the impact of exchange rate changes on stock market returns{an investigation of nigerian stock...

1 | P a g e The Impact Of Exchange Rate Changes On Stock Market Returns{An Investigation Of Nigerian Stock Market} By ARUNA OMOTAYO (Department Of Economics Lagos State University)

CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF THE STUDY

All over the world, the capital market has played significant roles in national economic

growth and development. One intermediary in the market that operates as a rallying point

for the overall activities is the stock exchange. It is a common postulation that without a

functional stock market, the capital market may be very illiquid and unable to attract

investment. Essentially, the stock market provides liquidity (Ezeoha et al, 2009),

contributes to capital formation, and investment risk reduction by offering opportunities

for portfolio diversification (Levine, 1991). The liquidity role stands out clearly as the

most significant among the numerous functions provided by the stock market. In the

words of Levine (1991, 1997), without a liquid stock market, many profitable long-term

investments would not be undertaken because savers may be reluctant to tie up their

investments for long periods of time. The stock market mainly provides liquidity by

enabling firms to raise funds through the sales of securities with relative ease and speed.

Through this catalyst role, the stock market is able to influence investment and economic

growth in general. As argued by Ndi Okereke-Onyiuke (2006): large stock markets lower

the cost of mobilizing savings, facilitating investments in the most productive

technologies.

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 (Ologunde et al 2006). As a result of this, the centrality of savings

and investment to economic growth has been given considerable attention in the literature

(Anthony Kyereboah-Coleman and Kwame F. Agyire-Tettey (2006). For sustainable

growth and development, funds must be effectively mobilized and allocated to enable

businesses and the economy harnessed their human, material resources for optimal

output. The stock market enables governments and industry to raise long-term capital for

financing new projects and expanding and modernizing industrial/commercial concerns.


If capital resources are not provided to those economic areas, especially industries where

demand is growing and which are capable of increasing production and productivity, the

rate of expansion of the economy often suffers. A unique benefit of the stock market to

corporate entities is the provision of long-term, debt financing and non-debt financial

capital. Through the issuance of equity securities, companies acquire perpetual capital for

development.

Through the provision of equity capital, the market also enables companies to avoid over-

reliance on debt financing, thus improving corporate debt-to-equity ratio. Since the

introduction of structural adjustment programme (SAP) in Nigeria, the country stock

market has grown very significantly (Alile, 1996). This is as a result of deregulation of

the financial sector and the privatization exercise, which exposed investors and

companies to the benefits of the stock market. Equity financing became one of the

cheapest and flexible sources of finance from the capital market and remain a critical

element in the sustainable development of the economy (Okereke-Onyiuke, 2000).

Though the stock market is growing, it is however characterized by complexities. The

complexities arise from trends in globalization and increased variety of new instruments

being traded: equity options, derivatives of various forms, index futures etc. However, the

central objective of the stock exchanges worldwide remains the maintenance of the

efficient market with attendant benefit of economic growth (Alile, 1997). The participant

at Nigerian Stock Exchange include, Discount Houses, Development banks, Investment

banks, Building societies, Stock Broking firms, Insurance and Pension Organizations,

Quoted companies, the government, and individuals. 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.

The link between Capital market growth, exchange rate and interest rate has in recent

time been an issue among analysts based on their study of developed and emerging


markets. Oke (2006) asserted that the financial structure of a firm, that is, the mix of debt

and equity financing, changes as economies develop. It moves towards equity financing

through the stock market. 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 nations output.

Interest and exchange rates are financial prices for credit and foreign currencies,

respectively. They both affect resource allocation, production levels, prices and

profitability. Ultimately, fluctuations in these reflect in share prices an indicator of

market performance. For instance, lowering of interest rate on demand and savings

deposits will improve returns to investing on the exchange relative to investing in deposit

money banks (DMBs) holding factors such as risk, transaction costs, etc. constant. This

will therefore increase the demand and share price of affected equities on the exchange

thereby affecting its performance.

The capital market synchronizes 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. As an economy develops, more funds are

needed to meet the rapid expansion. The stock market serves as a veritable tool in the

mobilization and allocation of savings among competing uses which are critical to the

growth and efficiency of the economy (Alile, 1984). The determination of the overall

growth of an economy depends on how efficiently the stock market performs its

functions of capital allocation. As the stock market mobilizes savings, concurrently it

allocates a larger proportion of it to the firms with relatively high prospects as indicated

by its rate of returns and level of risk. The importance of this function is that capital

resources are channeled by the mechanism of the forces of demand and supply to those


firms with relatively high and increasing productivity thus enhancing economic

expansion and growth (Alile, 1997).

All shares index is mostly used to determine the growth of the market as it captures the

overall performance of the market. NSE all-share-index captures all the other

performance measures such as market capitalization, liquidity, and turnover ratio. All

shares index is one of the major determinants of the market size of any stock exchange.

The size of the all share index and its growth rate pose a major influence on the growth

and development of the economy On the other hand, interest rates along with monetary

aggregates form targets of monetary policy in Nigeria. 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

nations output. This is more important because it has been asserted that the economic

environment plays a significant role in determining the performance of the stock

exchange and that overcoming the challenges facing the stock exchange depend to a large

extent on government policies relating to the private sector, the monetary and fiscal

policies, economic policies, financial sector reforms and the governments divestiture

program.

1.2 STATEMENT OF RESEARCH PROBLEM

The Capital Market is supposed to play an important role in the economy in the sense that

it mobilizes domestic resources and channels them to productive investments. However,

to perform this role it must have significant relationship with the economy. Capital

Markets are key elements of a modern, market-based economic system as they serve as

the channel for the flow of long-term financial resources from the savers of capital to the

borrowers of capital. Efficient capital markets are hence essential for economic growth

and prosperity. Thus a rising capital market is an indicator of an expanding economy.


Like any other capital market elsewhere in the world, the Nigerian Capital Market exists

to provide long term capital for economic and infrastructural development. One major

objective for the establishment of the Nigerian Capital Market was to enable corporate

institutions and government to raise quick capital to accelerate economic development. In

line with this objective, the Nigerian Capital Market has gained prominence by

facilitating tremendously the divestiture and privatization of some state-owned

enterprises. The presence and development of the capital market in Nigeria is no doubt, a

great catalyst to the internationalisation of investment opportunities in the country,

raising the chances of both local and foreign direct investment (FDI) as well as portfolio

investment. It constitutes the mostimportant institution for massive capital formation

geared towards economic development.

This study is being carried out especially because other empirical studies on the NSE

have looked at the impact of the Nigeria Capital Market on economic growth which does

not provide answers on issues related to how macroeconomic variables such as exchange

rate, interest rate, inflation rate etc affect the performance of the NSE, however, this

study specifically inquires into the impact of interest rate on capital market growth in

Nigeria, though restricted to the NSE.

1.3 OBJECTIVES OF THE STUDY

The broad objective of this study is to examine how interest rate and exchange rate as a

macroeconomic variables affects the growth of the Nigeria Capital Market, while others

objectives of this study are

1. To determine the impact of interest rate and exchange rate on Nigeria Capital

Market Growth through an inquiry into the performance of the NSE.

