock Exchange according to Yaroe

(1999).

1. To provide opportunities for raising new capital

2. To promote increasing participation by the public in the private sector of the economy

15
 3. To provide appropriate machinery to facilitate further offerings of stock and shares to

the public

4. To provide a central meeting place for members to buy and sell existing stocks and for

granting quotation to new ones.

5. To reduce the risk of liquidity by facilitating the purchasing and sale of securities

(Alefaki, 2007)

2.2.6 ECONOMIC GROWTH

Economic growth means an increase in the capacity of an economy to produce goods

and services, compared from one period of time to another. Economic growth is the rate of

growth in a country total output of goods and services gauged by the gross domestic product

(GDP).

Economic growth can also be refers to as the increase of per capital gross domestic

product (GDP) or other measures of aggregate income, typically reported as the annual rates

of change in the real GDP (Aiguh,2013).

Economic growth is primarily driven by improvement in productivity, which involves

producing more goods and services with the same inputs of labours, capital, energy and

materials. (Wikipedia) (Roser, M. 2021).

2.2.7 IMPACT OF CAPITAL MARKET ON ECONOMIC GROWTH ON NIGERIA.

The Nigerian capital market provides the necessary lubricant that keep turning the

wheel of the economy. It not only provides the funds required for investment but also efficiently

allocates these funds to projects of best returns to funds owners.

The market is vital to the growth and development of any country because it support

government, and corporate initiative finances the exploitation of new ideas and facilitates the

management of financial risk.

16
 The capital market has impacted on economic growth and development of Nigeria

through the following.

The capital market encouraged the inflow of foreign capital when foreign companies or

investors invest in domestic securities.

It reduces the over reliance of the corporate sector on short term financing for long term

projects and also provides opportunities for government to finance projects aimed at providing

essential amenities for socio-economic development.

The capital market aid the government in privatization programme by offering her

shares in the public enterprises to members of the public through the stock exchange (Louis,

2013).

It has impacted positively by providing avenues for the marketing of shares and other

securities in order to raise fresh fund for expansion of operations leading to increase

production/output.

The market provides means of allocating the nation real and financial resources

between various sectors, and companies. Through the capital formation and allocation

mechanism the market efficiently distributes the scare resources for the optimal benefits to the

economy.

2.3 THEORETICAL LITERATURE

The relationship between capital market and economic growth according to Arestils and

Luntel (2004) can be discussed based on some competing theories of capital market. The

initiation of capital market reform is seen as the major cause of success of the financial system

throughout the world such reforms could take the form of the introduction of market-based

procedures for monetary control, the promotion of competition in the financial sector and

relaxation of restriction on capital flows, The competing theories are outlined below:

 Bank -based theory

17
  Market-based theory

 Financial service theory

For a better understanding, those competing theories of capital market are briefly

discussed below.

2.3.1 THE BANK-BASED THEORY

The ban-based theory majorly emphasizes a direct role played by the bank in growth

and development of the economy. As a result, it outlined the drawbacks of market based

financial system. The theory opines that the development of the economic system can be more

efficiently and effectively financed by capital market than markets in developing economies

and in the case of state owned banks, market features can be controlled and the allocation of

savings can be taken strategically (Gerschenkrom, (1962). Rajon and Zingales(1998) argued

that countries

The World Bank (2001) recognized an issue of concern in the case of market based

financial system in developing countries as that of asymmetric information. It is argued that

most of the complexities of most modern economies and business activities has greatly

increased, the variety of ways in which insiders can try to conceal firm performances. Although,

progress in technology, accounting and legal practices have also improved the role of

defections on balance of asymmetry of information between users aid promoters of funds, this

has not been reduced as much in developing countries as it has in advanced economies and

indeed may have deteriorated.

2.3.2 THE MARKET-BASED THEORY

The market-based theory emphasizes the importance of a well-functioning market

which accentuates the problems of the bank-based financial system. Beck (2006) concluded

that a liquid and well-functioning market fosters growth and profit incentives enhance

corporate governance and facilitate risk management. Market-based system reduces inherent

18
deficiencies associated with capital market and are thus, better in enhancing economic growth

and development, with poor legal system benefits from a bank based system; better legal based

systems enhances bank based system, hence, it is preferable.

Schumpeter (1934) stressed that capital market as a financier of productive investment

and thus, an accelerator of economic growth. Agency problems and short termism are better

addressed by the bank-based financial systems than market based systems (Stiglitz, 1985,

Singh, 1997). Specifically banks can make investment without revealing their decisions

immediately in public markets, this help to create incentive for them to reach firms, managers,

and market conditions with positive ramification in resource allocation and growth. According

to Stilglitz, (1985);Bhide,(1993),the bank-based arrangement can produce better improvement

in resource allocation and corporate government than in market-based institution.

2.3.3 FINANCIAL SERVICE THEORY

Despite the brilliant views of bank-based and market-based theories, capital market

view according to Merton and Bode (1995), and Levine (1997), down plays their importance

due to the fact that the distinction between bank-based and market-based system matters less

than was previously thought. The World

Bank (2001) viewed the capital market themselves as more important than their form

of delivery. This simply means that what is more important is not the source of finances or the

form of finance delivery but the creation of an environment where financial services are

soundly and efficiently provided, hence, theory suggests that, it is neither the banks nor the

markets that matters but both. Levine (1997) opines that both banks and market are different

components of the financial system. They do not compete, as such; ameliorate

19
2.3.4 CAPITAL MARKETS AND GROWTH: THEORETICAL LITERATURE

A lot of studies establishing the impact of capital markets on growth have been carried

out. Most of these studies agree that capital markets promote economic development and

growth by facilitating and diversifying firms ‘access to finance. Caporaleet al (2004) argue that

stock markets promote economic development by fuelling the engine of growth through faster

capital accumulation, and by tuning it through better resource allocation. Oke (2010) is also of

the view that stock market serves as a veritable tool in the mobilization and allocation of

savings among competing ends which are critical and necessary for the growth and efficiency

of the economy. Josiah et al (2012) also support the argument that thriving capital markets are

often vibrant in private sector development and strong economic growth.

