NATION BUILDING AND DEVELOPMENT - THE ROLE OF THE CAPITAL MARKET
A PAPER PRESENTED BY
PRINCESS A.A. ADENIRAN
CHAIRMAN – DOMINION TRUST LIMITED
AT MEMBERS FORUM - I C A N, LAGOS MAINLAND DISTRICT SOCIETY
DATE: 5TH MAY 2007
VENUE: LAGOS AIRPORT HOTEL, OBAFEMI AWOLOWO WAY, IKEJA, LAGOS
Nation building and development has many dimensions and is dependent on several factors some of which are natural while others are man’s self – imposed problems. The singular enemy the human race has is itself and the greatest danger he faces is his ability through his action or inaction to cause his survival or extermination. The difference lies in the right application of his natural endowment in the form of natural and human resources.
Nation building and development has to be sustainable in practical terms and is dependent as stated above on available resources, the ability to optimize the application of these resources beneficially as well as preserve the physical environment safe, healthy, stable and highly conducive.
Sustainable development can be defined as “a development which permits for economic growth but at the same time demands the protection of the environment.” (Brundtland 1987) defines sustainable development as “a development that meets the needs of the present without compromising the ability of future generations to meet their own needs” Any of these two definitions sums up the use to which we must apply our human and natural resources and the guiding principle for nation building and development . Lack of sufficient human and natural resources and its judicious application will result in backwardness and poverty or put simply in national under-development. On the other hand where they abound and are effectively and efficiently applied, there certainly will be national prosperity and national building and national development can be taken for granted
As a summary to this introduction, nation building is dependent on good and committed political leadership, a corrupt-free and patriotic citizenry, political stability, the prevalence of the rule of law, freedom of speech, safety of lives and property and above all, a society where opportunities abound for every citizen to freely develop himself or herself to the best of his or her ability. I must emphasize that the capital market is an important financial means for nation building and development but will play its role better only if the conditions stated above are present. Finally the goal of nation building and development in an egalitarian society is where there is full employment and the population is happy, peaceful and there is a guaranteed future.
2.0 CAPITAL MARKET DEVELOPMENT IN NIGERIA
The history of capital market in Nigeria dates back to 1946 with the floating of the first government securities but without any formal institutional facilities. Later in 1961 the Lagos Stock Exchange was established with the listing of five (5) government stocks and three (3) equities. The market since then had grown in leaps and bounds owing to various government measures to promote its development – most notable is the indigenization exercise that took place (1972 – 1977) under the Nigeria Enterprises Promotion Decree which was aimed at indigenizing the Nigerian economy. Later the capital market improved through the introduction of modern technology - the computerization and the introduction of Central Securities Clearing Systems (CSCS) and other attempts to globalize its operations. Further expansion of the market was promoted during the privatization exercise in 1992, this took the market capitalization to N1.7 billion while the Bank consolidation exercise of 2005/2006 pushed the market capitalization to N5.1 trillion by the end of December 2006.
Financial market is a generic term for the market for the exchange of capital and credit in the economy. Financial markets include the stock market, bond market, commodities market, and foreign exchange market. Financial markets are simply where financial instruments are traded. In financial markets suppliers and users of funds converge through intermediaries to provide and seek funds at a cost or benefit. Thus in financial markets credits are allocated and liabilities created. This ability to tap savings for channelization into productive investment is perhaps the most important function of financial markets as this aids economic growth and development. This process facilitates the migration of fund to the best user in the economic system where it will yield the highest social return.
There are two broad categories of financial markets viz the money market and the capital market.
The money market trades in short term debt instruments with maturity of one year or less. The market trades in instruments such as treasury bills and certificates of deposit. Other elements of the money market include interbank borrowing as well as bank borrowing from the Central Bank and on a wider context dealings in foreign exchange. The money market provides the avenue for government (through the use of monetary policy instruments) to direct the economy towards desired objectives. Commercial and merchant banks are key institutions in the money market with central banks as the regulatory institutions.
