THE IMPACT OF STOCK MARKET PERFORMANCE ON   THE GROWTH OF NIGERIAN ECONOMY

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                                          ABSTRACT

This study is motivated primarily by the need to enhance capital accumulation from the stock market, being the long term end of the financial system. This study is an investigation of the impact of Nigeria stock exchange performance on the economic growth of Nigeria. To accomplish these objectives, an econometric methodology was adopted as a tool for testing the stated hypothesis. The ordinary least square was chosen as the estimation tool because of the advantages it has over other estimation technique considering the phenomenon under study.

The result of the student – t test revealed that the coefficient for market capitalization, investment rate and real exchange rate are all statistical significant at 5 percent level of significance. But the coefficient of real interest rate were not statistically significant at 5 percent level of significance The R² which is the coefficient of multiple determination also revealed that 99 percent of the variation in the dependent variable is caused by the variation in the explanatory variables. The F test result suggested that the model is statistically significant.

Expansion and efficiency of the Nigerian Stock Market would also be realizable if the recommendations in this project are considered This study recommends that the financial sector should be fully liberalized for efficient functioning of the financial system, the activities of the Nigerian Stock Exchange should be made more transparent as this will bring bout confidence in the mind of investors and people will be encouraged to invest, and the Government should encourage Nigerians to take advantage of the Stock Market and save for investment growth and capital formation in Nigeria.

 CHAPTER ONE

1.1 Background of the study ………………………………………1-10

1.2 Statement of the problem………………………………………10-11

1.3 Objectives of the study…………………………………………11

1.4 Hypothesis of the study…………………………………………11

1.5 Significance of the study……………………………………….12-13

1.6 Scope and limitation of the study………………………………13

CHAPTER TWO                                    

LITERATURE REVIEW

2.1 Theoretical literature…………………………………………..14-48

2.2 Empirical literature…………………………………………….48-56

CHAPTER THREE

METHODOLOGY

3.1 Method of Evaluation…………………………………………..57-61

3.2 Model specification……………………………………………..61-63

3.3 Data required and source………………………………………..63

CHAPTER FOUR

PRESENTATION AND ANALYSIS OF RESULT

4.1 ADF Test for stationery………………………………………64-66

4.2 Co integration test……………………………………………..66-67

4.3 Presentation of regression result………………………………67-68

4.4 Interpretation of regression results……………………………68-70

4.5 Statistical criteria……………………………………………….71-74

4.6 Economic criteria……………………………………………….74-78

4.7 Evaluation of hypothesis……………………………………….78

CHAPTER FIVE

SUMMARY, CONCLUSION AND POLICY RECOMMENDATION

5.1 Summary…………………………………………………….79-80

5.2 Conclusion………………………………………………….80-82

5.3 Policy Recommendation………………………………..….82-83

Bibliography………………………………………………….84-90

Appendix……………………………………………………..91-97

  CHAPTER ONE

1.1     BACKGROUND TO THE STUDY

Primarily, a stock market is the place where companies can raise money to make their businesses bigger and better. Companies raise money by selling shares or stocks to investors. At the same time, the stock market gives investors an opportunity to invest in these companies and benefit from any profit they can make.