The extent to which capital markets can play this crucial role however, depends on

whether they are mature or not. Mature capital markets would have very significant impact on

growth with less mature markets having lesser impact. Mature capital markets respond to the

financial needs of the local economy with such vibrancy and dynamism that is usually absent

in immature markets .An active stock market may be relied upon to measure changes in the

general economic activities using the stock market index. In principle, a well-developed stock

market should increase savings and efficiently allocate capital to productive investments,

which in turn leads to an increased rate of economic growth (Ernst and Young/Skolkovo

Institute, 2012). Caporaleet al (2004) posit that in a well-developed stock market, share

ownership provides individuals with a relatively liquid means of sharing risk when investing

in promising projects. Stock markets help investors to cope with liquidity risk by allowing

those who are hit by a liquidity shock to sell their shares to other investors who do not suffer

from a liquidity shock. The ACCA 2012 global capital market report emphasizes that at the

macro level, deep capital markets, which have ample liquidity and developed secondary

20
markets, are re-shaping the developing world, driving wealth creation and the emergence of

powerful regional trading blocs.

Capital markets, including markets in equity, debt, and derivative products on these

underlying assets, play an important role in promoting economic activity. The impact of capital

markets on growth is transmitted through interaction with the real sector facilitated by both the

primary and secondary market. In primary markets, businesses and sovereigns’ issue financial

instruments representing claims against their future cash flows and use these to tap large

regional and global pools of savings in order to finance themselves. Secondary markets, on the

other hand, provide an exit for investors and facilitate price discovery - the accurate valuation

of instruments that ensures issuers are paying an appropriate price for their access to finance

and investors are adequately compensated for the risk they take in providing it (ACCA,

2012).Stock markets allow savers to diversify their portfolios by making more financial

instruments available to them, which contributes to the mobilization of domestic savings. In

this way, stock markets provide an important source of investment capital at relatively low cost

(Dailami and Aktin, 1990) triggering productivity and growth. Edo (1995) asserts that

securities investment is a veritable medium of transforming savings into economic growth and

development and that a notable feature of economic development in Nigeria since

independence is the expansion of the stock market thereby facilitating trading in stock and

shares.

Existing literature suggests that the benefits that accrue to national economies as

financial markets grow and deepen are particularly sensitive to a combination of institutional,

structural and policy variables. Critical among these is whether such markets are deregulated

and liberalised or whether such markets are repressed by over-regulation. Because of this,

supporting the development of financial markets usually involves a broad and ambitious

programme of reforms emphasizing deregulation and market liberalisation. Essentially,

21
financial liberalisation promotes growth because it enhances financial development. Financial

liberalisation provides a mechanism intended to facilitate the flow of funds for private sector

development. The improved financial environment induced by liberalization is expected to

stimulate the level of investment and income, enhance manufacturing capacity utilization,

reduce poverty, increase per capita income, and by extension lead to economic growth

(Obamuyi, 2008).

The benefits accruable from a healthy and developed financial system relate to savings

mobilization and efficient financial intermediation roles (Gibson and Tsakalotos,

1994).Financial sector deregulation has also been perceived to fosterdevelopment and increase

growth in the long run (Levine, 1997). It has also been seen, in developing countries, to

stimulate domestic savings and growth and reduce excessive dependence on foreign capital

flow (Demirguc-Kunt and Detragiache, 1998). In the Nigerian case, the deregulation of the

financial sector and the privatization exercises exposed investors and companies to the

significance of the capital market. Okereke-Onyiuke (2000) argues that as a result of this

impact, equity financing became one of the cheapest and flexible sources of finance from the

capital market and remain a critical element in the sustainable development of the economy.

THE NEW GROWTH THEORY

The dissatisfaction with the mixed performance of the neo-classical growth theories in

explaining long-term economic growth led to the emergence of the new growth theory or

endogenous growth models. The new growth theory provides a theoretical framework for

analyzing endogenous growth, persistent GNI growth that is determined by the system

governing the production process rather than by forces outside that system. In contrast to

traditional neoclassical theory, these models hold GNI growth to be a natural consequence of

long-run equilibrium. According to Todaro and Smith (2011), a useful way to contrast the new

(endogenous) growth theory with traditional neo-classical theory is to recognize that many

22
endogenous growth theories can be expressed by the simple equation=AK,as in the Harrod-

Domarmodel. In this formulation, A is intended to represent any factor that affects technology,

and K again includes both physical and human [Link], there are no diminishing

returns to capital in this formula, and the possibility exists that investments in physical and

human capital can generate external economies and productivity improvements that exceed

private gins by an amount sufficient to offset diminishing returns. The net result is sustained

long-term growth-an outcome prohibited by traditional neoclassical growth theory.

3.1.4 FINANCIAL DEVELOPMENT AND THE FINANCE-LED GROWTH

HYPOTHESIS(FGH).

Although, traditional growth theories emphasize savings, capital, labour and investment as

critical determinants of growth; recent studies have emphasized the role of the financial system

in facilitating the growth process as captured in the finance-led growth hypothesis (FGH). The

hypothesis is a

generalized theory emphasizing the critical role of an economy's financial architecture in

promoting growth. The argument behind the hypothesis is that although labour and capital are

known to be critical determinants of national output, these resources can only be deployed in

the production process when there are effective financing arrangements. The hypothesis

therefore hinges on the argument that financing is a necessary condition for growth. The degree

to which the financial system can facilitate the growth process depends however, among other

factors, on the extent of development of the system itself. While robust and developed financial

systems are known to support growth through efficient intermediation between the financial

and real sector, poorly developed financial systems are generally unable to finance significant

real sector activities.

Financial development can affect growth via three channels (Pagano, 1993):

23
(i) It can raise the fraction of savings funnelled to investment, reducing the costs of financial

intermediation;

(ii) It may improve the allocation of resources across investment projects, thus increasing the

social marginal productivity of capital; and

(iii) It can influence households' saving rate.

Although the debate on finance and growth debate has been raging since the 1960s, the work

by King and Levine (1993a,b) are among the most recent to make rigorous the finance and

growth debate using panel data sets. King and Levine found not only a consistent

contemporaneous relationship between aggregate measures of financial depth and growth, but

also a strong predictive component. They argue that current financial depth can predict

economic growth over the consequent ten to thirty years and conclude that “better financial

systems stimulate faster productivity growth and growth in per capita output by funnelling

society's resources to promising productivity-enhancing endeavors."(King and Levine,

1993b).Consistent with these arguments, newer empirical evidence suggests that financial

development is associated with lower poverty and reduced income inequality. For instance,

Beck, Demirgüc-Kunt, and Levine (2006) find that in countries that experience financial-sector

deepening, the income of the poorest 20 percent of the population grows faster than average

GDP per capita and income inequality falls at a higher rate. According to Torre and Schmukler

(2007), there is also some evidence, albeit still limited, that the expansion of access to finance

may reduce poverty.