The capital market by contrast, trades in medium to long term financial instruments. It in essence provides funds for industrial concerns and governments for long term uses. Thus, the basic difference between the money and capital markets is the duration (tenure) of the funds sourced. Typically, money market funds are resorted to by business enterprises to meet working capital requirements while capital market funds are sought to finance growth and expansion projects such as fixed asset (land, factories, machineries etc) With respect to governments, borrowing in the capital market are usually for purposes of financing capital projects like bridges, roads, dams, ports and other infrastructural facilities. The capital market consists of the following:
a) The Primary Market
b) The Secondary Market
The primary market which is also called the new issues market is the markets for the sale and purchase of freshly issued securities. In other words, when a company or government needs long term capital, it could issue new securities in the primary market to raise the required funds. The primary market is therefore, the avenue to source new capital for investment in fixed assets. Through this function, it adds to the stock of capital (capital formation) in the economy and leads to improved standard of living. I personally believe that the capital markets are vital to the growth and development of any country. They support corporate initiatives, finance the exploitation of new ideas and facilitate the management of financial risk.
3.3.2 The Secondary Market
The secondary market, on the other hand, provides facilities for the transfer of existing securities. For instance, after securities have been bought in the primary market and divestment is desired, the secondary market provides the avenue for effecting such divestment. This process creates employment for stockbrokers registrars, Central Securities Clearing Systems (CSCS), Nigerian Stock Exchange (NSE), and in effect creates wealth for the nation. Although, the secondary market does not add to the stock of capital in the economy since it does not channel savings into investment like the primary market does, but the presence of formal and/or informal secondary markets in a country encourages public participation in primary issues as investors are sure that their securities can be disposed of whenever they wish to.
Nigeria faces a major challenge in efforts to develop and deepen the Nigeria Capital market. Development can only take place when industrial investment is growing and existing industries are fully utilized. Economic factors that accelerate or inhabit this development and growth are usually embedded in the business climate prevailing in the country such as inflation, fiscal policy, political stability, education, efficiency of the legal system, exchange rate policy and openness to international trade. The transmission from liquidity to economic growth occurs only through savings, investments and productivity.
Factors that have contributed to a less than expected performance on our market include:
4.1 Macroeconomic instability
Most of our African economies are still characterized by high fiscal deficits, high and volatile inflation, high interest rates and volatile and fast depreciating exchange rates (although Nigeria has managed to curb this.) Policy inconsistency and macroeconomic instability will undermine even the best laid out arrangements for stock markets.
4.2 Regulatory environment
The development of capital markets requires dynamic and effective regulation and can only be governed by how liberal or restrictive the regulations are applied.
4.3 Poor market infrastructure and human resources
A well functioning market infrastructure will reduce obstacles to trading flows. An efficient market infrastructure allows for low cost settlement of financial transactions and raises investors’ confidence in the market mechanisms. Nation development exists where there is availability of good transportation, trained personnel, energy and telecommunication. In Nigeria, this is restricted to cities like Lagos, Kano, Abuja, Port Harcourt and Kaduna. Hence, Industries are concentrated in these areas.
Our markets are characterized by a small investor base. This is because the majority of the population is unable to save or invest. They survive on less than $1 per day. Market development policies should focus on policies to mitigate these weaknesses.
The Nigerian capital market is plagued essentially by certain development problems which include the following:
Ø Low level of public awareness of the market. This is improving gradually now.
Ø Lack of depth and breadth when compared to other emerging markets. The Nigerian Stock Exchange monthly report figures for the end of December 2006 reveal that market capitalization (in USD) was 40 billion with 288 listed securities; while the figures for some other markets as revealed by the World Federation of Exchanges Members are as follow:
Market Capitalization Listed Securities
· Bombay Stock Exchange $818.9 billion 4,796
· Johannesburg Stock Exchange $711 billion 389
· Korea Exchange $744 billion 1,689
5.0 INSTITUTIONS OF THE CAPITAL MARKET
Institutions of the capital market fall under two broad categories - the regulators and the intermediaries (facilitators). The regulators are Security & Exchange Commission (SEC), Nigerian Stock Exchange (NSE), National Association of Security Dealers (NASD) which is the Self Regulatory Organization for over-the-Counter (OTC) market.
The other category of capital market institutions are intermediaries often called market operators. Intermediaries inter alia facilitate the savings and investment process by bringing together suppliers and users of funds. The issuing houses are most prominent in this respect. Other intermediaries such as stockbrokers facilitate the transfer of securities among investors while registrars keep proper records of shareholders of public companies, dispatch annual report, dividend warrants, convene annual general and extra ordinary general meetings on behalf of companies among other things.