A stock market can also be called a capital or securities market as it encompasses the stock exchange, the branches, and the stockbrokers. An organized securities market requires a securities exchange, a securities commission or other regulatory agency, and intermediaries such as dealers, brokers, securities analysts, etc. Virtually all costs are borne by those who benefit. The intermediaries receive their fees from the issuers or investors to whom they provide a service. The stock market is usually funded through fees paid by investors and issuers; even the expenses of the securities commission may be partially paid for by registration fees rather than being a major burden on the government budget. Companies which go public are subject to continuous cost of providing financial information, transferring shares, paying dividends, and other aspects of shareholder relations. The stock market is the aspect of the financial system which mobilizes and channels long term funds for economic growth. The stock market embraces trading in both new issues (primary) and old issues of stocks (secondary). Securities are primarily of 2 types: debt and equity. Debt securities include federal government development stock (GDS), industrial loans, preference stocks, bonds e.t.c, while equity securities mainly concern ordinary stocks which impose higher liabilities on the holders. Portfolio investment in the capital market is the acquisition of financial assets (which includes stock, bonds, deposits, and currencies) from one country in another country. It is a form of investment that attempts to achieve a mixture of income and capital growth, it deals with an institutional arrangement involving the Securities and Exchange Commission (SEC), the Nigerian Stock Exchange (NSE), the operators, and the investors. Stock market is viewed as a medium to encourage saving, help channel savings into productive investment, and improve the efficiency and productivity of investment. The emphasis on the growth of stock markets for domestic resource mobilization has also been strengthened by the need to attract foreign capital in non- debt creating forms. A viable equity market can serve to make the financial system more competitive and efficient. Without equity markets, companies have to rely on internal finance through retained earnings. Large and well established enterprises are in a privileged position because they can make investment from retained earnings and bank borrowings, while new companies do not have easy access to finance. Without being subjected to the scrutiny of the stock market, big firms get bigger, and for the emerging smaller companies, retained earnings and fresh cash injections from the controlling shareholders may not be able to keep pace with the needs for more equity financing which only an organized market place could provide. The corporate sector would also be strengthened by the requirements of equity markets for the development of widely acceptable accounting standards, disclosure of regular, adequate, and reliable information. While closely held companies can camouflage poor investment decisions and low profitability, at least for a while, publicly held companies cannot afford this luxury. The availability of reliable information would help investors make comparism of the performance and long term prospects of companies; corporations to make better investment and strategic decisions; and provide better statistics for economic policy makers.

The capital market in any country is one of the major pillars of long term economic growth and development. The market serves a broad range of clientele including different levels of government, corporate bodies, and individuals within and outside the country. For quite some time now, the capital market has become one of the means through which foreign funds are being injected into most economies, and so the tendency towards a global economy is more feasible/ visible there than anywhere else. It is, therefore, quite valid to state that the growth of the capital market has become one of the barometers for measuring overall economic growth of a nation.

Historically, the financial sector in the developing world has been primarily bank based. But, in recent years, there has been a gradual shift to a more holistic approach which, alongside the banks, seeks to develop the securities market. Some of the strength of the securities market which makes them the focal point of the shifting emphasis is their ability to:

1. mobilize long term savings for financing long tenure investments;
2. provide risk capital (equity) to entrepreneurs;
3. encourage broader ownership of firms; and
4. Improve the efficiency of resource allocation through competitive pricing mechanisms.
5. Provision of alternative sources of finance other than taxation and foreign loan to fund public projects.

Apart from these primary benefits, a developed securities market in the sense of efficient financial intermediation further brings additional gains to the economy. These gains arise through:

1. lower cost of equity capital for firms;
2. imposition of discipline on corporate managers as share prices react to right and wrong judgment in firm’s investment decisions;
3. existence of mechanisms for appropriate pricing and hedging against risk; and
4. Increased flow of funds to the domestic economy as international capital responds to the thriving stock market.

The development of securities market could help to strengthen corporate capital structure (i.e. the composition of the capital of the firms) and efficient and competitive financial system. The stock market encourages savings by providing households with an additional instrument which may better meet their risk preferences and liquidity needs.

In well-developed capital markets, share holding provides individuals with a relatively liquid means of sharing risks in investment projects. To the extent that securities and bonds are a viable and relatively secure form of investment with an attractive long term return, they serve two functions:

1. stocks provide an incentive to save and invest; and
2. Financial savings are promoted and domestic savings rate increase as a whole.

