Discuss the role of financial market in economic development of Nigeria
Abdulmalik Muhammad: BUAD 829. Distance Learning Centre Ahmadu Bello University, Kaduna, Zaria.
Phone: 080733439948. Email: [email protected]
Dawari Akobo. MBA Student, Registration Number: DP17MBA0967.
Phone: 08167161055. Email: [email protected]
Nigeria financial system comprises the financial markets and financial institutions. Financial market refers to the framework within the financial system for the buying and selling of short term funds. Financial markets are mechanism for facilitating the issuance of securities. They provide the system for issuing stocks, bonds, and other securities. Financial markets can therefore be said to mean an arrangement or structure for exchange of financial instrument. Financial market can be divided into two. Capital market and money market (Ugwu,nd). While money market provides facilities for the trading of short-term instruments, capital market is for the trading of long-term instruments. All the markets provide avenue for the transfer of funds from surplus to deficit units (Ekanem, 2009 cited in NOUN, nd; ABU, 2016). The Nigerian Securities and Exchange Commission (SEC) is the apex institution for the regulation and monitoring of the Nigeria capital market. The commission was established under the Securities and Exchange Commission decree 1979, operating retrospectively from 1st April 1978 (ABU, 2016). The Nigerian Stock Market effectively came into being in 1960 with the establishment of the Lagos Stock Exchange. It became the Nigerian Stock Exchange (NSE) in 1977 with branches in different parts of the country. This paper highlights financial markets and the role in economic development with emphasis on Nigeria
The financial system refers to the totality of the regulatory and participating institutions including financial markets and instruments involved in the process of financial intermediation. It is the collection of markets, individuals, institution, laws, regulations and techniques through which bonds, stocks, and other securities are traded, financial services provided and delivered, and interest rate determined. It provides a means by which society harnesses the savings of the residents and non- residents and channels same into the production process (Aderiagbe, 2004). A financial market is a market where financial assets are bought and sold (exchanged). Such financial assets include treasury bills, treasury certificates, bills of exchange, the call money, stocks, shares, bonds, debentures, etc. Financial markets bring together the savers and the investors and by interaction of the two groups in an open market. The financial market is made up of two important markets. These are money market and capital market. The fundamental function of financial markets is the transfer of funds from individuals or institutions with surplus funds (savers-lender) to those who require funds by: Indirect financial: via financial intermediaries- banks, savings institutions and investment intermediaries that facilitate the transfer of funds from saver-lender to borrower-spenders. Direct financial: via financial markets – the purchase of securities issued by borrower-spenders, by savers-lender themselves or by financial intermediaries. The borrower-spenders raise fund from savers-lenders by selling securities to them through financial intermediaries (ABU, 2016; Ogiji, 2002).
Other economic functions performed by the financial markets include price discovery, liquidity and reduced transaction costs. Others include: Providing avenues for the populace to partake and share in the wealth of the nations. Channeling savings and investments for business to survive and prosper. Providing credits to businessmen, households, and others to cater for their needs over and above what their current income can contain. Storing wealth for the future & promoting solvency, efficiency and competitiveness of the financial system. Protecting against loss as a result of negligence, theft and other unforeseen calamities. Supporting financial discipline, accountability, and transparency of the corporate sector of the nation. Providing channels for the application of economic policies for sustaining strong and stable economies. Reducing over reliance of the corporate sector on debt financing by producing equity capital and improving balance sheet through better debt equity ratio. Enabling easy adjustment of portfolio investment, thus encouraging investors to provide funds to industry and government for developmental. Indeed financial markets facilitate the saving in the capital market & the transfer of risk in the derivatives market; and in the currency market) (ibid).
Economic development is concerned with the promotion and establishment of an economic system that would improve the standard of living through the effective utilization of resources for the provision of basic infrastructure, higher productivity, higher per capita income and net capital investment in productive sectors of the economy which will in turn lead to a higher Gross National Output (ABU, 2016; Soyode, 1990).