According to Torre and Schmukler (2007), financial deregulation facilitates financial

development which in turn facilitates the maturity of an economy's money and capital markets.

In the same vein, the maturity of the money and capital markets is also a major determinant of

financial development indicating a bi-directional relationship. In a developed financial system,

firms are able to have increased access to affordable investment capital for production

24
activities. With increased investment, output rises and unemployment falls since more labour

would be hired to combine with the increased capital in the production process. Falling

unemployment rate is expected to-go together with falling poverty rate. Output growth would

generally lead to a rise in per capita income and provided that the gain from growth is evenly

distributed, national consumption and savings would soar. Increased consumption would

stimulate further output expansion while savings would go back to the financial system to

increase the pool of available funds for further intermediation and the cycle goes on.

2.4 EMPIRICAL REVIEW OF LITERATURE

The link between capital market and economic growth has been empirically

investigated by researchers in both Nigerian and other countries.

2.4.1 CAPITAL MARKETS AND GROWTH: EMPIRICAL REVIEW

Much of the literature on the relationship between capital markets and real output

suffered a lack of evidence until the 1970s when studies by Goldsmith (1969), Shaw (1973)

and McKinnon (1973) found that the development of financial markets was significantly

correlated with the level of per capita income. Levine and Zervos (1996) examine whether

there is a strong empirical association between stock market development and long-run

economic growth. The study used pooled, cross-country time-series regression of forty-one

countries from 1976 to 1993 to evaluate this association. The study tows the line 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 growth rate of

Gross Domestic Product (GDP) per capita was regressed on a variety of variables designed to

control for initial conditions, political stability, investment in human capital, and

macroeconomic conditions; and then include the conglomerated index of stock market

development. The finding was that a strong correlation between overall stock market

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

25
the theories that imply a positive relationship between stock market development and economic

growth.

Studies on the impact of the Nigerian capital market on her economic growth, however,

have produced mixed results - while some suggest that the capital market has a positive impact

on Nigeria's economic growth, others submit that the market has no positive impact on growth.

Nyong (1997) developed an aggregate index of capital market development and used it to

determine its relationship with long-run economic growth in Nigeria. The study employed a

time-series data from 1970 to [Link] 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. Financial market depth was also included as

a control variable. It was found that capital market development negatively and significantly

correlates with long-run growth in Nigeria. However, Osinubi (2001) employed ordinary least

squares regression and examined the relationship between stock market development and

economic growth using data from 1980 to 2001. The results obtained indicated a positive

relationship between stock market development and economic growth in Nigeria and therefore

suggested the pursuit of policies geared towards the rapid development of the stock market in

Nigeria. Itiveh and Okolie, (2023) examined capital market operation and Nigerian economic

growth. The study, which spans between 1980 and 2021, employs the Ordinary Least Square

(OLS) method. It concludes that capital market has significant positive impact on the economic

growth of Nigeria. Oluwaleye, Usman and Adenipekun, (2023) adopted the Autoregressive

Distributed Lag (ARDL) model to investigate the impact of the Nigerian capital market on the

economic growth of the nation between 1986 - 2021. Results also shows that capital market

operation is a positive correlate of economic growth.

26
 Adam and Sanni (2005) examined the role of stock market on Nigeria's economic

growth using granger causality test and regression analysis. The authors discovered one way

causality between GDP growth and market capitalization and a two way causality between

GDP growth and market turnover ratio. They also observed a positive and significant-

relationship between GDP growth and market turnover ratios. Osinubi and Onyeodiwe (2003)

also examined the relationship between Nigeria stock market and economic growth from 1980

to 2000 using ordinary least squares regression (OLS).

Their result indicates a positive relationship between the stock market and economic

growth and suggests the pursuit of policies geared towards rapid development of the stock

market. Oke (2010) examined the effect of the Nigerian capital market on the development of

the oi and gas sector between 1999 and 2009. Using the Co-integration and Error Correction

Model, he formulated two models, one regressing a number of capital market development

variables on oil GDP and the other regressing these variables on total GDP. He obtained results

that showed that the market capitalization and the stock prices have positive influence on the

share of oil and gas sector to GDP and the GDP as a whole in the short run and has a negative

influence in the long run. Also, the number of deals has a negative influence on the share of oil

and gas sector of GDP and GDP as a whole in the short run, while in the long run; their

relationship is positive. Ogboi and Oladipo (2012) also examined the stock market-economic

growth nexus in the Nigerian economy between 1981 and 2008. The results obtained showed

that the stock market has a negative effect on economic growth in the short run but positive

effect in the long run. The Granger-Causality test, however, indicated a unidirectional causality

between stock market and economic growth which ran from economic growth to stock market

capitalization. Although, empirical studies on the impact of the Nigerian capital market have

produced mixed results, majority of available studies suggest that the Nigerian capital market

has a positive impact on growth in line with theoretical postulations.

27
 Capital market liberalization on its own promotes the development of the capital

market. At the global level, Bekaertet al. (2005) find that equity market liberalizations led to

over one percentage point of additional economic growth in those countries that implemented

them in the late 20th century. As long as domestic government debt remains at moderate levels

(less than 35% of bank deposits), the growth of bond markets contributes positively to

economic growth (Ali Abbas and Christensen, 2007) and provides a basis for the development

of other capital markets (Chamiet al.2009). Moreover, Gupta and Yuan (2009) note that capital

market liberalization yields higher benefits for incumbent firms in sectors and markets in which

competition is low; new entrants generally benefit only if liberalization is accompanied by pro-

competition reforms. Udegbunam (2002) noted that the Nigerian economy is moving towards

increased liberalization, greater openness and greater financial development. He then studied

the implications of these developments for industrial growth in

Nigeria using a simple model which relates industrial output growth to openness, stock

market development and some control variables. The study suggests that openness to world

trade and stock market development are among the key determinants of industrial output

growth in Nigeria.

2.4.2 EMPIRICAL REVIEW ON OTHER COUNTRIES

Bayer, (2022), examined pension fund, insurance companies and stock market

development in Chile, Indonesia, PhilippinesS, South Africa and Korea. The study adopted

panel cointegration and causality test and find out that stock market and insurance have positive

impact on the economies studied.

