Capital Market As Catalyst to Economic Development

Despite that the Nigerian economy emerged the largest in Africa after the rebasing, expert opinion is that growth and development in the economy is still short-changed as a result of a financial system which is dominated by the money market which provides short-term funds as against growth funds available through the mechanism of the capital market. The capital market is the major driver of economic growth while the money market complements it by providing necessary working capital to support gross fixed capital formation. Its mechanisms provide equity capital and infrastructure development capital that has strong socio-economic benefits such as roads, housing, energy, public transport etc. The level of economic growth is correlated to capital market development.

In a research report titled, Creating Securities Market in Developing Countries: A New Approach for the Age of Automated Treading’’, Benn Steil noted that ‘’countries with more liquid stock markets enjoy faster growth rates of real per capita GDP over subsequent decades as they increase economy wide mobility of productive resources’’. He also observed that stock markets are critical to the development of venture equity financing as they provide an essential exit mechanism for venture capitalists. The capital market is a web of institutions and mechanisms through which mediumterm and long-term funds are pooled and made available to individual business and government.

Africa is in dire need of big, strong, efficient and competitive capital markets in order to accelerate development. There are about 21 stock exchanges in Africa and most of them are in early stages of development and do not have the same characteristics of with mature markets. Some of the common characteristics of African capital markets is that they are mono product markets which do not provide investors broader choices of investment. Other characteristics include small capitalization, illiquidity, lack of quality asset classes, budding institutionalized settings, non-integration with the global markets and low investor education and awareness. But the good news is that African capital markets offer high return on investment with relatively low share prices. And the prospect is bright.

Nigeria Stock Exchange is among the top five in Africa. Though the market faced daunting challenges after the 2008 fiasco, there has been much improvement as a result of the concerted efforts of the regulatory agencies, especially the Securities and Exchange Commission (SEC) under its erstwhile Director General, Ms Arunma Oteh. The Nigerian Stock Exchange (NSE) has restructured but has not really rebranded for a maximum impact going forward. The management appears to be chauvinistic with the technical and structural reformation which is necessary but not sufficient to optimally drive numerical growth. More attention and resources should be committed on the sociopsychological component of the market which is the spring board of the soul of capital market operation. The deficiency in that aspect is a major reason the number of individual investors have not grown beyond yesteryear figure that range between three to five million individual investors out of a population of 170 million. There is need for intensive and consistent investor education and rebranding by the Nigerian Stock Exchange to co-opt more local individual investors into the market. The natural trend is that international investors take a cue from local investors to invest in foreign markets, but the reverse is the case in our market. Foreign portfolio investors take the lead. But that reverse trend exposes the market to greater volatility.

In an article titled ‘’Beware of Hot Money’’ which was published in Government- Leadership newspaper in 2013, I expressed reservation on the glee with which the regulatory agencies announced that foreign portfolio investors accounted for 70 per cent of trading activities in the stock market. My concern was because foreign portfolio investors operate with massive quantum of hot money and often in a flux and with no iota of sentiment attached to local markets. Their exit from markets is often felt and can be devastating in extreme cases.

There is a concerted effort to drive growth in the stock market. The Chartered Institute of Stockbrokers (CIS), under its new President, the Group Managing Director, BGL, Mr Albert Okumagba, has emerged with renewed vigour and strategic action plan to make the market more attractive to government, industries, investing public, its members and other stakeholders. In recognition of the power of information and communication in driving growth in the market, CIS has initiated a monthly forum for the assemblage of stock brokers, CEO’s of listed companies, investors and the financial press interact and exchange quality information on the market. The Institute has also initiated strategic partnership with relevant professional bodies and the entertainment industry which contributed in the gross domestic product of the rebased economy.