Linkage Between Capital Market Development and Economic Growth Essay

The smashing commercialize placeplace is an integral part of the monetary dodge that provides efficient delivery mechanism for mobilization and allocation, management and distribution of long fund (Sunday O. E. Ewah and Judey Bassey). The jacket crown securities industry is a foodstuff for long-term debt and virtue securities, where business enterprise and goernment can raise fund for long-term enthronisations. It is normally divided into two broad categories the buy in commercialise and the fond regard market (Central Bank of Lesotho Economic look back 2009). According to Tokunbo S.Osinubi (2000), the stock market is reported to perform some functions which promote the exploitation and exploitation of an economy.It plays a pivotal role in mobilizing idle fund from surplus sparing unit and transmits such fund into shortfall unit for enthronement in long-term project. The supplier of funds argon basically individuals and embodied bodies who subscribe to majus cule market instrument as a port of adding value to their unused pecuniary resources while the deficit unit i. e. the stamp out users of the fund are government and bodily bodies as individual can non lift the superior market for fund.Equally, the majuscule market provides ideal source for corporate bodies and government to pool monies from people and corporate bodies to finance chapiter intensive project which its internal purse cannot cope with. Akingboungbe (1996) opined that the importance of the cracking lies in its financial intermediation capacity to link the laggard sector of the economy with the active sector. According to him, the absence of such capacity robs the economy of investment and production of goods and services for societal advancement.Capital market in all nation lasts to provide long-term funds for government and corporate bodies for developing purpose. It deals with long-term financial instruments which include equities or stocks, debentures, gove rnment bonds and derivatives like hereafter options. In the dandy market, the stock in trade is money which is a good deal viewed as the lubricant of the economy and which can be raised done various instruments such as right issues, debt instrument, honor offering as well as by and through the stock alter.This is a pointer to the circumstance that the large(p) letter market provides the wherewithal with which the goal of sparing ontogenesis can be actualized, and as held the key to sparing prosperity of any nation. A strong superior market is capable of assisting a nation to muster financial resources and skills for rapid ontogenesis and out yield. The capital market is viewed as engine of increase in most countries. Empirical investigate by CBL Economic Review 2009 indicated that the capital market connects monetary sectors with the real sector and therefore facilitates growth in the real sector and stinting development.The CBL stinting review adduced the chas e as the fundamental channels through which capital market is affiliated to economic growth First, capital markets increase the proportion of long-term savings (pension, funeral savings) that is channeled to long-term investment. Capital market enables contractual savings industry to cite long-term savings from small individual households and channel them into long-term investment. It fulfils the transpose of current purchasing power, in monetary forms from surplus sector to deficit sectors, in exchange for reimbursing a great purchasing power in future.In this way, the capital market enables corporations to raise funds to finance their investments in real estate. The implication will be an increase in pile up consumption and hence growth and development. Second, capital market also provides equity capital and infrastructure development capital that has strong socio-economic benefit through development of roads, housing, energy, telecommunication, etc. These projects are ideal f or financing through capital market via long-term bonds and asset backed securities.Moreover, capital market promotes public-private confederacy to encourage private sector participation in productive investment. The command to shift economic growth from public to private sector has fit inevitable as resources continue to diminish . It assists the public sector to nearly the resource gap, and complement its effort in financing socio-economic development through raising long-term project based capital. It also attracts foreign portfolio investors who are critical in supplementing the domestic savings levels.It facilitates inflow of foreign exchange into the domestic economy. Furtherto a greater extent, the CBL Economic review 2009 equally asserted that countries with developed capital market hasten higher economic growth than countries without. An instance cited to release this position is South Africa, the country with the largest and most developed capital market in Africa in terms of market capitalization which is experiencing faster growth compared to other countries with less-developed capital market.In Nigeria, the capital market seems not to have contributed so robustly to economic growth as the empirical research of the CBL Economic review and the predict of endogenous growth model which create mentally positive correlation amidst the development of the capital market and economic growth both suggested. The capital market in Nigeria started rolling in 1960 when the Nigeria channel Exchange was opened. It metamorphosed from the Lagos Stock Exchange which had been created in 1959 based on the recommendation of the Barback Committee set up by the then federal official government.However, the Nigeria capital market has enjoyed a decade of unprecedented growth in the past five years. Going by the annual report of the Nigeria Stock Exchange (NSE) the total market capitalization has increased by over 90%though, this feat was short lived by the decline of 45. 