Anis (2021), examined the impact of capital market, insurance industry and mortgage

sector on the economic growth of Egypt. The study used Vector Autoregressive (VAR) model

revealed that the insurance sector has no statistically significant impact on the economy of

Egypt. Hou, (2017), studied the impact of stock market on the Taiwan economy. The study

28
adopted time series and error correction modelling econometrics procedure. The results show

that stock market impacts positively on economic growth. Demetriades, et al (2001) utilized

time series data from five developed countries, examine the relationship between stock market

and economic growth, controlling for other effect of the banking system and stock market

volatility. Their result supports the view that, although banks and stock market may promote

economic growth, the effect of bank is more. They suggested that the contribution of stock

market to economic growth may have been exaggerated by studies that uses cross country

regressions.

Mohtadi And Agarwal (2004) examined the capital market and economic growth in

developing countries using a panel data approach that covers 21emerging markets over 21years

(1977-1997), they found that turnover ratio is an important and statistically insignificant

determinant of investment by firms and that these investment in turn are significant determinant

of aggregate growth. Foreign direct investment is also found to have a strong positive influence

on aggregate growth. The result of their study indicates that both turnover ratio and market

capitalization are important variables as determinants of economic growth.

Nieuwerburghet al (2005) investigated the long terms-relationship between capital

(stock) market development and economic growth in Belgium. Their result shows that the

market causes economic growth in Belgium.

Mishra, et al (2010) examined the impact of capital market efficiency on economic

growth of India using the time series data on market capitalization, total market turnover and

stock price index over the period spanning from the first quarter of 1991 to the first quarter of

2010. Their study reveals that there is a linkage between capital market efficiency and

economic growth in India. This linkage is established through high rate of market capitalization

and total market turnover. The large size of capital as measured by greater capitalization is

positively correlated with the ability to mobilize and diversify risk on an economy wide basis.

29
The increasing trend of market capitalization in India would certainly bring capital market

efficiency and thereby contribute to economic growth of the country.

2.4.3 EMPIRICAL REVIEW ON NIGERIA.

Andabai and Owei, (2023) examined the impact of insurance sector on the capitalisation

of the Nigerian stock exchange group. The study employed time series data. Having controlled

for unit root, the Ordinary Least Square results show that the cost of insurance subscription is

a statistically significant negative correlate of the stock exchange group. Imade, (2021),

examined the impact of capital market on the Nigerian and the American economies. The study

show that capital market in general, impacts positively on both economies though with different

levels of statistical significance. Osinubi and Amaghionyediwe (2003) examined the

relationship between the Nigerian stock market and economic growth during the period 1980-

2000. Unfortunately, their result did not support the claim that stock market development

promotes economic growth.

Adam and Sanni (2005) examined the role of stock market in Nigeria's economic

growth using Granger causality test and regression analysis. The study discovered a one-way

causality between GDP growth and market capitalization and two-way causality between GDP

growth and market turnover. They also observed a positive and significant relationship between

GDP growth turnover ratios. The study advised that government should encourage the

development with economic growth.

Obamiro (2005) investigated the role of the Nigerian stock market in the light of

economic growth. The author reported a significant positive effect of stock market on economic

growth. He suggested that government should create more enabling environment so as to

increase the efficiency of the stock market, and to attain higher economic growth;

Ewahet al (2009) appraised the impact of the Nigeria capital market efficiency on the

economic growth of the nation using time series data from 1961 to 2004. They found that the

30
capital market in Nigeria has potential of growth inducing but it has not contributed

meaningfully to the economic growth of Nigeria because of low market capitalization,

illiquidity, misappropriate of funds among others.

Ezeohaet al (2009) investigated the nature of the relationship that exists between stock

market development and the level of investment and foreign private investment) flows in

Nigerian. The study discovered that stock market development promotes domestic private

investment flows, thus suggesting the enhancement of the economy's production capacity as

well as promotion of the growth of national output. However the results show that stock

development has not been able to encourage the flow of foreign private investment in Nigeria.

Afees and Kazeem (2010) critically and empirically examined the casual linkage

between stock market and economic growth in Nigeria between 1970 and 2004. The indicator

of the stock market development used are market capitalization ratio, total value traded ratio

and turnover ratio while the growth ratio of gross domestic product is used as proxy for

economic growth, using the Granger causality (GC) test, the empirical evidence obtained from

the estimation process suggests a bidirectional causality between turnover ratio and economic

growth, a uni-directional relationship from market capitalization to economic growth and no

causal linkage between total value traded. The result of the causality test is sensitive to the

choice of variable used as proxy for stock (capital) market. Overall the result of the G.C test

suggested the capital market drive economic growth.

31
 CHAPTER THREE

THEORETICAL FRAMEWORK, MODEL SPECIFICATION AND

METHODOLOGY

3.0 INTRODUCTION

This chapter deals with the theoretical framework and methodology adopted in this

study. Section 3.1 presents the theoretical framework, section 3.2 is the model specification

itself and section 3.3 outlines the source of data and methodology used in estimating the model.

3.1 THEORETICAL FRAMEWORK OF MODEL

The theoretical framework of this study is based on the Classical economics theories of

growth. The goal of these theories is to explain the determinants of growth rates within a

country and the reasons for differences in growth rates and per capita incomes. In what follows,

we summarize the major tenets of these theories under the headings of the Classicalists', Neo-

Classicalists' and the New Growth Theories.

3.1.1 THE CLASSICALISTS' THEORY ON GROWTH:

The Classical economists dominated the economic scene in the 18th and 19th centuries.

Here, there is no single growth theory but a combination of the contributions of core

classicalists like Adam Smith, David Ricardo, and Robert Malthus to form a generalized

classical theory. Classical economists explained the growth process in terms of rates of

technological progress and population growth. The major philosophy of the classical theory is

metaphysical with the invincible hand recognized as the chief means of allocating societal

resources effectively. The main components of the classical theory of growth are the production

function, technological progress, investment, the determinants of profit, size of labour force,

and the wage system. The growth model adopted during this period can be derived from the

basic equation:

Q_G=A(K)N

32
Where A is labour productivity, depending on the capital endowment per worker K. The output,

Qc depends on the labour productivity and the quantity of labour, N.

3.1.2 NEO-CLASSICALISTS THEORY

The neo-classical growth theory dates back to the late 1950s and 1960s.

Many Theorists like Sir Harrod and EvseyDomar made interesting contributions in explaining

the growth process but the most prominent contribution was the one made by Robert Solow.

The Harrod-Domar model uses a fixed coefficient or Leontief-type production function. In the

model, growth is a result of the interaction between saving and capital-output ratio with capital

acting as the engine of growth. However, the model was criticized as unstable in that its

equilibrium is precariously balanced, as on a knife-edge (Iyoha, 2004). Solow's model differed

markedly from Harrod-Domar's as it adds a second factor, labour, and introduces a third

independent, technology to the growth equation. Unlike the fixed-coefficient, constant- returns-

to-scale assumption of the Harrod-Domar model, Solow's neo-classical growth model exhibits

diminishing returns to labour and capital separately and constant returns to both factors jointly.