2. To ascertain the effect of interest rate changes on the growth of capital market in

Nigeria.


3. To review the speed at which the stock exchange captitalisation is adjusted due to

changes in the countrys interest rate.

1.4 RESEARCH QUESTIONS

To make the research more manageable, the main questions to be answered in this study

are as follows:.

1. Does interest rate and exchange rate have any impact on the growth/performance

of the Nigeria Stock Exchange over the years?

2. To what extents do other macroeconomic variables such inflation rate affects the

capital market growth?

3. How well does interest rate determine stock exchange capitalisation in Nigeria?

1.5 RESEARCH HYPOTHESES

This research work will test the following hypotheses, and also H0: Null Hypothesis and

H1: Alternative Hypothesis.

Hypothesis 1:

H0: Interest rate and exchange rate have no significant impact on the growth of the

Nigerian Stock Exchange Market.

H1: Interest rate and exchange rate have significant impact on the growth of the Nigerian

Stock Exchange Market.

Hypothesis 2:

H0: Inflation rate has no significant impact on the growth of the Nigerian Stock Exchange

Market capitalisation.

H1: Inflation rate has significant impact on the growth of the Nigerian Stock Exchange

Market capitalisation.


1.6 SIGNIFICANCE OF THE STUDY

This study examines whether stock market returns are influenced by interest rate and

exchange rate changes in Nigeria. Investors and potential investors will get to understand

whether changes in IR and EXR affect returns on the stock market and to what extent it

affects investment in both markets. It will assist local firms to identify periods that may

be conducive to get listed on the stock market as well as assist investors to make good

investment decisions.

The findings of this study would help the country and government to decide on which

sector of the economy would need special attention in terms of attracting direct foreign

investment and earning much revenue. In addition to being useful as a source of

information, it may also arouse interest for further studies in this or related areas

concerning the activities of both foreign and local investors.

1.7 SCOPE AND LIMITATION OF STUDY

Obtaining and collating data for the research was one of the mitigating factors for this

research; I will employ used annual data on MPR (representing IR), EXR and Stock

Market Index from 1983 to December 2012 which may not reflect the whole effects of

the macroeconomic variables on the stock market returns since the data is limited to the

some part of the years of operation of the stock exchange not from the inception of the

Nigerian Stock Excahnge.

1.8 CONCEPTUAL DEFINITIONS OF TERMS.

A brief description of the variables is presented below:

1. NSE ALL-SHARE INDEX (NASI): The NASI captures the performance of the

market. It is the principal stock index of the Nigerian Stock Exchange. This index is

calculated from the values of each of the market's listings.


2. EXCHANGE RATE (EXR): This is the value Nigerian currency (Naira) is

exchanged for a unit of another countries currencies especially Dollars ($).

3. INTEREST RATE (IR): This is the expected rewards which an investors is

expected from forgoing present consumptions to save some part of his income. This

is usually determined in Nigeria by the Monetary Policy Rate of the Central Bank of

Nigeria.

4. FOREIGN DIRECT INVESTMENT (FDI): This is total inflows of capital

5. from outside the country either for direct investment or for infrastructural

developments in the country.

6. CAPITAL MARKET: This is the market where government bonds, private and

public companies shares are sold and bought by private investors in the economy.

REFERENCE

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Development and

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Adeyemi, K.S.(1998), Option for Effective Development of Nigeria Capital Market at

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seminar organized by Nigeria Economic Society at the Institute of International

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CHAPTER TWO

LITERATURE REVIEW

2.1 INTRODUCTION

This chapter contains the review of relevant literatures and research works which relate

this study under the following headings: theoretical, methodology and empirical reviews.

The theoretical review looks at the theories that have been propounded interest rates and

stock returns, while methodological review take the path of reviewing works of early

researchers and the research methods employed to test for the interlink between interest

rates and stock market performance and finally, empirical review presents the results of

others researchers on this subject matter.

2.2 THEORITICAL REVIEW

Irving Fisher (1930) found that real interest rates were equal to nominal interest rates minus

expected inflation. This macroeconomic relationship is known as the Fisher Effect. The Fisher

Effect is unique in that it incorporates expected inflation as opposed to actual inflation rates into

the analysis. This is crucial to this study because it allows the use of rational expectations model.

The Fisher Effect is primarily an alternative way of measuring real interest rates and is used as a

means of relating interest rates and inflation expectations to stock prices. To fully understand the

relationship between the Fisher Effect and stock prices, it is necessary to understand the

individual relationships between inflation expectations, interest rates, and the stock market.

An Efficient Market is market in which the values of securities at any instant in time fully reflect

all available information resulting in the market value and the intrinsic value being the same.

Propounded by Fama (1970) EMH also states that the prices of shares will immediately adjust to

new information. There are three different types of efficiency in an efficient market. These are

weak form, semi strong form and strong form. The weak form fully incorporates information

about past stock prices. Stock prices are said to follow a random walk as the information on

stock comes in a random manner. Attempts to use technical analysis are futile in predicting

future prices. In the semi strong form, prices incorporate all publicly available information


including published accounting statements as well as historical price movements. Thus any

information that can be extracted is already reflected in the price.

In the strong-form all information public or private is incorporated. It makes the most stringent

demand on information since it says that even the information available only to those closely

concerned with the firms has already been taken up and incorporated in the price. The main

fundamental implication of EMH is that if the markets are efficient then it is impossible for

investors to exploit information in order to earn excess returns over a sustained period of time

(Howells and Bain 2002).

As for the effect of macroeconomic variables on the stock market EMH suggests that

competition among profit maximizing investors in an efficient market will ensure that all the

relevant information currently known about changes in macroeconomic variables are fully

reflected in current stock prices so that investors will not be able to earn abnormal profits

through prediction of future prices, Chong and Goh (2003).

The Capital Asset Pricing Model (CAPM) was developed by Sharpe and Litner in 1964. It is an

equation that equates the expected rate of return on a stock to the risk free rate and the risk

premium for the stocks systematic risk, Martin and Scot jnr (1996). Basically, the CAPM

illustrates the relationship between expected return on an individual security and the beta of the

security. The beta according to Hull (1997) is a parameter that shows the relationship between

the return on a portfolio of stocks and the return on the market. In all, the model argues that the

investor requires excess returns to compensate for any risk that is correlated to the risk in the

return from the stock market but requires no excess return for other risks. The

Arbitrage Pricing Model (APM) was developed by Ross (1976). According to the APM returns

vary from their expected amounts because of unanticipated changes in a number of basic

economic forces such as industrial production, inflation rates, term structure of interest rates and

the difference in interest rates between high and low risk bonds, Martin and Scot jnr (1996). It

suggests that the risk of a security is reflected in its sensitivity to unexpected changes in

important economic forces.


The Classical case of investment and savings theory strongly argue that the savings are invested

as a result of interest mechanism. They propel that in an economy where demand and supply

forces are at play, savings and investments are equated in the economy. They suggest that both

investments and savings are functions of interest rates. Savings are positively related to the rate

of interest. As interest rates rise, people are induced to save more and the convex is typically

true. If on the other hand, the interest rates decline, depositors are discouraged to save and they

transfer their money from the money market to equity market and the stock market will start to

perform well (Arnold, 1998). On the other hand, investment is inversely related to interest rates.