In economic development, agriculture is boosted through the use of modem technological implement, thus reducing the percentage of the manual labour force while diverting the excess labour force to other sectors of the economy such as manufacturing industry etc. Economic development implies a qualitative improvement in the overall superstructure through the eradication of poverty, unemployment and in-equality, provision of a good standard of living and effective manpower utilization.
Thus, economic development is generally defined to include improvements in material welfare, especially for persons with the lowest incomes, the eradication of mass poverty with its effects on literacy, disease and early death; changes in the composition of input and output that generally include shift in the underlying structure of production away from agriculture towards industrial activities. The organization of the economy is in such a way that producing employment is general among working age population rather than the situation of a privileged minority; the corresponding greater participation of broadly based groups in making about the directions, economic and otherwise, making in which move to improve their welfare.
Some basic requirements of economic development are necessary, of which the productive forces that lead to the production of goods and services are effectively used and mobilized for the people welfare. The use of technology is improved for proper exploitation of resources. The use of manpower in both skilled and unskilled techniques exists. In addition, structural changes are expected within the various productive sector of the economy i.e. agriculture, industries, service sectors etc. Lastly, the proportion of labour and output to employment, GDP to the national economy increases overtime.
When analyzing the concept of economic development, a vital distinction should always be made between it and economic growth. The latter refers to the quantitative improvement in the wealth or resources of society overtime. Such increase may result from introduction of new technology which may foster high productivity. Discovery of new resources or in predominantly agricultural society, good harvest from favorable climate, etc. enhance economic growth. However, in consonance to quantitative growth, Economic development has distributive and moral connotations. In economic development, resources are expected to be used in such a manner that its benefits spread as evenly as possible to members of the society.
The primary aim of the Nigerian capital market is to mobilize long-term funds. The Nigerian Stock exchange (NSE) is the center point of the capital market while the Securities and Exchange Commission (SEC) serves as the apex regulatory body. It provides a mechanism for mobilizing private and public savings and makes such funds available for productive purposes. The capital market is the hub of the national economy as it serves the pivot for capital formation (savings) and investment. It therefore, plays a vital role in wealth creation, employ generation, poverty reduction and income redistribution. As is in public in public domain, the National Economic Empowerment Development Strategy (NEEDS) of the Federal Government was predicted on four key strategies viz reforming the way government works and its instruments, growing the private sector, implementing a social character for the people and re-orientation of the people with an enduring African value system. The capital market provides a veritable framework, the institutional and regulatory platform for realization of the lofty goal of the NEEDS Agenda. In promoting the NEEEDS agenda, the Capital market adopts a Capital Economic Empowerment and Development Strategy (CaMEEDS) CaMEEDS will compliment NEEDS by the promotion of the real sector of the economy (Ugwu, nd).
Accordingly, Adam Smith in 1776 with an inquiry into the nature and causes of the wealth of nations strongly emphasized that saving is a necessary condition for economic development. “Every increase or diminution of capital, therefore, naturally tends to increase or diminish the real quantity of industry, the number of productive hands, and consequently the real quantity of the annual produce of the land and labour of the country, the real wealth and revenues of all its inhabitants” (ABU, 2016).
According to Smith, once development sorts, it tends to become cumulative. First, given adequate market possibilities and the basis for capital accumulation, division of labour takes place and raises the level of productivity. The resultant increase in national income and the probable growth of population associated with the rise in income only increases the extent of the market but permits a larger saving out of the increased income stream. Moreover, as labour becomes more specialized; and market expands, the ability and incentive to introduce improvements of arts” increase. Those improvements lead to still further specialization and productivity gains (ibid).
Finance is the “application of economic principles to decision making that involves the allocation of money under conditions of uncertainty”. Finance provides the framework for the sourcing and investing of funds by different entities – investors, governments and businesses to meet their desired needs. Through the financial system of money and capital market most governments try to regulate their economic performance, promote economic growth, combat inflation and provide employment for the large number of job seekers who enter the job market every year. They are indeed vehicles for achieving stronger and more stable economies globally. When there is crisis in these sectors, a global economy crisis erupts as was witnessed in 2008 (Fabozzi and Drake, 2009 cited in NOUN, nd; Jhingan, 2004).