Stock market development has an important role to play in economic development. Shahbaz and his friends (2008) argue that stock market development is an important wheel for economic growth as there is a long-run relationship between stock market development and economic growth. Stock market development has the direct impact in corporate finance and economic development. Gerald (2006) states that stock market development is important because financial intermediation supports the investment process by mobilizing household and foreign savings for investment by firms. It ensures that these funds are allocated to the most productive use and spreading risk and providing liquidity so that firms can operate the new capacity efficiently. A growing body of literature has affirmed the importance of financial system to economic growth. Financial markets, especially stock markets, have grown considerably in developed and developing countries over the last two decades. Claessens, et al (2004) states that several factors have aided in their growth, importantly improved macroeconomic fundamentals, such as more monetary stability and higher economic growth. General economic and specific capital markets reforms, including privatization of state-owned enterprises, financial liberalization, and an improved institutional framework for investors, have further encouraged capital markets development. Similarly Mishkin (2001) states that a well-developed financial system promotes investment by identifying and financing lucrative business opportunities, mobilizing savings, allocating resources efficiently, helping diversify risks and facilitating the exchange of goods and services. From the view point of Sharpe, et al (1999), stock market is a mechanism through which the transaction of financial assets with life span of greater than one year takes place. Financial assets may take different forms ranging from the long-term government bonds to ordinary shares of various companies. Stock market is a very important constituent of capital market where the shares of various firms are traded Trading of the shares may take place in two different forms of stock market. When the issuing firm sells its shares to the investors, the transaction is said to have taken place in the primary market but when already issued shares of firms are traded among investors the transaction is said to have taken place in the secondary market. Stock markets are very important because they play a significant role in the economy by channeling investment where it is needed and can be put to best (Liberman and Fergusson, 1998). The stock market is working as the channel through which the public savings are channelized to industrial and business enterprises. Mobilization of such resources for investment is certainly a necessary condition for economic take off, but quality of their allocation to various investment projects is an important factor for growth. This is precisely what an efficient stock market does to the economy (Berthelemy and Vardoulakis, 1996). Earlier research emphasized on the role of the banking sector in the economic growth of nation. In the past decade, the world stock markets surged, and emerging markets accounted for a large amount of this boom (Demirguc-Kunt and Levine (1996a).  Recent research has begun to focus on the linkages between the stock markets and economic development. New theoretical work shows how stock market development might boost long-run economic growth and new empirical evidence supports this view. Demirguc-Kunt and Levine (1996a), Singh (1997), and Levine and Zervos (1998) find that stock market development is playing an important role in predicting future economic growth. In underdeveloped countries like Nigeria, the development and growth of stock markets have been widespread in recent times. Despite the size and illiquid nature of stock market, its continued existence and development could have important implications for economic activity. For instance, Pardy (1992) has noted that even in less developed countries capital markets are able to mobilize domestic savings and able to allocate funds more efficiently. Thus stock markets

 COMMERCIAL BANK CREDIT AND AGRICULTURAL  OUTPUT IN NIGERIA: (1982-2007)

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ABSTRACT

This research work examined the impact of commercial Bank credit on Agricultural output in Nigeria using Macroeconomic variables (commercial bank credit and agricultural output). The broad objective of the study is to investigate the extent to which commercial bank credit had supported agricultural output Nigeria. The specific objectives are: (i) to determine the impact of commercial banks credit on agricultural output in Nigeria, and (i) to determine the impact of agricultural output on economic growth in Nigeria. The methodology adopted  for the study was ordinary least square (OLs) involving the student’s T-test, to test  the significance  of the individual parameter estimate, the F-test, to test the significance of the entire regression plane, the R² and Adjusted R², to test the joint influence of the explanatory variables on the dependent variable. Finally, Durbin-Watson’s statistics (DW) was used to check the presence or absence of serial correlation on the data.  After the regression, the result shows that: firstly, agricultural output as well as commercial bank credit to agriculture and real interest rate contributed a lot to economic growth in Nigeria. Secondly there is a general agreement that Nigeria agricultural sector is grossly underfunded.  Finally, the share of actual expenditure that went to the agricultural sector compared unfavorable with the shares that went to other sectors. Based on the findings above, the researcher made the flowing suggestions:

There is the need for improvement of public expenditure tracking system in agricultural sector.

There is also the need for clarification of the roles of the three tiers of government in agricultural services delivery.

