1.1. Introduction
It is a known fact that the investment that promotes economic growth and development requires long term funding, far longer than the duration for which most savers are willing to commit their funds.
Capital market is a collection of financial institutions set up for the granting of medium and long term loans. It is a market for government securities, for corporate bonds, for the mobilization and utilization of long-term funds for development − the long term end of the financial system. In this market, leaders (investors) provide long term funds in exchange for long term financial assets offered by borrowers.
This market embraces both the new issues (primary) market and secondary market. Such securities might be raised in an organized market such as the Stock Exchange. In this sense, it involves consortium under writing, syndicated loans and project financing. Thus, it is a mechanism whereby economic unit desirous to invest their surplus funds, interact directly or through financial intermediaries with those who wish to procure funds for their businesses.
In the Nigerian context, participant includes Nigerian Stock exchange, Discount Houses, Development banks, Investment banks, Building societies, Stock Broking firms, Insurance and Pension Organizations, Quoted companies, the government, individuals and the Nigerian Stock Exchange Commission (NSEC).
The capital market is therefore very important to any economy because, it encourages savings and real investment in any healthy economic environment. Through the market, aggregate savings are channeled into real investment that increases the capital stock and therefore economic growth of the country.
More so, the capital market synchronize the divergent preferences for portfolio managers and financial institutions and those of savers by mobilizing long − term funds for portfolio managers and financial institutions while providing avenues for savers to invest when the need arises through the secondary market, without affecting the operation of the firm, their savings had earlier financed. In other words, through the secondary market, the capital market converts long-term or perpetual investment enlarged and economic growth accelerated.
By far the greatest achievement of the Central Bank of Nigeria since it was established on July 1st, 1959 has been the gradual development of the Nigerian financial system. The − system consists primarily of the money market for short term lending and borrowing. The Nigerian Stock Exchange (formally called the Lagos Stock exchange) is the pivot or the fulcrum around which the entire capital market rotates. It is the market for the sale and purchase of the securities, stocks and shares: a market In which those individuals, institutions and governments who have funds surplus to their immediate requirements can employ them profitably. Its major significance is that it is the machinery for the mobilization of the countries resources for economic growth and development. Since its establishment in 1961, a major local investment outlet has been provided for Nigerian investors.
As a marketplace where securities (stocks, bonds, shares) are bought and sold openly with relative ease, the stock exchange is very important to the investors. The existence of a stock exchange in a capital market helps to broaden the share ownership base of firms and evenly distribute the nation’s wealth by making it possible for people in different locations to own shares in a firm in another location by purchasing the shares, bond/ stock through the simple mechanism of tire stock market.
For the government therefore, the stock exchange provides the mechanism for exchanging the mobilization of capital for creating goods and services for the satisfaction and wellbeing of the citizens. The stock exchange is not only crucial but also central to the entire mobilization process. This is because it offers an opportunity for continuous trading in securities.
1.2 Statement Of Research Problem
The capital or stock markets are feature of the economics of Western Democracies. They do not exist in communist or socialist countries for they have no business doing there. In the western capitalist countries, they constitute the most important institution for massive capital formation geared towards economic development. The complexity of capitalist ideology resulted in the control and measures to put the economy in equilibrium state. Factors such as capital market capitalization rate, government stock rate, rate of interest charged on financial instruments amongst others exert some impact on the developmental and growth of the economy.
Bakare (2000:58) defines capitalization rate as the discount rate used to determine the present value of future earnings. It is one of the major determinants of the market size of any stock exchange. The size of the market capitalization and its growth rate pose a major influence on the growth and development of the economy. The determination of this rate is based on the forces of demand and supply of securities.
On the other hand, interest rates along with monetary aggregates form targets of monetary policy in Nigeria. Within the period chosen for this study, interest rates in Nigeria were directly managed by the monetary authorities- the Central Bank of Nigeria. This control of rate of interest was based on the 156 International Research Journal of Finance andEconomics − Issue 4 (2006) expert advice from financial gurus who perceived that the economy, as at that period, lack a well developed financial market. Under this regime control, the federal government of Nigeria did set the deposit and lending rates of the financial intermediaries at their prevailing levels. In addition, the government did set the rates for lending to specified sector of the economy with a view to encouraging (or discouraging) lending to these sectors.
If the rate of interest paid by banks to depositors is increased, investors will patronize the banks the more and fewer investors will invest on the capital market. This will lead to a decrease in capital investment in the economy. Hence, economic growth and development will be lowered, because the allocation of capital resources plays a crucial role in the determination of the rate of the nation’s output. If capital resources are not provided to those in the industries, or if capital is not made available to sectors which are capable of increasing production and productivity, the rate of the country expansion (growth) will be retarded.
Thus, the disparity in the determination of interest rate, capitalization rate by different forces must have influenced the development and growth of the economy. These influences constitute the major problem that this study intends to investigate. The variation in The interest rate might cause investors also to either go to the bank or buy government development stock (bond), thereby helping in the development of the economy. The relationship between interest rate and government stock rate will also be generated in the course of this work. The capital market is often accessed to strengthen a company’s capital base, diversify it shareholder’s base, improve the debt/equity ratio and in some cases raise money to retire existing short-term liabilities.
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