Therefore, as interest rates rises, investments fall since the cost of borrowing rises also. However

under the hyperinflationary environment such as the case in Nigeria, people will rush to the

equity market where positive capital gains prevail. Hence most investors will rush to the stock

market where capital gains will be inevitable, Arnold (1998).

McKinnon-Shaw (1973) theories on finance and development criticized the dominant

neo-classical monetary theories and the Keynesian counter arguments. The neo-classical

monetary growth models postulate that high-positive interest rate have a direct impact on

savings and investment. Within this school of thought, money is regarded as a substitute

for physical assets and productive investments. Keynesian economists on the other hand

argue that low-interest rate increases investment, income and eventually savings.

McKinnon (1973) advances an argument in favor of a complementary relationship

between financial and physical assets as opposed to the substitutability theory by the

neoclassical in a critique of the Keynesian theory. Paddy (1992) contends that

macroeconomic and fiscal environment is one of the building blocks which determine the

success or otherwise of securities market. Conducive macroeconomic environment

promotes the profitability of business which propels them to a stage where they can

access securities for sustained growth. Generally, the barometers for measuring the

performance of the economy include among others real GDP growth rate, rate of

inflation, the exchange rate, fiscal position and the debt position. Of these the exchange


rate, interest rate and the rate of inflation can be singled out to affect stock market

activity as they impinge directly on the state of corporate activity in the country. Interest

and exchange rates are financial prices for credit and foreign currencies, respectively.

They both affect resource allocation, production levels, prices and profitability.

Ultimately, fluctuations in these reflect in share prices an indicator of market

performance. For instance, lowering of interest rate on demand and savings deposits will

improve returns to investing on the exchange relative to investing in deposit money banks

(DMBs) holding factors such as risk, transaction costs, etc. constant. This will therefore

increase the demand and share price of affected equities on the exchange thereby

affecting its performance.

Agenor (2000) captures these views by stating that interest rate, high inflation, large

fiscal deficits and real exchange rate over-valuation are often key symptoms of

macroeconomic instability which constraints private sector investment and savings and

thereby results in inefficient allocation of resources on the exchange thereby affecting its

performance.

From the above scenario, it should come to light that low interest rates reflect themselves in

limited savings generation, especially in a hyperinflationary climate. In fact, investors will be

more concerned about real return that is nominal interest rates less inflation rate. Therefore, they

will discard the money market and invest in the stock market and property market where real

returns are positive. It should be clearly noted that investors are rationale and aim to maximize

capital gains, Arnold (1998).

2.3 METHODOLOGICAL REVIEW

The relationship between economic fundamentals and stock returns has been studied by a

large number of researchers (see Chen, Roll & Ross (1986); Fama (1990); Chen (1991);

Nasseh & Strauss (2000); Dickinson (2000); Shanken, & Weinstein (2006); Samitas &


Kenourgios (2007); Gunsel & Cukar (2007); Leon (2008); Ahmed (2008) ; Nikolaos,

Grigoris, Nikolaos & Nikos (2009) and Abdullahi (2011).

Chen, Roll and Ross (1986) studied The Effect of Macroeconomic Factors on the

London Stock Return (a Sectoral Approach) and concluded that the macroeconomic

factors have a significant effect on the UK stock exchange. Chen Roll & Ross (1986)

hypothesized and test a set of macroeconomic data series to explain US stock return.

They investigated the sensitivity of macro-economic to stock returns. They tested seven

macroeconomic variables; term structure, industrial production, risk premium, inflation,

market return, consumption and oil prices in the period of January 1952- Nov. 1984.

Dhrymes, Friend, Gultekin and Gultekin (1985) focused on the attention of financial

profession on factor analysis. They reach substantially different conclusion from those

drawn by Roll & Ross (1980) regarding the empirical evidence supporting arbitrage

pricing theory (APT). They found that the number of factors increases with the number of

time series observations used to estimate factor loading. They conclude that the evidence

on the usefulness of the APT model is at best mixed.

Brown and Wein (1983) estimate and test the APT in the context of the bilinear paradigm

introduced by Kruskal (1978). They examine the special case of the APT in which the

numbers of factors are pre-specified, using the same data of Roll and Ross (1980) but

through forming 60 securities groups instead of 30 grouping securities according to their

industrial classifications instead of alphabetical order. They find a 3-factor APT model

rejecting the 5 or 7-factors version. Also, they show that specific firm or industry effects

that may be diversified are not price in the APT scenario. This means that there are few

rather than many economy wide factors that appears to be prized in the APT.

On the other hand, Beenstock and Chen (1988) investigated four factors namely interest

rates, money supply (M3), fuel, and material cost, and the retail price index. They fund


that unanticipated increase in interest rate and fuel and material costs reduce security

returns. They conclude that export volume and relative export prizes as risk factors, but

were not significant.

Clare & Thomas (1994) are of opinion that a number of factors have been prized in the

UK stock and are; oil prices, default risk and the retail price index. UK private sector

bank lending, the current account balance and the redemption yield on an index of UK

corporate debentures and loans. Priestley (1996) identified seven macroeconomic and

financial factors; namely default risk, industrial production exchange rate, retail sales,

money supply (M3), unexpected inflation, change in expected inflation, term structure of

interest rate, commodity prizes and market portfolio. He found that with the factor

generating from the rate of change approach, all factors are significant in the UK stock

market.

Tursoy, Gunsel & Rjoub (2008) tested seven macroeconomic variables of Turkish

economy. He separated into expected and unexpected series by a regression process then

two step testing methodology is implemented on these series. The study covered 54

stocks for the period of January 1989 to July 1995. The result was beta coefficient of

expected factors is found to be significant for asset return.

Altay (2003) employed various economic variables which consider the basic indicator of

an economy; from those economic variables, he derived the factor analysis process and

factor realizations of principle economic phenomenon for two countries Germany and

Turkey. The idea behind employing macro economic variables is described to be just

quantitative indicators of basic economic phenomena. He tested the period of January

1988 to June 2002 and January 1993 to 2000 for Turkey and Germany respectively. The

tested economic variables are: consumer price index, wholesale price index, money

market interest rate, imports, export foreign exchange rate, average yield of public bonds

and industrial production index. For German Stock Market, he found the evidence of only

one factor beta, unexpected interest rate level factor beta, reward in the market. For


Turkey Market, the result can not present evidence for statistically significant unexpected

macroeconomic factor beta on expected asset returns during the period tested

Gunasekarage et al (2004) examined the influence of macroeconomic variables on stock market

equity values in Sri Lanka using the Colombo all share price index to represent the stock market

and money supply ,the Treasury bill rate (as a measure of interest rates ),the consumer price

index as (a measure of inflation ) and the exchange rates as the macroeconomic variables. With

monthly data for the 17-year period from January 1985 to December 2001 and employing the

usual battery test which included unit roots, cointegration, and the Vector Error Correction

Model (VECM) , they examined long run and short run relationships between the stock market

index and economic variables.