Technological progress became the residual factor explaining long-term growth, and its

level was assumed by Solow and other neoclassical growth theorists to be determined

exogenously, that is, independently of all other factors in the model.

The Solow's model can be represented in the equation below:

𝑌 = 𝐾 𝛼 (𝐴𝐿)1−𝛼

Where Y is gross domestic product, K is the stock of capital, L is labour and A represents

the productivity of labour which grows at an exogenous rate. a represents the elasticity of output

with respect to capital.

3.2 MODEL SPECIFICATION

This study adopts the neo-classical growth model to explain the source of growth in the

economy. The national accounts form the basis of the economies to be analyzed and it is used

33
in conjunction with the aggregate production function. Specifically, we adopt Robert Solow's

(1956) model which recognizes three sources of economic growth - stock of physical capital,

increases in the size of the labour force, Total Factor Productivity and a residual that captures

all other factors. Solow's model which uses an aggregate production function that is continuous

and homogenous of degree one which is presented below:

Y=f(L,K,T) (1)

Where Y is aggregate real output, k is stock of physical capital, L is labour and T is technical

change/Total Factor Productivity.

The model shall, however, be extended to incorporate other critical determinants of growth

particularly the financial sector as espoused in our framework. With this, the model is specified

in both the theoretical and structural forms as follows:

Theoretically, we relate the model as

𝑙𝑅𝐺𝐷𝑃 = 𝑓(𝑙𝑅𝑁𝐺𝐹, 𝑙𝐿𝑉𝑇𝑆, lPCGDP, lBSCD, lTNI) - (2)

The structural form is related as

𝑅𝐺𝐷𝑃 = 𝛼0 + ∑5𝑗=1 𝛼𝑖 𝛽 + 𝜇⋯ - - (3)

We break this further down to

𝑅𝐺𝐷𝑃 = 𝛼0 + 𝛼1 𝑙𝑅𝑁𝐺𝐹 + 𝛼2 𝑙𝑉𝑇𝑆 + 𝛼3 𝑙𝑅𝐶𝑃𝐺𝐷𝑃 + 𝛼4 𝑙𝐵𝑆𝐶𝐷 + 𝛼5 𝑙𝑇𝑁𝐼 + 𝜇..(4)

When we double-log the model, we obtain

𝑙𝑅𝐺𝐷𝑃 = 𝛼0 +𝛼1 𝐼𝑅𝑁𝐺𝐹 + 𝛼2 𝑙𝑉𝑇𝑆 + 𝛼3 𝑙𝑃𝐶𝐺𝐷𝑃 + 𝛼4 𝑙𝐵𝑆𝐶𝐷 + 𝛼5 1𝑇𝑁𝐼 + 𝜇. ..(5)

Table 1: Definition of Variables

VARIABLE DEFINITION THEORETICAL JUSTIFICATION

Gross Domestic Product at Constant Prices is
Log of Real Gross
lRGDP used instead of the current prices to remove the
Domestic Product.
distortionary effects of inflation.
The total amount of new issues (both equity
Log of Ratio of new and debt stocks) is a major indicator of how
issues to gross fixed popular the capital market is as a source of
lRNGF
capital formation growth funds. Gross Fixed Capital Formation
Formation. is the total investment in fixed assets in an
economy. The relationship between New

34
 Issues and Gross Fixed Capital Formation
measures the total amount of fixed investment
financed by new issues. New Issues constitute
a primary market activity
The Value of Traded Shares is an indicator of
liquidity in the capital market. Liquidity makes
the market attractive and provides the
Log of Value of Traded
lVTS opportunity for market participants to move in
Shares
and out of positions without difficulty. The
value of traded shares constitutes a secondary
market activity.
We use a measure of financial development to
proxy the impact of financial deregulation
since theory holds that financial deregulation
facilitates financial development. The Ratio of
The Log of the Ratio of
Credit to Private Sector to GDP is a major
lPCGDP Credit to Private Sector
indicator of financial depth. PCGDP is
to GDP
significant because it measures the capacity of
the financial system to support private-sector
economic activities relative to the size of the
economy.
Banking sector financing is a critical
The log of banking
component of growth-financing especially in
lBSCD sector credit to domestic
developing countries like Nigeria where capital
economy
markets are not well-developed
Represents Gross Capital Formation (fixed and
The log of Total National inventory investment). Investment is the most
lTNI
Investment important channel through which the financial
sector impacts real sector activities.
The Gaussian White
Μ Accounts for random disturbances in the model
Noise

Apriori expectations:

𝛼0 > 0 Constant Parameter represented by the intercept.

𝛼2 , 𝛼3 , 𝛼4 , 𝛼5 > 0. Based on the theoretical analysis so far, all the explanatory variables are

expected to have a positive relationship with real output. These capture the values of the

constant term and the slope coefficients of the independent variables which are elasticity

coefficients.

35
3.3 SOURCE OF DATA AND METHODOLOGY

This study adopts secondary data for empirical evaluation which runs from 1980 to 2022. The

data were obtained from the Central Bank of Nigeria statistical bulletins, the World Bank, the

IMF and the capital market bulletin of the Securities and Exchange Commission (SEC).

The Ordinary Least Squares (OLS) and Co-integration methods were adopted to analyse the

data sourced and to investigate the relationship between the dependent variable and the

explanatory variables. The Error Correction Model (ECM) was also formulated and its value

estimated. The choice of Co-integration approach in addition to the OLS is to mitigate its short

comings including the possibility of a spurious regression result. With the Co-integration and

ECM approach, the results obtained are able to stand the variations caused by the dynamics of

economic and non-economic variables. This has implication on the relevance this study for

future policy making.

36
 CHAPTER FOUR

PRESENTATION OF RESULTS

4.0 Introduction

In this chapter estimated results from the data analysis are presented and analysed. Among the

key indicators are the: the long run (OLS), short run (ECM) results and their contents. Need

would have to be mentioned of the presence or otherwise of expected features for the estimates

to be acceptable for policy making or not.

4.1 Unit Root Test Results.

In order to ascertain that policy prediction based on the parameter estimate shall be reliable,

the stationarity status of the series used for the estimation have to be established. This is

normally carried out by testing for the presence or order wise of unit-root using the Augmented

Dickey-Fuller test statistic. Result for stationarity status of the time series is as presented in

table 4.1.