6.0 THE ROLE OF THE CAPITAL MARKET IN NATION BUILDING
Economic growth is defined as the rate of change in output from one year to the next. In other words, it reflects the increase in the production of goods and services over the time and is often used as a measure of increased material well-being generated through economic activity. Economic growth is driven by efficient use of inputs (such as labour, capital and natural resources) and/or growth in productivity. It is usually reported as a percentage increase in Gross Domestic Product (GDP) for a country.
There is a convergence of opinion on the pivotal role of the Capital Market in Nation building and Economic development. The extent of this role is perhaps where there are varied opinions. Empirically, stock market liquidity has been a catalyst for long-term growth in developing countries. Evidence of this abound in both developing and developed economies. Specifically, the Capital Market aid economic development and nation building in the following ways:
6.1 Enhances efficient allocation of financial resources
Without a liquid stock market, many profitable long-term investments would not be undertaken because savers would be reluctant to tie up their investments for long periods of time. In contrast, a liquid equity market allows savers to sell their shares easily, thereby permitting firms to raise equity capital on favorable terms. By facilitating longer-term investments, a liquid market improves the allocation of capital and enhances prospects for long-term economic growth.
6.2 Attraction of foreign Direct Investment
The out-going President of our country Chief Olusegun Obasanjo spent quality time canvassing for Foreign Investment. The achievement of the government in this area was largely made possible because of the capital market. Many quoted companies, particularly the banks, have attracted foreign investment by way of equity, either permanent or for a defined period with exit plan. For instance, Foreign Direct Investment steadily rose from $2.23 billion in 2003 to $5.13 billion in 2004. This rose to $9.92billion in 2005 but dropped marginally to $9.44 billion in 2006. (Source: LOCO monitor)
6.3 Allows for the separation of Ownership and control
Because the ownership of quoted companies is so large in most cases, very competent professionals are hired to run the affairs. This enhances the quality of management while perpetual existence is guaranteed.
6.4 Acts as a barometer for gauging the state of the economy
The capital market is the barometer to gauge the pulse of the economy. Thus, in times of depression or economic boom, the market always shows the symptoms. For instance, during the military era in the mid-90s, there was a crash in stock market prices in Nigeria because of the then economy downturn.
6.5 Enhances management transparency
The regulatory authorities have set minimum standard of disclosure of the state of affairs of quoted companies. This makes it mandatory for management to be as transparent as possible in their day-to-day operations.
A liquid equity market allows savers to sell their shares easily, thereby permitting firms to raise equity capital on favorable terms. By facilitating longer-term investments, a liquid market improves the allocation of capital and enhances prospects for long-term economic growth. Investors in the market can readily turn their investment into cash when they so desire – provides easy access and easy exit.
The Nigerian capital market is still developing. Its rate of development is impeded by several factors among which are lack of necessary infrastructure, inadequate awareness, lack of depth, and a host of others. However, the performance of the market in recent times, especially during the banking and insurance sectors consolidation exercise, leaves no one in doubt as to its level of contribution to national development.
The regulators are doing a lot to create awareness in investors who have resources to invest and those who need financing. The contribution of the market will become manifest in the no distant future. This is evident in market capitalization relative to GDP which is on the increase year in year out.
6.7 Generates multiple employment.
a) In industries/Government using the capital raised.
b) Due to increase activities in the capital market there
would be need for extra hands: -
i) by the regulators – Security & Exchange Commission (SEC), Nigerian Stock Exchange (NSE) etc.
ii) by the market operators – Issuing houses, Stockbrokers, Registrars etc.
The role of the capital market in Nation building and development is certainly very significant and greater effort is needed to further develop the market and enable it play its role in the service of the nation for economic growth and societal development .
It cannot be over-emphasized that for the capital market to play its role there has to be a conducive environment and circumstances that guarantee political stability, committed leadership and infrastructure that functions efficiently, safety of life and property, confidence of other nations in our economy and most importantly reduced corruption of our business life to the barest or tolerable level.
Distinguished Ladies and Gentlemen, thank you for listening.