Rigobon and Brian (2001) used an identification technique based on the heteroscedasticity of

stock market returns to identify the reaction of real interest rates to the stock market performance

in United States of America. They found that real interest rates reacts significantly to stock

market movements, with a 5% rise or fall in the industrial index increasing the likelihood of a 25

basis point tightening (easing) by about half.

Mukherjee and Naka (1995) applied Johansens (1988) Vector Error Correction Model (VECM)

to analyze the relationship between the Japanese stock market and exchange rates , inflation ,

money supply ,real economic activity ,long term government bond rate and call money rate.

They concluded that a cointegrating relation indeed existed and that stock prices contributed to

this relation. Maysami and Goh (2000) examined such relationship in Singapore. They found that

inflation ,money supply growth , changes in short and long term interest rate and variations in

exchange formed an cointegrating relation with changes in Singapore stock market levels.

Vuyyuri (2005) investigated the cointegrating relationship and causality between the financial

and real sectors of the Indian economy using monthly observations from 1992 through December

2002. The financial variables used were interest rates, inflation rate, exchange rate stock return

and the real sector was proxied by industrial productivity. Johansen (1988) multivariate

cointegration test supported the long run equilibrium relationship between the financial sector


and the real sector. Granger test showed unidirectional Granger causality between financial

sector and real sector of the economy.

William Breen, Lawrence Glosten, and Ravi Jangannathan (1989) completed a study of the

relationship between the Treasury bill rate and the stock market in India using the usual battery

tests (Vector Error Correction Model (VECM), unit roots tests cointegration tests). The study

found that an inverse relationship between stock index returns and Treasury bill interest rates

exists when a value-weighted stock index is used.

Oyama (1997) looked closely at the relationship between stock prices and the macroeconomic

variables in Zimbabwe using Revised Discount Model, Error Correction Model and Multifactor

Return Generation Model. This study used quarterly time series broad money supply(M2) ,three

month Treasury Bill rate and the IFC stock return index which considers both capital and

dividends payments. The sample period was set from the first quarter of 1991 to the fourth

quarter of 1996. He noted that by using an error- correction model to stock returns and growth

rate of money and Treasury bill rates has been quite stable since 1991, except during the period

of partial capital account liberalization.

Ibrahim (1999) also investigated the dynamic interactions between the KLSE composite index

and seven macroeconomic variables (industrial production index, money supply M1 and M2,

consumer price index, foreign reserves, credit aggregates and exchange rate using the Johansens

(1988,1991,1992b) and Johansen and Juselius (1996) multivariate cointegration techinique.

Observing that macroeconomic variables led the Malaysian stock indices he concluded that

Malaysian stock market was informationally-inefficient.

Chong and Goh (2003) results were similar to the above they showed that stock prices, economic

activities, real interest rates and real money balances in Malaysia were linked in the long run

both in the pre and post capital control sub periods.

Sadosky (2001) studied the interaction between the stock market and economic activity in the

United States using monthly data from 1974 to 1994. The macroeconomic variables considered


were the US production index, consumer price index and three month Treasury bill rate. The real

stock prices were calculated by deflating the nominal standard and poor index 500(S&P 500) by

the CPI. He used the Granger causality tests and noted that causality runs from inflation to

changes in interest rates. Interest rates on the other hand, predict changes in real stock returns

and changes in stock prices predict changes in industrial production. He also concluded that there

was no evidence of Granger causality running from real stock returns to inflation.

Maysami and Sims (2002, 2001a, 2001b) employed the Error Correction Modeling (ECM)

technique to examine the relationship between macroeconomic variables and the stock returns in

Hong Kong and Singapore (Maysami and Sims 2002b), Malaysia and Thailand (Maysami and

Sims 2001a), Japan and Korea (Maysami and Sims 2001b).

Through the employment of Hendry (1986) approach which allows making inferences in the

short run relationship between macroeconomic variables as well as the long run adjustments to

equilibrium, they analyzed the influence of interest rates, inflation, money supply, exchange rate

and real activity along with a dummy variable to capture the impact of the 1997 Asian financial

crisis. The results confirmed the influence of macroeconomic variables on the stock market

indices in each of the six countries under study though the type of magnitude of the association

differed depending on the countrys financial structure.

Kurihara (2006) chooses the period March 2001-September 2005 to investigate the relationship

between macroeconomic variables and daily stock prices in Japan. He takes Japanese stock

prices, U.S. stock prices, exchange rate (yen/U.S. dollar), the Japanese interest rate etc. The

empirical results show that domestic interest rate does not influence Japanese stock prices.

However, the exchange rate and U.S. stock prices affect Japanese stock prices. Consequently, the

quantitative easing policy implemented in 2001 has influenced Japanese stock prices. Doong et

al. (2005) investigate the dynamic relationship between stocks and exchange rates for six Asian

countries (Indonesia, Malaysia, Philippines, South Korea, Thailand, and Taiwan) over the period

1989-2003. According to the study, these financial variables are not cointegrated. The result of

Granger causality test shows that bidirectional causality can be detected in Indonesia, Korea,

Malaysia, and Thailand. Also, there is a significantly negative relation between the stock returns

and the contemporaneous change in the exchange rates for all countries except Thailand.


Bhattacharya and Mukherjee (2003) investigated Indian markets using the data on stock prices

and macroeconomic aggregates in the foreign sector including exchange rates, money supply as

well as interest rates and concluded that there is no significant relationship between stock prices

and exchange rates. In another study, Muhammad and Rasheed (2003) examined the relationship

between stock prices and exchange rates of four South Asian countries namely Bangladesh,

India, Pakistan and Sri Lanka and found that there is no significant relationship between the

variables in India and Pakistan, either in the short-run or long-run. However, they found a bi-

directional relationship in the case of Bangladesh and Sri Lanka.

2.4 EMPIRICAL REVIEW

There have been several studies focusing on the extent of variables influencing the

market index and their importance in including in the model. Some researchers resorted

to classifying the variables depending on the relativity to the index taken for study. The

selection of variables is different in each of the studies with varied time lines involving

different countries. The study of impact of the macro-economic variables has been

complex due the nature of interaction of different factors and the time lag to take effect.

Due to the economic liberalization of countries, the cross border factors have been

playing a significant role with contagion effects of economic conditions.

Rigobon and Brian (2001) used an identification technique based on the heteroscedasticity of

stock market returns to identify the reaction of real interest rates to the stock market performance

in United States of America. They found that real interest rates reacts significantly to stock

market movements, with a 5% rise or fall in the industrial index increasing the likelihood of a 25

basis point tightening (easing) by about half. The authors decompose both daily and weekly

movements in interest rates and stock prices from approximately 1985 to 1999. Their results

suggest that stock market movements have a significant impact on short-term interest rates,

driving them in the same direction as the change in stock prices. The authors attribute this

response to the anticipated reaction of monetary policy to stock market increases. They

acknowledge that this interpretation should be taken a bit cautiously.


Sulaiman D. Mohammad et al. (2009) conducted the study on the Karachi stock exchange

with influencing variables as foreign exchange reserve, foreign exchange rate, industrial

production index, whole sale price index, broad money and gross fixed capital formation

for the period of

1986 - 2008. It concluded that the foreign exchange rate and foreign exchange reserve

significantly affect the stock prices while the others affect insignificantly.

