AN ANALYSIS OF THE IMPACT OF STOCK MARKET DEVELOPMENT ON ECONOMIC GROWTH IN NIGERIA

CHAPTER ONE

INTRODUCTION

The mobilization of resources for national development has long been the crucial focus of development economists. This is because, for sustainable growth and development to take place, funds must be effectively mobilized and allocated to enable business and the economy harnesses their human, material and managerial resources for optimal output. It is against this background that every country has a financial system which serves as a mechanism for the mobilization of resources for the attainment of economic growth. Consequently, the more developed the financial system of an economy is, the more efficient it is likely to be in the mobilization and allocation of resources for development purposes. The financial system of any society is the framework within which capital formation takes place. According to Odife (1994), it is the framework within which the savings of some members of the society are made available to other members of the society. Put differently, it is the arrangement or mechanism by which the savings surplus units of the economy transfer their resources to the borrowing deficit units for the purpose of enhancing economic growth (Okereke – Onyiuke, 2009). The financial system is made up of two major markets. These are the money market and the capital market. According to Elakama (2009), the two markets are at the heart of the financial system. The money market is a type of market where short term funds and securities such as treasury bills, inter-bank deposits, Banker’s acceptance, certificate of deposits etc whose tenor are usually shorter than or equal to a year are bought and sold. In other words, it is a market where short term capital is sourced. The capital market on the other hand is a type of market where long term debt instruments whose tenor exceeds a year are traded.

According to Sulaiman (1999), it is a network of interrelated institutions governed by operational guidelines, which permit the sale of equity and long term debt. Furthermore, Al-Faki (2006) describes the capital market as a network of specialized financial institutions, series of mechanism, processes and infrastructure that, in various ways, facilitate the bringing together of suppliers of medium to long term capital for investment in socio-economic development projects. Instruments traded in the capital market include equities, debts, government bonds, corporate bonds, preference shares, debentures, rights etc. Within the broad classification of the capital market is the stock market, which operates as the rallying point for the overall activities in the capital market. According to Alile and Anao (1984), the stock market is the pivot around which every activity in the capital market revolves. Its follows therefore that without the facilities provided by the stock market, it is doubtful if the capital market can efficiently perform its expected role of resource mobilization (Ologunde, Elumilade and Asaolu, 2006). It is in the light of the above that the stock market is considered a vital element in the mobilization and allocation of resources in any modern economy. Until now, the literature has mainly focus on the role of financial inter-mediation in the process of economic growth and capital accumulation. Indeed, many studies have analyzed the channels through which banks and other financial intermediaries may help to increase, for example, the savings rate or the average productivity of capital and, in turn growth. Recently, however, with the upsurge in world stock markets and with a large proportion of this boom accounted for by emerging markets, there has been a growing interest among economists and policy makers on the role played by stock market development in the process of economic development. Recent research has therefore begun to focus on the linkage between the stock market and economic development. It is no wonder, that the World Bank Economic Review dedicated its May 1996 issue to the role of the stock market in economic growth.