Table 4.1: ADF Tests for Presence of Unit Root (Stationarity) and Cointegration Results
Var ADF @ Critical Value @ ADF @ 1st Critical Value @ Remarks
Levels 5% Diff. 5%
LNRGDP -1.9319 -3.5403 -3.9010 -3.5266 I(1)
LNPCGDP -2.3180 -3.5236 -5.4914 -3.5266 I(1)
LNVTI -1.1468 -3.5442 -10.5066 -3.5484 I(1)
LNRNGF -3.2228 -3.5236 -7.2973 -3.5266 I(1)
LNBSCD -2.9186 -3.5360 -5.8656 -3.5330 I(1)
LNTNI -3.0251 -3.5236 -7.2411 -3.5266 I(1)
ECM -5.0776 -2.9484 - - I(0)

Results in table 4.1 shows the Augmented Dickey Fuller (ADF) tests results for the order of

integration of the series to indicate the presence of unit root or otherwise. The last item is the

ECM order of integration to show the order of integration of the error term as test for

cointegration.

37
Results show that the series employed in the analysis are integrated of order one at 5% level of

significance. Meaning they all have unit root but when differenced once they became

stationary. This also means that the parameter estimates from the series would be efficient and

reliable.

4.2 Cointegration Result.

Since the series are all integrated of order one, the relevant test for existence of long run

convergence characteristic (Cointegration) of the series is Engel and Granger residual based

cointegration test. This is done by carrying out the ADF test on the residual (ECM) to confirm

if the error term is integrated of order zero or not. If it is integrated of order zero, it means that

there is cointegration but if otherwise then there is no cointegration. From table 4.1 ECM is

seen to be integrated of order zero at 5% level of significance. Thus implying that the series

are cointegrated. That is to say, that the short and long run dynamics of the series are capable

of converging to equilibrium even though there might be some divergence between them in the

short run.

4.3 Presentation of the ECM Results.

The short run results of the regression estimates (ECM) are as presented in table 4.2.

Table 4.2a: Short Run (ECM) Regression Estimates.

Dependent Regressors Coefficients Standard t-Values Probabilities
Variable Errors
RGDP C 6.373453 0.860536 7.406378 0.0000
D(LNRGDP(-1)) -1.006190 0.504244 -1.995444 0.0591
LNPCGDP 0.470729 0.091785 5.128626 0.0000
D(LNPCGDP(-1)) -0.084202 0.140565 -0.599025 0.5556
LNBSCD -0.075391 0.139605 -0.540034 0.5949
D(LNBSCD(-1)) -0.135864 0.111330 -1.220375 0.2359
LNRNGF -0.544296 0.191949 -2.835633 0.0099
D(LNRNGF(-1)) -0.092652 0.226732 -0.408640 0.6869
LNTNI 0.648359 0.194081 3.340656 0.0031
D(LNTNI(-1)) 0.085286 0.259565 0.328571 0.7457
LNVTS 0.031192 0.015568 2.003639 0.0582
D(LNVTI(-1)) -0.004510 0.024327 -0.185404 0.8547
ECM(-1) -0.643264 0.278875 -2.306639 0.0278

38
From table 4.2a it is seen that values of ratio of private sector credit to GDP (PCGDP), total

national investment (TNI) and value of total traded share (VTS) are correctly signed. In other

words they satisfy their expected theoretical expectations. Those of banking sector credit to

domestic economy (BSCD) and ratio of new issue to gross fixed capital formation (RNGF) did

not fulfil their a-priori expectations.

Of the five explanatory variables, the result, shows respectively, that, private sector credit to

GDP ratio (PCGDP), total national investment (TNI), value of traded share (VTS), ratio of new

issues to fixed capital formation (RNFC) are statistically significant while banking sector credit

to domestic economy (BSCD) is not statistically significant at 5% level. The lag values of the

regressors, in the model with the exception of those of ECM and the dependent variable, are

not statistically significant. The coefficient of the lag value of the dependent variable is also

not correctly signed.

Thus from the results, 1% increase in PCGDP, will cause 47% increase in real GDP but its one

period lag value will reduce RGDP by 8%. 1% increase in BSCD will reduce RGDP by 7%

and when taken in retrospect by one period, (a year), it will further reduce the RGDP by 13%.

1% rise in the ratio of new issue to gross fixed capital formation will reduce economic growth

(RGDP) by 54% but its one year retrospect will reduce it by 9%. A percentage increase in total

national issues (TNI) will increase economic growth (RGDP) by 64%but but its one year

retrospect will increase RGDP by 8%. One percent increase in total value of shares will increase

economic growth (RGDP) by 3% but by a year retrospect, it will reduce it by 0.4%.

The ECM is correctly signed, statistically significant and ranges between zero and unity

(0.643264).

39
4.4. Results of the diagnostic statistics

Table 4b shows the summary of the diagnostic statistics of the regression estimation in table

4.2a. From it, it can be seen that the coefficient of determination (𝑅 2 ) is 0.98 and when adjusted

̅̅̅̅̅
to its degree of freedom (𝑅 2 ) it reduces to 0.96. F-statistic is 88.29 approximately and has zero

probability of a type one error. The Durbin Watson statistic is 2.0 showing absence of negative

autocorrelation.

Table 4.2b: Summary of Diagnostic Statistics.

Statistic(s) Value
R-squared 0.980566
Adjusted R-squared 0.969461
F-statistic 88.29895
Prob(F-statistic) 0.000000
Durbin-Watson stat 2.010128

4.5 Discussion of the ECM Results.

The results in tables 4a and 4b show some interesting concern for economic growth. Among

such, is the banking sector credit to the domestic economy (BSCD) which happens to be

negative instead of being positive. This shows that banking sector credit to the domestic

economy is counterproductive instead of expanding production it reduces it. This can be

predicated on the poor banking culture of Nigerians and practice of excessive consumption

expenditure. The value is not, however, statistically significant.

The value of the ratio of new issues to that of fixed capital formation (RNGF), is also not

correctly signed and statistically significant. Instead of increasing economic growth by being

positive, it rather reduces it by being negative and it is statistically significant. This also reflects

the effect of poor infrastructure provision in the economy and its drag on economic

productivity. The dearth of adequate infrastructure in economic activities in the economy could

be the explanation of this anomalous impact of RNGF on real RGDP. The correct sign of the

40
rest explanatory variables (PCGDP, NTI and VTS) shows that they consistently retain their

importance according to theory in driving economic productivity of any nation, moreover, this

is verified by their statistical significance at 5% level.