Another study by Basabi Bhattacharya & Jaydeep Mukherjee (2002) explored the

relationship between the stock market and Exchange rate, foreign exchange reserves and

Value of trade balance in India. The researchers used unit-root tests, cointegration and the

long-run Granger non-causality test to conclude that the BSE Index and the macro-

economic variables exhibit no casual linkage.

The study that was conducted by T.P.Ghosh (2008) as a case analysis on NIFTY50 index

attempted to predict the index using the bond index, future price of NYMEX light sweet

crude, Nikkei 225, S&P500 and US$ / INR exchange rate. The study concluded that the

appreciation of

Indian Rupees has not affected the market growth and the Indian markets are influenced

by the

US market cues. Further, the study established that the crude prices and stock index are

inversely related.

The study on Stock Exchange of Thailand by Sardar M.N Islam et al.(2004) concluded

that the market indexes are determined by the interest rate, bond rate, foreign exchange

rate, market capitalization, price to earnings ratio and consumer price index both in the

short and long term.

In a research conducted by Jun Tu et al. (2011) to study the impact of US economic

variables in predicting the Chinese stock market two conclusions were arrived depending


period of study considered. The paper concluded that the economic variables of United

States were not useful in predicting the Chinese stock market pre 2001 period. However,

the results indicated that it provided significant predictability post 2001.

Dubravka Benakovi & Petra Posedel (2010) analyzed the returns on fourteen stocks of the Croatian capital market taking inflation, industrial production, interest rates, market

index and oil price as factors. The results indicated that the index was positively related

to the stock returns and had the largest statistical significance for all the stocks. Further,

interest rates, industrial production and oil price was positively related while the inflation

was otherwise.

Khaled A.Al-Zubi and Hussain Salameh (2007) investigated the relationship between the

macro-economic variables (Industrial production, expected inflation, unanticipated

inflation, term structure) and its impact on the stock returns in the industrial sector in

Jordan. The study concluded that the expected inflation and unanticipated inflation affect

the stock returns while considering the returns without its dividends. However,

unanticipated inflation is the only variable affecting the returns considering with

dividends. Further, the evidence from the study suggests that there exists a long-run

relationship between the variables but not short-term.

Randi Ns, Johannes A. Skjeltorp and Bernt Arne Odegaard (2009) analysed the return

patterns of Oslo Stock exchange. The study concluded that the market, size factor and

liquidity factor provided reasonable fit for the cross-section of Norwegian stock returns.

Alonso Gomez Alber (2006) studied the Mexican stock exchange with respect to the US

markets. The variables were classified as local and foreign variables for the study. The

empirical evidence from the paper suggested that the foreign factors were able to explain

the cross-section returns in Mexico for both conditional and unconditional versions of the


model. The paper concluded supporting the hypothesis of integration of the Mexican

stock exchange to the US market.

Halil Tunal (2010) investigated the relationship between the macro-economic variables and stock returns in Turkish stock market using the Arbitrage Pricing theory framework.

The study concluded that there exists a long run relationship between the basic macro-

economic indicators of Turkish economy and the stock returns at different levels.

Further, the study conducted by Engsted and Tanggaard (2002) concluded a moderately

positive relationship between expected stock returns and expected inflation for the US

and a strong positive relationship for Denmark. Sharfe (2002) suggests that rise in

expected inflation reduces equity prices in the US.

Bilson et al. (2001) tested the ability of the local macroeconomic variables (money

supply, goods prices and real activity) in explaining the stock returns in 20 exchange

emerging markets for the period 1985-1997. The results indicated that the exchange rate

variable is clearly the most influential macroeconomic variable, and money supply has

greater importance.

Griffin (2004), postulated that foreign inflows are significant predictors of stock returns

for Korea, Taiwan, Thailand and India. This indicates that foreign investors are buying

before market index increases. Further, the results indicated that contemporaneous flows

are positive and highly significant in India. FII and Stock Index show positive

correlation, but fail to predict the future value.

Dr. Nishat (2004) studied the long term association among macroeconomic variables,

stock prices and employed money supply, CPI, IPI, and foreign exchange rate as

explanatory variable using Karachi stock exchange 100 index prices from 1974 to 2004.

The result indicated that there exists a causal relationship among the stock price and


macroeconomics variables. Most of the time series data is non-stationary hence unit root

technique was employed to make data into stationary. Further, the result also indicates

that industrial production significantly affects to macroeconomic variables. Granger

causality test was used to find the correlation among the variables the results indicated

that the interest rate is not granger cause by stock price.

Shahid Ahmed (2003) empirically investigated on SENSEX index price affects and

concluded that the real and financial sector performance in Indian economy has influence

in performance of the index using the data from the period 1997 to 2007. The study

considered export, foreign exchange rate and foreign direct investment as variables.

Granger causality test is used to find out the causal relationship between the variables.

All the variables are Granger cause to stock prices.

Roa & Radjeswari (2000) conducted study incorporating a big number of macro variables

in order to predict the asset returns. The study concluded that the factors that influence

the returns of assets are industrial production, agricultural production, money supply,

interest rate, exchange reserves and inflation.

Mukherjee et al. (2002) conducted a study on impact of FIIs in Indian equity market. The

evidence suggested that the FIIs activities had a strong demonstration effect. The study

concluded that FII flows tend to be caused by the return in the equity market. Gallagher

& Taylor (2002) suggested based on the empirical study that the stock returns are

negatively impacted by both the expected and unexpected inflation.

Lambrick (2005) examined the relationship between sixteen macroeconomic variables

and the equity returns in Australian stock market. The sixteen variables were classified

under five different heads namely real, monetary, labour variables, price level variables

and external variables. The US dollar exchange rate and the composite leading indicator


possibly decide the prices in stock market. Further, the impact of variables retail sales and

industrial production hold true for the entire period of the study.

The study conducted by Chinzara and Aziakpono (2009) concluded that the stock returns

and volatility in South African are linked to major world stock markets with US, China

and Australia having greater impacts. Further, the volatility exhibits asymmetry pattern

and stability over the period of time. However, they observed that there was a lack of

evidence for risk premium hypothesis for the period of study.

The study conducted by Yu Hsing (2011) examined the relationship between stock

market index of Hungary and relevant macro-economic variables. The study concluded

that the stock market index of Hungary has a positive relationship with the real GDP,

ratio of government debt to GDP, nominal effective exchange rate and German stock

market index. Further, the evidence showed that the market index of Hungary was

negatively related to real interest rate, expected inflation rate and government bond yield

in Euro region.

Flannery and Protopapadakis (2001) studied seventeen macroeconomic risk factors by

analysing the impact of those economic variable announcements on the level and the

conditional volatility of the daily stock returns. They identified that six of them for price

factors in nominal and real terms. The nominal category included three elements CPI, PPI

and money aggregate while real category included the employment report, housing starts

and the balance trade.

Chinzara (2011) investigated the relationship between the macroeconomic uncertainty

and stock market volatility for South Africa. The study concluded that that the stock

market volatility is significantly affected by the macroeconomic uncertainty. The

volatilities in foreign exchange rates and short-term interest rates have significant impact


while volatilities in oil price and inflation play a minor role in influencing the stock

market volatility.

