Nigerian Capital Market: Impacts and Roles in Nigerian Economy

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By Arowosegbe Benjamin Abiodun

The rise of massive industrialization, production and emergence of startup companies has made it eminent and necessary for organizations to seek out more funding to aid their production & companies, this occurs at a level far higher than what savers and banks can provide; out of this necessity the capital market was born. The capital market thus provides a medium in which both governments and industry are able to raise long term capital for expanding and modernizing industry as well as providing financing for developments projects. It is with this backdrop that this research study is undertaken to examine the importance and impact of capital market in Nigeria.

DEFINITION

The financial Market is categorized into; both the Capital Market and Money Market which serve distinct and specialized purpose. The money market is exchange market where both individuals and government borrow high quality debt securities in the short term. Some of the instruments traded in the market include; Treasury Bills, Certificate of Deposits, Commercial Paper, Federal Funds, Bills of Exchange and Short-Term Mortgage-backed Securities and assets-backed securities.

The Capital Market on the other hand provides debt and equity backed securities for a longer term. In this market remains the cheapest and most flexible source of financing for the government and companies and remain central elements in stainable development of a nation.[1]

RATIONALE FOR ESTABLISHMENT OF CAPITAL MARKET 

It helps provide seed money for startup development which can serve as a vehicle for industrial development.

It reduces the overreliance of the corporate sector on money market in order to raise funds for long-term projects.

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It creates an avenue for the Nigeria population to participate in the corporate sector of the economy and shares [2]

IMPORTANCE AND IMPACT IN NIGERIAN ECONOMY

Capital Market has in various ways impacted and given volatility to Nigeria economy;

Capital market increases the proportion of long-term savings (pensions, funeral covers, etc.) that is channeled to long-term investment. Capital market enables contractual savings industry (pension and provident funds, insurance companies, medical aid schemes, collective investment schemes, etc.) to mobilize long-term savings from small individual household and channel them into long-term investments. It fulfills the transfer function of current purchasing power, in monetary form, from surplus sectors to deficit sectors, in exchange for reimbursing a greater purchasing power in future. In this way, capital market enables corporations to raise capital/funds to finance their investment in real assets. The implication will be an increase in productivity within the economy leading to more employment, increase in aggregate consumption and hence growth and development. It also helps in diffusing stresses on the banking system by matching long-term investments with long-term capital. It encourages broader ownership of productive assets by small savers. It enables them to benefit from economic growth and wealth distribution, and provides avenues for investment opportunities that encourage a thrift culture critical in increasing domestic savings and investment ratios that are essential for rapid industrialization.[3]

Capital market creates a sustainable low-cost distribution mechanism for multiple financial products and services across the country. This writing has sought to demonstrate an important role played by capital market in economic growth and development. Capital market enhances efficient financial intermediation. It increases mobilization of savings and therefore improves efficiency and volume of investments, economic growth and development.

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The role of capital markets is vital for inclusive growth in terms of wealth distribution and making capital safer for investors. Capital markets can create greater financial inclusion by introducing new products and services tailored to suit investors’ preference for risk and return as well as borrowers’ project needs and risk appetite. Innovation, credit counseling, financial education and proper segment identification constitute the possible strategies to achieve this.

In addition, the capital market mechanism allows not only an efficient allocation of the financial resources available at a certain moment in an economy – from the market’s point of view – but also permits to allot funds according the return and the risk – from the investor’s point of view – offering a large variety of financial instruments with different profitableness-risk characteristics, suitable for saving or risk covering. Nowadays, the protection against financial risks becomes a necessity, imposed by the transformations in the global economy, by the accented instability and the financial crisis that affects without discrimination both developed and emerging stock markets.

Covering the risk, that could be realized by the help of different operations, market orders or derivatives, defines the function of insurance against risks, specific function of the capital markets. The capital market allows risk dispersion between investors (of the diversifiable risk), exactly in the same measure in which each of them is willing to assume it, too.[4]

CONCLUSION 

The Nigeria capital market has achieved moderate growth to the economy, this is in aid of various government enactment which to enable the market sound footing. 

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Arowosegbe Benjamin Abiodun is a Law student of Ekiti State University, Ado Ekiti. He has Keen interest in Capital Market, FinTech and Corporate and commercial Law. He can be reached through benjaminbamidele1999@gmail.com

Footnotes

[1] Akingbohungbe SS 1996. The Role of the Financial Sector in the Development of the Nigerian Economy. Paper
presented at a Workshop Organized by Centre for Africa Law and Development Studies

[2] Soyede A (2005). The Role of Capital Market in Economic Developments. Secur. Mark. J., 6(3): 6-14.
Sule O, Momoh J (2009). Capital Market and the Nigeria industrial growth, financial system and Economic
growth. A CBN publication. Pp. 8-10.

[3] Mishira B. R. (2010) India Capita Market Efficiency and Growth. European Journal of Economics, finance and
administrative sciences, ISBN 1450-2275 Issue 27

[4] https://www.vanguardngr.com/2021/12/capital-market-as-catalyst-for-nigerias-economic-growth-devpt/

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