There is the need for applied research targeted at priority issues

 CHAPTER ONE

INTRODUCTION

• BACKGROUND TO THE STUDY……………………………………….1
• STATEMENT OF PROBLEM…………………..………………………..6
• OBJECTIVE OF THE STUDY…………………………….…………..…9
• HYPOTHESIS OF THE STUDY…………………………………………9
• SIGNIFICANCE OF THE STUDY…………………….………………..10
• SCOPE AND LIMITATION OF HE STUDY…………………………..10

CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1    THEORITICAL L ITERATURE……………………………….……….12

2.1.1 THE PRE-REQUISITE THESIS VERSUS

THE CONCURRENCE THESIS……………………………………….14

2.2    FINANCING AGRICULTURE IN NIGERIA …………………………18

2.1.1           SOURCES OF AGRICULTURAL FINANCING …………………….20

2.3    COMMERCIAL BANK CREDIT AND AGRICULTURAL OUTPUT………………………………………………………………… 23

2.4    EMPIRICAL LITERATURE……………………………………………..28

CHAPTER THREE

RESEARCH METHODOLOGY

3.1    MODEL SPECIFICATION …………………………………….……….34

3.2    ESTIMATION PROCEDURE………………..…………………………36

3.3    EVALUATION TECHNIQUES………..………………………………..37

3.4    DATA REQUIRED AND SOURCES…………………………………..41

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

4.1    UNIT ROOT TEST………………………………………………………43

4.2    CO INTEGRATION TEST………………………………………………44

4.3    PRESENTATION AND INTERPRESTATION OF RESULT………..46

4.3:1 INTERPRESTATION OF REGRSSION RESULT…………..………..47

4.4    EVALUATION OF EMPIRICAL RESULT……………………………..48

4.4:1 ECONOMIC CRITERIA (A PRIORI EXPECTATION)……………….48

4.4:2 STATISTICAL CRITERIA……………………………………………..50

4.4:3 COEFFICIENT OF DETERMINATION (R²)………………………….51

4.4.4 THE T-STAISTICS……………………………………………………..51

4.4.5 THE F-TEST…………………………………………………………….52

4.5. ECONOMIC CRITERIA (SECOND ORDER TEST)…………………53

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION

5.1    SUMMARY……………………………………………..……………..… 59

5.2    CONCLUSION …………………………………………………………..62

5.3    RECOMMENDATION………………………………………..………….63

BIBLIOGRAPHY……………………………………………….…………67

APPENDIX

CHAPTER ONE

1.1    BACKGROUND TO THE STUDY

          As confirmed by Ugochukwu (1999:02), agriculture is the first and most thriven occupation of mankind. From its early form of wild fruits, leaf, root, snail and insect gathering, fishing and hunting, to its present mechanized and almost automated form, it has undergone a lot of development

Okah (2007:04) conceived agriculture as the cultivation of land, raising animals for the purpose of production of food for man, feed for animals, and raw materials for our industries. It also consist of croup production, forestry, livestock and fishing. It is also essential for expansion of employment opportunity, reduction of poverty and improvement of income distribution, speeding up industrialization and easing the pressure of balance of payments disequilibrium.

The role of agriculture in transforming both the social and economic frame work of an economy cannot be over emphasized. Anyanwu (1997:213) posits that “agriculture has been the main source of gainful employment from which Nigeria nation can feed its feeding population, providing the nations industries with local raw materials and as a reliable source of government revenue. Corroborating the above is Reynolds(1975.35) who asserts that agricultural development can promote the economic development by increasing the supply of food available for domestic consumption and releasing the labour needed for industrial employment.

The major agricultural export commodities in Nigeria include cocoa, coffee, cotton, groundnut, groundnut oil, palm kernel, soya beans, ginger rubber, benign –seed and chili pepper (CBN,2003).there are other commodities that are being demanded in the world market such as cassava and cassava products, banana, plantain and so on. The Nigerian economy until today is still dependent on primary products both as foreign exchange earner and contribute to gross domestic product.(GAP). Olurosunsola (1996:131) attributes this to the fact that the main interest of the colonial masters was and still is the exportation of products needed for their home industries.