In the paper by Johansson (2009), the evidence showed that China has been experiencing

increased level of integration with the major financial markets in the period overlapping

with the period after China became member of World Trade Organisation. The study

postulated that the impact of developed markets like US may increase over time on the

emerging markets. Hence, the economic variables of the US may be useful in predicting

the Chinese stock market.

The study conducted by Robert D. Gay (2008) examined the relationship between the

stock prices and macroeconomic variables in Brazil, China, India and Russia using Oil

price, exchange rate and moving average lag values as independent variables. The study

concluded that the domestic factors have significant influence on the in emerging

economies than the external factors.

Ramin Cooper Maysami, Lee Chuin Howe & Mohamad Atkin Hamzah (2004) examined

the relationship between the macroeconomic variables and sector stock market indexes in

Singapore stock exchange. The study concluded that the stock market in Singapore and

the property index form cointegrating relationship with the changes in short and long

term interest rates, industrial production, price levels, exchange rate and money supply.

Valeriano Garcia & Lin Liu (1999) examined the pooled data of fifteen developing and

industrial countries to study the macroeconomic determinants of stock market

development and market capitalization in particular. The paper concluded that the real

income, saving rate, financial intermediary development and stock market liquidity are

important determinants of stock market capitalization.


The study conducted by Emmanuel E Daferighe. & Samuel O Aje (2009) examined the

impact of real domestic product, interest rate and inflation rate on the stock market value

index of

Nigeria. The study concluded that the reduction in interest rate and inflation rate resulted

in increase of stock prices. Further, an increase in real gross domestic product impacts

positively.

Ndri. Konan Lon (2008) studied the effects of interest rate volatility on stock market

returns and volatility of Korean stock market. The study concluded that the conditional

market return has negative and significant relation with the interest rates while the

conditional variance has a positive but not significant relationship with the interest rates.

The study undertaken by Nathan Taulbee (2000) concluded that the real gross domestic

product is a major determinant of the performance of the stock market index S&P 500.

Further, rising unemployment rates significantly reduce the performance of the overall

stock market.

Desislava Dimintrova (2005) investigated the link between the stock prices, exchange

rate, fiscal and monetary policy. The study concluded that the interest rate parity

condition affects the stock prices significantly. The study conducted by Rapach, Wohar

and Rangvid (2003) examined the predicting ability of macroeconomic variables in

twelve industrial countries and concluded that interest rate as the most consistent

predictor across the geographies.

Another study conducted by Ratanapakorn and Sharma (2007) investigated the long-term

and short-term relationship between the S&P500 index and selected macroeconomic

variables in the US over a period from 1975 to 1999. The study concluded that the long-

term interest rate negatively impacts the stock prices while money supply, inflation,


exchange rate, industrial production, exchange rate and short-term interest rate positively

impact the stock prices in the long run.


CHAPTER THREE

STRUCTURAL COMPOSITION

3.1 INTRODUCTION

This chapter contains the structural composition of the study which x-rayed the trends of

Stock Exchange Market in Nigeria, also it included the operations and management of

Stock Exchange Market in Nigeria. Attempt was also made to check the trend of interest

rate and its effect on Stock Exchange Performance and the Returns on Stocks and stock

prices in the country. The problems of Stock Exchange Market in Nigeria were also

looked into.

3.2 NIGERIAN STOCK EXCHANGE: A GENERAL OVERVIEW.

Globally, the state of the capital market gives an idea of the state of health of a nations

economy as it measures the stability of the nations economy to the extent which

economic stability can rely on it. According to NEEDS (2003), the level of National

Economic Development and the extent to which most economic activities can effectively

rely on the safety of the capital market are major indicators of a healthy balance between

a sound financial system and macro-economic stability. It was in the light of these

assumptions that the Nigerian stock exchange was established.

a. ESTABLISHMENT OF THE NIGERIAN STOCK EXCHANGE

In 1958, the federal government sets up a committee headed by Professor R.H. Barback

to examine the viability of fostering a share market in Nigeria. In their report, the

committee (1959) recommended among others that:

a) Facilities for dealings in shares be created.

b) Establishment of share transfer mechanism.

c) To put in place measures that will encourage savings and issuing of government

securities and that of private organizations.


In the same year of this report (1959) the nearly established Central Bank of Nigeria in an

attempt to evolve a capital market floated the first FGN development loan of N4 million

on behalf of the federal government and managed the stock since there was no capital

market. The recommendations of the Barback report coupled with the need to ensure

sustainability and efficient management of the FGN development loan stock, Nigerian

Stock Exchange was established in 1960 as the Lagos stock exchange. Through the

promulgation of Lagos stock exchange Act of 1961, it was the first stock exchange in

West Africa and the sixth in Africa. The exchange opens its doors for business on June 5,

1961 with an authorized share capital of N10,000 divided into 500 shares of N20 each

with 19 securities listed for trading.

Following public dissatisfaction over the prevailing financial system, a committee (the

Okigbo Committee) was set up by the federal government to review the nations financial

system. The committee among other things recommended the decentralization of the

exchange so as to enhance the performance of the markets function. In line with this

recommendation, the Lagos stock exchange was constituted into the Nigerian stock

exchange in 1977 and was to have branches in major cities to meet the aspirations of the

users of its services. Each branch now has trading floors with branch councils. However

the national council retained responsibility for quotation, regulations and discipline of the

capital market. By 1990 the exchange has a total of six trading floors across the nation;

currently the exchange has 9 branches.

b. OBJECTIVES OF THE NIGERIAN STOCK EXCHANGE

The memorandum of association states the objective of the exchange as follows:

1) To create an appropriate mechanism for capital formation and efficient allocation

of resources among competing project.

2) To maintain fair price for securities.


3) To maintain discipline in the capital market.

4) To broaden share ownership practice.

c. FUNCTIONS OF THE NIGERIAN STOCK EXCHANGE

The functions of the Nigerian stock exchange includes but not limited to:

1) To enhance the mobilization of private and public savings for investment through

trading in shares and stocks.

2) To serve as a broad communication arena for its constituencies and the dual role

of overseeing the markets and their member-firm participants on one hand and self-

regulating itself on the other hand.

3) To ensure fair dealings in securities through its rules, regulations and operational

codes which help to protect the public from shady deals.

4) To maintain broad, liquid secondary markets for corporate securities thereby

helping to build public confidence and participation in the market.

5) To enhance issuers ability to raise capital in the primary market and

understanding the importance of efficient capital management.

6) To serve as a forum or mechanism for the implementation of indigenization

programme. The realization of the exchanges objectives through efficient and effective

performance of the function mentioned above is linked to the activities of members.


d. MEMBERSHIP OF THE NIGERIAN STOCK EXCHANGE

Membership of the exchange is basically either ordinary dealing or dealing members.

Ordinary members are individuals and institutions who have acquired at least five shares

of N20 each out of the issued share capital of the exchange and have been admitted to the

register of members in line with the exchanges articles of association. On the other hand,

dealing members are individuals or institutions that are not only admitted as members,

but are also licensed by the council of the exchange to transact business in stocks, shares,

debentures, bonds and other securities on the floors of the exchange in accordance with

the rules and regulations of the exchange. This category of members is represented by

authorized dealing clerks on the floor of the exchange.