The F-statistic of the result is 88.30 approximately. This shows that the explanatory variables

jointly explain significantly, the systematic behavior of economic growth (RGDP) in Nigeria.

The probability of the F-statistic being zero, implies that there is no chances of committing

type one error in rejecting the null hypothesis of the parameters of the model. This means that

rejecting the null hypothesis in this analysis is absolutely correct decision.

The coefficient of determination ̅𝑅̅̅2̅ of 96% shows that the regressors in the model account for

96% systematic variation in economic growth of Nigeria as proxied by RGDP. The F-statistic

and the ̅̅̅

𝑅 2̅ show that the goodness-of-fit of the model of investigation is high and very good

for the study on hand. This on the whole, shows that the explanatory variable included in the

specified model are appropriate for modeling economic growth in Nigeria.

The value of Durbin-Watson statistic being 2.0 shows a clear absence of auto or serial

correlation in the model. This means that the predictive ability of the estimated parameters are

very efficient. Meaning that every prediction from the model based the estimated parameter

are very reliable.

The ECM value of 64.32 implies that 64.32% of the divergence between the short and long run

dynamics are reconciled, annually, to convergence to equilibrium and it is statistically

significant at 5% level of significance. This, on the whole, justifies the specified model as a

very good instrument for modelling economic growth in Nigeria.

41
4.6 Presentation of the long run (OLS) Results.

Tables 4.3a and 4.3b present the long run regression results of the study as reflected in the

Ordinary Least Square (OLS) results the series. Table 4.3a shows the OLS parameter estimates,

standard errors and t-statistics to measure the individual statistical significance of the variables

at 5% level.

Table 4.3a: Long Run (OLS) Regression Estimates.

Dependent Regressors Coefficients Standard t-Values Probabilities
Variable Errors
RGDP C 5.870847 0.750737 7.820108 0.0000
LNPCGDP 0.536588 0.083514 6.425134 0.0000
LNBSCD -0.200436 0.112857 -1.776018 0.0859
LNRNGF -0.692194 0.165981 -4.170325 0.0002
LNTNI 0.784047 0.173534 4.518120 0.0001
LNVTS 0.031650 0.013851 2.285081 0.0295
Table 4.3b: Summary of Diagnostic Statistics.
Statistic(s) Value
R-squared 0.974300
Adjusted R-squared 0.970017
F-statistic 227.4645
Prob(F-statistic) 0.000000
Durbin-Watson stat 1.757831

From the OLS regression results, it can be seen that bank credit to domestic sector (BSCD) and

ratio of new issues to gross fixed capital formation (RNGF) do not still satisfy their a-priori

expectation, moreover, BSCD is still not statistically significant. Meanwhile, the other

regressors, PCGDP, TNI and VTS satisfy their theoretical expectations and are still statistically

̅̅̅̅2 ) is 97% while the F-statistic is

significant at 5% level. The coefficient of determination (𝑅

still very statistically significant at 5% level. The Durbin-Watson statistic approximately 2.0

showing that there is no self-generating correlation among the error terms of the observations

of the series which is referred to as auto correlation.

42
 CHAPTER FIVE.
SUMMARY AND CONCLUSION OF RESULTS
This chapter presents the policy implications, policy recommendation and conclusion from the

study.

5.0 Policy Implication.

The analysis of results in chapter four has a number of policy implications for economic growth

in Nigeria. These are as presented below:

i. Ratio of private sector credit to GDP (PCGDP) is critical correlate to RGDP. This

means that in the process of modeling economic growth in Nigeria, credit to private

sector and GDP, in particular, their ratio, should enhanced as it would boost

economic growth.

ii. Value of Traded Stock (VTS) is also another very crucial instrument for enhancing

economic growth. Since the result shows that it is a positive correlate of RGDP.

This means too, that policy makers in Nigeria should pay policy attention to it to

enhance it. So that RGDP can continue to grow.

iii. National total investment (NTI) is also another critical instrument which is

positively correlated with RGDP. It also statistically significant. Thus it forms an

important variable in the process of modeling economic growth in Nigeria.

iv. Banking credit to the economy (BSCD) being a negative correlate shows the

evidence of extreme poor banking culture in Nigeria. This calls for serious policy

attention.

v. Ration of new issues to gross fixed capital formation (RNFG) having a negative

correlation to RGDP also evidences the very poor state of infrastructural

development in Nigeria.

43
 vi. All the lag values of the regressors not been statistically significant shows that the

variable in the model do not have retrospect impact on economic growth variable

(RGDP).

5.1 Policy Recommendations.

Base on the foregoing, below are the policy recommendations of the study.

i. The proportion of the GDP dedicated to private sector should be increased to boost

continuous growth in RGDP.

ii. The values of total traded shares (VTS) and national total investment (NTI) should

also be enhanced so as to boost RGDP as this will directly increase economic

growth.

iii. Banking policy should be made to strengthen inclusive banking and create banking

awareness among Nigerians. This will reverse the negative correlation of bank

credit to the economy to RGDP.

iv. Infrastructure relevant to production should be invested upon so as to reverse the

negative impact of the new issues out of gross fixed capital formation (GFCF).

5.2 Conclusion.

The study examined the impact of capital market on economic growth of Nigeria. The results

of the study shows that value of traded shares, total national investment and bank credit to

private sector share of GDP as expected, are positively correlated with real gross domestic

product RGDP in Nigeria. They were also found to be statistically significant in encouraging

economic growth in Nigeria.

The ratio of new issues to gross fixed capital formation (RNGF) and bank credit to domestic

economy (BCSD) were found to be negatively correlated to RGDP instead of being positive

correlates.

44
Base on the above the study concludes that to enhance economic growth in Nigeria, policy

should be directed at encouraging the growth and increase of total national investment, total

value of traded shares as well that of credit to private sector since they would always channel

such credit facilities to production. The critical role of infrastructure and total strength of

productive capacity of the economy as a whole, should not neglected in planning economic

growth in Nigeria. This should therefore, stimulate the need for policy at encouraging growth

in infrastructure and banking culture among Nigerians. This will reverse the undesirable impact

of RNGF and PCSDC on RGDP.