The continuous production and exports of the agricultural product played a dominant role in attracting foreign exchange to boost economic activities from independence to the early 1970s. Obadan (2000:68), observes that the production and palm oil accounted for 96.4% of total exports earnings while non- oil export product accounted for 97.3% for total export then. He observed further that from the 1970^s, the Nigerian economy became mono-cultural, having been transformed from one dependent on fairly diversified portfolio of agricultural products to an economy heavily dependent on crude oil for growth and sustenance. Oyo (1994:23) observed that the advent of crude petroleum production and related activities especially in the early 1970’^s changed radically the structure of Nigeria economy. The huge foreign exchange earnings from crude oil export encouraged importation of finished foods to the detriment of domestic manufactured ones, while the agricultural sector was rendered less competitive over time through over-valued currency, inappropriate pricing policies and scarcity of farm labour caused mainly by the migration of youth to urban areas in search of wage employment.

Nigeria agriculture is divided into two types, the subsistence agriculture and commercial agriculture-: the subsistence agriculture is the type of farming which involves only the farmer and his family i.e the farmer produces for himself and his family with little or none to sell in the market it is practiced in small scale system. It involves only a little amount of money to practice unlike commercial farming that involves huge amount of money to practice. It does not involve the machine to carry out, since the land is very small and fragmented (Amechi 2004).

The second type is commercial agriculture, and this is where a farmer produces his crops and sells them in the market. It is carried out in large scale with enough land and machines. These machines are used in cultivating crops. It involves a lot of capital and time, and also increase the farmers income. Commercial farming helps farmers to engage in the cultivation of different varieties of crops, since the money, land and equipment could easily be used.

In agriculture, fund is needed to enable the farmer purchase more land, buy his inputs at the appropriate time and to pay for hired labour or farm machinery. Unfortunately, credits are not easily available for most of the farmers because of collateral and other things that are usually required by the commercial banks and other credit institutions. This makes it possible for most of the farmers in Nigeria to lack the required capital for investment in large scale agriculture, hence the reason for the recent low agricultural productivity.

With the recent move by the leading economies of the world to diversify their economy Nigeria in a bid to join the rest of the developed economies is conscious of the danger signals observed both within and outside the country that underscores the need to move away from total reliance on petroleum related revenues. These signals according to soludo (2009:28) include the on-going global economic crisis that is threatening the growth and development agenda of the present administration, the crisis in the Niger delta which has interrupted petroleum operations in the past few year’s, and the frightening revelation that the united states of America, the highest buyer of Nigeria crude oil, Brazil and several other countries are seriously engaged in research for an alternative source of energy.

Hence, the need to diversify Nigerian economy, especially Agricultural sector that has for long, been neglected.

1.2    STATEMENT OF  THE PROBLEM

          Several research have shown that Nigeria Is endowed with Huge expance of fertile Agriculture land rivers, streams, lakes, forest and grassland, as well as a large active population that can sustain a high productive and profitable agricultural sector. Adubi(2000:103) admits that this enormous resource baser if well managed could support a vibrant agricultural sector capable of ensuring self- sufficiency in food and raw materials for the industrial sector as well as, providing gainful employment for the teeming population and generating foreign exchange through exports.

A CRITICAL EVALUATION OF MONETARY POLICY ON THE NIGERIAN ECONOMY

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ABSTRACT

This study aimed at analyzing through econometric methodology the effects of monetary policy in Nigeria economy. To meet the above objective, output growth was chosen as the dependent variable while real exchange rate, real interest rate and inflation was chosen as the independent variable. The ordinary least square was used in the regression estimation. From the empirical result, we realized that the entire explanatory variables are insignificant in the t-test, but in f-test we rejected the null hypothesis and conclude that the slope coefficient are not simultaneously equal to zero. We realizes from the battery test that there is a co integration between the explanatory band the dependent variables since its level of stationarity are the same.

The policy implication of the result is that if monetary and banking policies are effectively applied, it will be consistent with determining the level of output growth in the economy

CHAPTER ONE

1.0       INTRODUCTION

One of the ways taken by all economy to make the banking sector effective is the use of the monetary policy introduced by the federal government and carried out by the apex bank of the country. Apparently, the existence of  an effective banking industry is vital to every economy and it encourages economic growth and development via its role in financial interdiction of funds supplies to deficit economic units .This stimulates international trade, investment economic growth as well employment growth as well as employment.