Dealing members of the Nigeria stock exchange are required to deposit sums as specified

from time to time by the stock exchange before they are issued license to deal. Such

deposits can also be made by equivalent acceptable securities. According to Osaze

(2007:108) every dealing member is expected to maintain a presence on at least two

trading floors of the exchange with eight dealing clerks six authorized and two

ordinary. Dealing members are also required to make an annual subscription as specified

by the exchange in order to retain their license to deal on the exchange. Members have

liabilities limited to their shareholding in the exchange and do not share excess income

over expenditure.

e. MANAGEMENT OF THE NIGERIAN STOCK EXCHANGE

The Nigerian Stock Exchange being a non-profit making organization, a private company

limited by guarantee has a national council with the responsibility for quotation,

regulations and general discipline of the capital market. The director general with the

assistance of other directors takes care of the day-to-day running of the exchange. Prior to

1977, the exchange was being promoted by the Central Bank of Nigeria through financial

supports in the form of annual subvention. Between 1963 and 1965, CBN cash


subventions to the exchange amounted to N14,000.00. With the desensitization of the

exchange, each branch has a trading floor with a branch council exchange of it. The

branches are located in Lagos, Kaduna, Ibadan, Yola, Onitsha, Port-Harcourt, Abuja and

Uyo. The branch council has elected members from among member affiliated to the

branch. The branch council elects representative to the national council of the stock

exchange during the annual general meeting (AGM). The branch council is responsible

for the initial vetting of applications for membership of the stock exchange and making

the necessary recommendation.

f. TRADINGS/BUSINESS VOLUMES ON THE NIGERIAN STOCK

EXCHANGE

The Nigerian Stock Exchange started trading on its Lagos floor in 1961 with 19 securities

worth N80 million listed on the exchange. By December 2005, the securities have grown

to 288 with a market capitalization of N2.900 trillion with over 760 operators. Out of the

288 securities as at December 2005, 214 were equities, 58 were industrial loans and

preferences shares while 16 were gilt-edged securities. It is worth of note that

government stocks accounted for over 30% of the total securities. As at 2007, there were

over three million individual investors and about 400 institutional stock holders in the

market. The Nigerian Stock Exchange accounted for over 280 billion turnover in 2005.

Osaze (2007) argued that the low turnover is due to low trading of stocks by the stocks-

holders below expectation. He therefore contended that the infrequent trading of stocks

by their holders has made the stock market not to be as vibrant as other emerging stock

markets elsewhere. This is responsible for the low average transaction ratio which is the

ratio of the annual turnover of securities to total annual market capitalization.

Up to 1988, government stock (gilt-edged securities) dominated the NSE in value even

though it was few in volume. Because the value of government borrowing in the market

was often rather large with frequent block trading in them by capture institutional

investors (insurance companies, national provident fund) trading value in government


stock had been overwhelmingly larger than industrial stocks. After 1988, there was a

dramatic change as industrial stock started having greater value than government stock.

Although the number of industrial loans listed on the exchange is still very small, it has

increased tremendously between 1990 and 2005. The sudden rise is believe to be as a

result of year of dilution of share holdings ratio, reluctance on the part of foreign equity

participants to bring in new funds; and the preference for local funds for local

development.

3.3 The Historical Evolution of the Nigerian Capital Market -

The origins of the Nigerian Capital Market date back to colonial times when the British

Government ruling Nigeria at the time sought funds for running the local administration.

Most of these funds are derived from agricultural produce marketing and solid mineral

mining. Discovering that these sources were inadequate to meet its growing financial

obligations, the colonial administration decided to expand its revenue base by reforming

the system of revenue mobilization, taxation and other payments. It also saw the need to

raise funds from public sector to cover temporary shortfalls in funds availability. Hence,

it found it necessary to establish a financial system by setting up the basic infrastructure

for its take off pending the development of an organized private sector. According to

Odife (2000:6), the first step in this direction was to secure the necessary finance for the

development of this infrastructure and long-term capital project. This it did in 1946 when

it promulgated the 1946 10-year plan Local Loan Ordinance for the floatation of the first

N300,000, 3% Government stock 1956/61 with its management vested on the

Accountant-General.

In 1957, the government and Other Securities (Local Trustees Powers) Acts was enacted.

This law specified the types of securities in which trust funds may be invested. It also

clearly defined the powers and responsibilities of trustees. In addition, the colonial

government set up the Professor Barback committee to examine the ways and means of

fostering a share market in Nigeria. Part of the terms of reference of this committee


included the possibility of establishing a capital market in Nigeria. The committee

recommended, among others, the creation of facilities for dealing in shares , the

establishment of rules regulating share transfer and measures for encouraging savings and

issues of securities of government and other organizations. By the end of the year (1957),

the colonial administration had promulgated the General Loan and Stock Act and the

Local Loan (Registered Stock and Securities) Act on the recommendations of the

Barback Committee.

In 1958, the Central Bank of Nigerian was established through the Central Bank of

Nigeria Act of 1958. The purpose of these various legislations was to establish the legal

and infrastructural frame work for the take-off of a viable securities/capital market in

Nigeria. As a follow up to these laws, the colonial administration issued the first N2

million Federation of Nigeria Development Loan Stock in May 1959. In 1959, it also

enacted the Statutory Corporations (Guarantee of Loans) Act. In April 1960, the Central

Bank of Nigeria issued the first Nigerian Treasury Bills which were meant to provide an

avenue for the investment of short-term liquid funds in Nigeria and assist in providing

government with funds pending receipt of its own revenues. On September 15, 1960, the

Lagos Stock Exchange was incorporated as a private limited liability company, limited

by guarantee under the provisions of the Lagos Stock Exchange Act 1960. The Lagos

Stock Exchange Act 1960 conferred monopoly powers on it members to deal in securities

granted quotation on the Exchange. It also allowed the Central Bank to Deal directly in

securities. On June 5, 1961, the Lagos Stock Exchange opened for business with 19 listed

securities made up of 3 equities, 6 Federal Government Bonds and 10 industrial loans.

In 1961, the National Provident Fund was established as a compulsory contributory

savings scheme aimed at providing some protection to contributors at old age, invalidity

or temporary loss of employment. The enabling Act required the Fund to invest its

surplus funds only in securities in Nigeria authorized by the Trustee Investment Acts of

1957 and 1962 and restricted to securities created or issued by or on behalf of the


government of the federation (SEC, 1999:49). By 1962, the Exchange Control Act and

Trustees Investment Act were enacted. The Capital Issues Committee was also

constituted to examine and recommend the establishment of an apex monitoring

institution for the growing Nigerian Capital Market. In 1966, the Borrowings by public

Bodies Act was enacted. This was followed in 1968 by the Companies Decree and the

Banking Decree in 1969. In 1972, the Nigerian Enterprises Promotion Decree was

promulgated which was followed in 1963 by the Capital Issues Commission Decree. The

Capital Issue Committee thus became the apex regulatory body for the Nigeria Capital

Market. By this decree, it was empowered to determine the price and timing of new

issues of securities through offer for sale or for subscription. In 1977, the name of the

Lagos Stock Exchange was changed to the Nigerian Stock Exchange by the

Indigenization Decree of 1977 following the recommendations of the Industrial

Enterprises Panel (Adeosun Panel) of 1975 that branch exchanges should be established.