45
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 APPENDICES
Appendix I: Series and Data for the study.
Year RGDP RNGF VTI PCGDP TNI BSCD
1981 19748.53 0.075847 0 6.151762 11.976 5.725914
1982 18404.96 0.205339 0 7.157501 26.476 6.375795
1983 16394.39 0.44941 0 7.349939 45.832 6.151426
1984 16211.49 0.785027 0 7.514391 55.904 6.211178
1985 17170.08 0.113987 0 6.958579 6.876 5.99109
1986 17180.55 1.090141 0.6248 7.695945 65.904 7.528398
1987 17730.34 1.564051 0.0279 8.616549 88.664 6.563383
1988 19030.69 1.837939 0.0669 8.65814 111.154 6.010196
1989 19395.96 2.026638 0.1434 7.328533 130.554 5.042703
1990 21680.2 1.253607 0.4 6.782195 91.9039 4.948032
1991 21757.9 1.839097 0.4562 7.008182 133.156 4.992393
1992 22765.55 1.868377 0.7936 6.415129 135.9699 8.171612
1993 22302.24 1.435357 1.788 10.11138 112.3265 6.940109
1994 21897.47 1.353634 6.9168 8.108599 103.3265 7.994131
1995 21881.56 1.449955 10.2226 5.806165 103.3264 6.48923
1996 22799.69 1.357715 13.5553 5.839275 103.3265 6.15079
1997 23469.34 0.905388 14.0712 7.156097 72.9309 7.012976
1998 24075.15 1.088845 28.145 7.324552 88.9309 7.608687
1999 24215.78 0.965076 57.6482 7.864657 80.9309 8.152684
2000 25430.42 0.965832 59.4041 7.509444 86.8951 8.218357
2001 26935.32 28.94059 113.8825 9.289721 1985.453 9.843124
2002 31064.27 32.02684 223.7725 8.090231 2421.143 8.070036
2003 33346.62 32.97332 254.6831 8.088351 3026.347 8.896912
2004 36431.37 47.19081 468.5884 7.84407 3467.741 8.451011
2005 38777.01 33.53153 1074.884 7.950867 2521.73 8.425299
2006 41126.68 14.29329 1675.614 7.541084 1509.07 8.111026
2007 43837.39 15.81554 683.9321 10.57984 1304.183 13.38805
2008 46802.76 11.40828 799.1943 19.77047 916.2816 18.57315
2009 50564.26 15.77144 638.7539 22.75484 1392.43 19.60353
2010 55469.35 21.82225 808.4249 18.96213 2003.95 13.4594
2011 58180.35 36.18058 2349.866 15.06752 3048.49 11.03214
2012 60670.05 41.7747 1337.931 18.31089 3609.654 10.58945
2013 63942.85 39.17109 977.4392 17.8514 3650.881 11.52443
2014 67977.46 36.70103 575.7043 18.58616 3879.47 13.29021
2015 69780.69 36.85998 1077.275 19.63529 3845.317 13.06695
2016 68652.43 45.88883 1202.217 20.49735 4555.502 14.59721
2017 69205.69 46.67381 925.2823 19.54685 4495.48 12.77727
2018 70536.35 31.62266 1028.173 17.54347 3342.388 10.17951
2019 72094.09 27.87564 916.1231 17.63047 3190.608 10.43073
2020 70800.54 34.65801 1164.419 18.81982 3383.141 11.22807
2021 73382.77 40.47717 1168.526 18.65431 4135.479 12.19745
2022 74752.42 44.29306 0 19.2486 4675.86 12.93561

50
RGDP Real GDP (in Nbillions)

RNGF Ratio of new issues to gross fixed capital formation

BSCD Bank sector credit to Domestic economy

PCGDP Ratio of Credit to Private Sector to GDP (in %)

TNI Total National Investment (in Nbillions)

VTS Value of Traded Shares (in Nbillions)

Appendix II: Estimation Results

Cointegration Result

Null Hypothesis: ECM has a unit root

Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -5.077689 0.0002

Test critical values: 1% level -3.632900
5% level -2.948404
10% level -2.612874

*MacKinnon (1996) one-sided p-values.

Appendix III
ECM (Short run Estimations)
Dependent Variable: LNRGDP
Method: Least Squares
Date: 07/10/24 Time: 15:43
Sample (adjusted): 1988 2021
Included observations: 34 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C 6.373453 0.860536 7.406378 0.0000

D(LNRGDP(-1)) -1.006190 0.504244 -1.995444 0.0591
LNPCGDP 0.470729 0.091785 5.128626 0.0000
D(LNPCGDP(-1)) -0.084202 0.140565 -0.599025 0.5556
LNBSCD -0.075391 0.139605 -0.540034 0.5949
D(LNBSCD(-1)) -0.135864 0.111330 -1.220375 0.2359
LNRNGF -0.544296 0.191949 -2.835633 0.0099
D(LNRNGF(-1)) -0.092652 0.226732 -0.408640 0.6869
LNTNI 0.648359 0.194081 3.340656 0.0031

51
 D(LNTNI(-1)) 0.085286 0.259565 0.328571 0.7457
LNVTI 0.031192 0.015568 2.003639 0.0582
D(LNVTI(-1)) -0.004510 0.024327 -0.185404 0.8547
ECM(-1) 0.243264 0.378875 0.642068 0.5278

R-squared 0.980566 Mean dependent var 10.53938

Adjusted R-squared 0.969461 S.D. dependent var 0.490826
S.E. of regression 0.085774 Akaike info criterion -1.791340
Sum squared resid 0.154500 Schwarz criterion -1.207731
Log likelihood 43.45278 Hannan-Quinn criter. -1.592313
F-statistic 88.29895 Durbin-Watson stat 2.010128
Prob(F-statistic) 0.000000

Appendix IV
Longrun Results

Dependent Variable: LNRGDP

Method: Least Squares
Date: 07/10/24 Time: 15:55
Sample (adjusted): 1986 2021
Included observations: 36 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C 5.870847 0.750737 7.820108 0.0000

LNPCGDP 0.536588 0.083514 6.425134 0.0000
LNBSCD -0.200436 0.112857 -1.776018 0.0859
LNRNGF -0.692194 0.165981 -4.170325 0.0002
LNTNI 0.784047 0.173534 4.518120 0.0001
LNVTI 0.031650 0.013851 2.285081 0.0295

R-squared 0.974300 Mean dependent var 10.49648

Adjusted R-squared 0.970017 S.D. dependent var 0.509245
S.E. of regression 0.088179 Akaike info criterion -1.867885
Sum squared resid 0.233266 Schwarz criterion -1.603965
Log likelihood 39.62193 Hannan-Quinn criter. -1.775770
F-statistic 227.4645 Durbin-Watson stat 1.757831
Prob(F-statistic) 0.000000

52