Monetary policy is one of the steps taken by every economy to make the banking sector effective. Monetary and banking policies are the sole responsibilities of monetary authority, which comprises of The CBN for the initiation, implementation and articulation of monetary system. The CBN carried out these duties on behalf of the federal government according to CBN decree 21 of 1991 and the banks and other financial institution BOFIA A4, of 1991 as amended. The banks proposal on monetary policy is subjective to the federal government.

The policies to be pursued is usually out in form of ‘’Audience’’ to all banks and other financial institutions. The guideline are general in operation within a fiscal year but could be amended on the course of the year. The CBN is equally empowered to direct the activities of the financial institutions in other to carry out certain duties in pursuit of approved monetary policy of which penalties are prescribed for non-compliance with specific provision of the guidelines.

1.1       BACKGROUND OF THE STUDY

Monetary policy affects financial and economic activities over the year. In other to appreciate the effects of monetary policy on the banking industry, it would be wise to move a review of changing views of monetary influence. Usually when the quantity of money changes in relation to financial activities as viewed by FISHER (1932). Fisher, take other neoclassical writer who held the view that in short run, money influences real cash balances. According to him, when the money stock increases, example;

An increase commodity prices since output and velocity were fixes initially. He assumed that a rise in commodity prices would exceed the increase in interest rate which was regarded as a component of a firms operating cost. In the whole analysis, rise in commodity prices will lead to an increase in a firms profit, demand, money stock and deposit which will eventually lead to a further rise in investment and commodity price. The excess reserved for lending will decline with interest rate, which was stocky earlier.

In the analysis of long-term transmission of monetary influence, Fisher replaced ‘’Interest-Investment’’ channel with ‘’Real Cash Balance’’. He noted that when wealth rises due to rise in money stock, people tend to reduce their cash balances by purchasing goods and service. Since the velocity (v) and output (y) in Fishers equation of exchange (MVPT) is fixed, the risen money stock (M) cannot lead to increased holding of goods and services but will lead to decline in prices level (P). Keynes (1936) accepted the change in money supply relative has both substitution and effect and considered investment to be quite responsive to interest rates.

Keynes recommended price induce wealth effects, (i.e. change in wealth due to change in yields). There are ranging accounts by his interpreters about the extent he integrate them in his general theory. Hence subsequent write to Keynes (i.e. Keynesian or post Keynesian regards the cost of capital (interest rate) as the main process by which changes in money stock influence the economy. Thus the change in volume of money alters the rate of interest. Usually approximated by the long-term government bound rate, which affects investment and consumption. Thus the link between wealth of private sector and real sectors and consumption was analyzed by Piguo (1974) and Patikin (1951) in form of ‘’real cash balance effect’’ According to them changes in quantities of money would affect aggregate demand even if they did not alter interest rate. On the other hand, credit rationing channel of monetary influence explained  how financial interdiction, would be controlled by the market forces so as to ration the supply of credit by non-price mechanism.

Thus an expansionary monetary policy would raise the force of equity (i.e. reduce the yield on equities). The margin between the market evaluation and cost of reproducing the existing capital goods will stimulate new investment over those goods.  The non-monetarist argued that monetary policy is as effective as fiscal policy as to determine total spending in the economy in spite of their differences. It holds the following views:

1. Movement in quantity of money is the most reliable measure of monetary value.
2. Monetary authority can detect the movement in the stock of money over time and business cycle.
3. Changes in stock of money are the primary determination of total spending as emphasized on owen’s economic stabilization program.
4. Monetary impulse are transmitted to real economy through an active price process or profit adjustment process which affect many financial and real antes.

1.2       STATEMENT OF PROBLEM 

             Despite the establishment of Central Bank of Nigeria (CBN) in 1958, banking industry remained both poor, inadequate in terms of number, quality and variety of service rendered. The establishment of CBN paved way for adoption of monetary management by the banking industry. Just incase any analyst is waiting in the wings to strike CBN for its poor monetary policy performance. Ogwuma (1994:362) offers a defense which says “A less than objective appraisal of the CBN role in the Nigerian economy could interpret the adverse macro-economic