As a result, six new trading floors of the Nigerian Stock Exchange were created in

Kaduna (1978), Port Harcourt (1980), Kano (1989), Onitsha (1990) and Yola (2002). On

April 1, 1978, the Securities and Exchange Decree was promulgated to replace the

Capital Issues Commission and expand the scope of its activities following the

recommendations of the Financial System Review Committee (Okigbo Committee) of

1976. The Committee also recommended the establishment of multiple exchanges and the

approval of share allotments by the Securities and Exchange Commission. In 1978, the

first state government revenue bond was floated by the defunct Bendel State of Nigeria.

The N20 million 7% first Bendel State Loan was floated to finance the states housing

development programme. On April 5, 1985, the Second-tier Securities Market (SSM) of

the Nigerian Stock Exchange was established to cater for the requirements of small and

medium scale enterprise.

It essentially diluted the listing requirements of this category of companies to encourage

them to seek quotation and thereby further broaden and deepen the market. In 1987, the

Nigerian Enterprises Promotion Decree 34 (Issue of non-voting equity shares) was


promulgated permitting public companies quoted on the Nigerian Stock Exchange to

issue through the Exchange, non-voting paid-up shares for the subscription of persons

whether citizens of Nigeria or not and whether resident in Nigeria. In 1988, the functions

of the Securities and Exchange Commission were further expanded by Decree 29 of 1988

to include the review and approval of all mergers, acquisition and combinations between

or among companies. In 1988 also, the Privatization and Commercialization Decree 25

was promulgated. This Decree provided for the privatization of some enterprises in which

the Federal Government of Nigeria has equity interest and the commercialization of some

Federal Government wholly-owned enterprises. The exercise that ensued from this

Decree brought more companies to the Nigerian Stock Exchange whose shares were thus

listed.

Similarly, in 1958, Debt Conversion was officially adopted by the Central Bank of

Nigeria and a guideline on the debt conversion programme published. The Nigerian

Deposit Insurance Corporation was also established in 1988 to monitor the performance

of the banking sector and insure depositors against possible bank distress and consequent

loss of funds. In 1989, the Companies and Allied Matters Act (CAMA 1990) was enacted

to regulate the incorporation, corporations and activities of all bodies in Nigeria.

Specifically, Sections 541-623 cover dealings in the securities of companies and vests

its administration on the Corporate Affairs Commission. Indeed, the CAMA(1990) is a

comprehensive securities law for the country as it deals with a wide range of issues such

as invitation of the public to securities offer, registration of securities, prospectus,

allotment, unit trusts, reconstructions, mergers and takeover as well as insider trading

(SEC, 1990:53).

By 1991, following the spate of large scale distress in the financial system, the Banks and

Other Financial Institutions Decree 25 (BOFID), 1991 was promulgated to monitor the

operations of the banking and financial sector and reduce the tide of distress. In 1991, the

Inter-ministerial Committee on the Nigerian Capital Market recommended the


discontinuation of official pricing of securities as well as the establishment of more stock

exchanges. The Central Bank of Nigeria Decree of 1991 was also promulgated; this

decree expanded the functions of the Central Bank granting it greater autonomy in

monetary policy and repealed the Central Bank of Nigeria Act 1958. In 1992, the first

municipal bond in the Nigerian Capital was floated by the Lagos Island Local

Government. The first Lagos Island Local Government Floating Rate Revenue Bond

N100 million was floated to finance the Sura Shopping Complex in Lagos. The coupon

rate was 24.75%.

In 1992, The Chartered Institute of Stockbrokers Decree was promulgated which granted

the Institute of Stockbrokers powers to charter stockbrokers and dealers, conduct

examination for brokers and generally oversee the conduct of its members in the interest

of the orderly development of the capital market. On July 29, 1992, the Central Securities

Clearing System was incorporated as the official central clearing and depository of the

Nigeria Stock Exchange. The CSCS was incorporated to implement a computerized

Stock Exchange Management System (SEMS) which emphasizes the immobilization of

share certificate in a Central Depository. In 1993, the federal government, through its

budgets presentation, formally deregulated the capital market, thus ending the official

pricing, timing and allotment of securities issues. These functions were passed on to the

issuing houses to perform. In 1993, the second Kaduna State Revenue Trust Fund

(NSITF) was created by decree to replace the National Provident Fund. By this Act, the

scope of activities of the National Provident Fund was expanded and the National

Provident Fund Act thereby repealed. In 1995, the Nigerian Investment Promotion Act

No.16 of 1995 was enacted to guarantee the ease of transfer of funds through authorized

dealers. It stipulated the funds that can be transferred out by foreign investors to include:

(a) Dividends and profits (net of taxes) attributable investments;

(b) Payment in respect of loan servicing where a foreign loan has been obtained;

(c) The remittance of proceeds (net of taxes) and other obligations in the event of a sale

or liquidation of investments or any interest attributable to the investor.


In 1995, the Exchange Control Act of 1962 and the Nigerian Enterprises Promotion

Decree of 1989 were abrogated to promote greater foreign investment in Nigeria. In

1995, the Nigerian Investment Promotion Council was established by Decree 16 of 1995

to promote industrial growth and development through the attraction of foreign capital

and encouragement of domestic savings and investment. On March 19, 1996, the Federal

Government of Nigeria appointed the panel on the Review of the Nigerian Capital

Market (The Odife Panel). Members of the Panel included Chief Dennis Odife

(Chairman), Otunba A. O. Ogunde, Dr. Ahmed Abdullahi, Alhaji Baba Danbappa, Prince

Lekan Fadina (Members), Mr. O. G. Abiose and Mrs M. A. Lashmann (Secretaries).

The panel concluded its assignment and submitted its final report dated September 24,

1996 to the Honourable Minister of Finance on Thursday October 10, 1996. The report of

the Panel culminated in the promulgation of the Investment and Securities Act 1999. On

June 26, 1996, the African Capital Market Forum was formally launched in Accra, Ghana

to: Promote the establishment of formal capital market in Africa;

Accelerate the development of existing markets; Promote cooperation among African

Capital Market Institution; and Provide a forum for the exchange of ideas among African

Capital Market Institutions.

On June 17, 1998, the Abuja Stock Exchange (ASE) was incorporated as a Public

Limited Liability Company as the second bourse in Nigeria after the Nigerian Stock

Exchange. On July 13, 1998, Rights Issues were permitted for trading as the first

derivative instrument in the Nigerian Stock Market. The Investment and Securities Act

No.45, 1995 was promulgated into law with a commencement date of May 26, 1999. The

Act repealed the Se

the impact of exchange rate changes on stock market returns{an investigation of nigerian stock...

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capital market

stock market returns

functional stock market

liquid stock market

stock exchange

longterm capital

large stock markets

capital resources