8% in market capitalization recorded in 2008. According to the NSE, the impressive death penalty of the capital market can be attributed to some reasons First, the bank consolidation exercise which introduced a minimum capital requirement for banks stimulated the public presentation of the capital market as it has encouraged most banks to choose the stock market.Equally, the privatization policy has also significantly impacted on the performance of the capital market. Even though with this scenario, the Nigeria capital market is yet to keep grounds with the trend across the globe. According to Sule Ndanusa the Director General of the Securities and Exchange Commission, the Nigeria capital market is tranquilize a small market by inter field of studyistic standard as its equity listing and market capitalization stood at 196 and $7billion on an individual basis.This size of the Nigeria capital market is affected by the continuous dispraise of the naira. While the global trend dictates that the market capitalization of the capital market should be nearer the GDP or be to a higher place it, the market capitalization of the Nigeria capital market hovered most 60% and 39% respectively for 2007 and 2008 (NSE Annual report2009) respectively compared to that of South Africa which stood at 239%. Thus, a lot still need to be done to make the Nigeria capital market the engine of growth for the Nigeria economy.Given the scenario in the Nigeria capital market, the point of departure of this employment is to raise the linkage between capital market development and economic growth with a view to explore the channels through which the capital market in Nigeria can be made engine of growth while addressing problem inherent in its operation. In the word of Adebiyi (2005), capital market in developing countries often suffer from classical desolate such as illiquidity, escape of equity capital, bank dominated economies and lack of investors confidence in the c apital market.The situation in the Nigeria capital market is not different as the predominant problem revolves around low market capitalization as well as illiquidity as most research works have revealed (e. g. Emenuga 2004, Judey Bassey and Sunday E. Ewah). This is coupled with the more serious obstacle of non-strengthening of the channels of transmission from financial development to economic growth such as financial depth(ratio of financial asset to national income), advanced financial structure(moving from bank and non-bank ntermediaries to stock market ), size as well as the efficiency of the financial system .The description of the Nigeria capital market as a small market by external standard as well the dominant roles which banks still play in the financial system at the expense of other financial intermediaries lends faith to this viewpoint. Several recent overviews of the link between financial market development and economic growth affirm positive correlation between fina ncial market development and economic growth.But, in Nigeria evidences to this effect are weak, ill-judged and non-definitive. For instance, Sunday O. E. Ewah and Jude Bassey (2004) concluded that capital market has growth inducing probable but it has not contributed to economic growth owing to such problems such as low market capitalization and illiquidity. In similar vein, efforts were equally made by Nyong (1997) to develop an aggregate index of capital market development and use it to determine its relationship with long-term growth in Nigeria. The study employed a time series data between 1970 and 1974.The result of the study reveals that capital market is negatively and significantly correlated with long-run growth in Nigeria. The result also showed that there exist bi-directional causality between capital market development and economic growth. However, Levine and Zervos (1996) completed positive relationship between the measure of stock market development and long-run gro wth rates. Ariyo and Adelegan (2005) contended that the liberalization of capital market contributes to the growth of the Nigeria capital market but its impact at the macro-economy is negligible.That is, the question of the channels through which capital market development correlate with economic growth has not been given detailed attention in empirics literary works in Nigeria as most available empirical analysis in this direction are cross-country study and more so, are conducted for Asian and European economy. much(prenominal) works include Jose De Gregorio et al (2003) Dipendra Sinha et al Saray Joy et al (2002) .A more potent proof of the scanty of evidence on the channel of transmission from financial development and economic growth can be found in the word of Valpy FitzGerald (2006) who stated that financial development and economic growth are clearly related and this relationship has occupied the school principal of economists from Smith to Schumpeter, although the channe ls and direction of this relationship has remained unresolved in both theory and empirics literature. Thus, the absence of empirical analysis in this direction has leave a serious gap that needed to be filled with a research enquiry.Following the foregoing from the few empirical evidences sighted above which reveal inadequacy and lack of agreement among analysts about the sine-qua-non role of capital market in economic growth coupled with scanty of literature on channels of transmission from financial development to growth and the permeative problem of decline in market capitalization and illiquidity which characterize the Nigeria capital market as reflected in Nigeria Stock Exchange Annual report(2009), it becomes alpha to turn the searchlight on the capital market and every other topic that accompany or propel it with a view to empirically examine how linkage between capital market development and economic growth as well as the channels of transmission from capital market devel opment to growth can be pursued to bring the ambition of economic growth to fruition.