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Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB) An Online International Research Journal (ISSN: 2306-367X) 2015 Vol: 4 Issue 2 1513 www.globalbizresarch.org Impact of Nigerian Capital Market Capitalisation on the Growth of the Nigerian Economy Zainab Dabo, Faculty of Social and Management Sciences, Department of Business Admistration, Kaduna State University, Nigeria. E-mail: [email protected] ___________________________________________________________________________ Abstract The study examines the impact of capitalization of the Nigerian capital market and it’s on the growth of the Nigerian economy. The paper employs annual time series data from 2001 to 2012(12 year period) collected from various issues of Central Bank of Nigeria’s Statistical Bulletin and Annual Report and statements of Accounts of Nigeria Stock Exchange. A regression analysis was adopted in computing the interaction between the capitalization of the Nigerian capital market and Nigeria’s economic growth. The empirical results showed that, there was unidirectional causality between capitalization of the stock market and economic growth, which ran from economic growth (GDP) to capitalization of the stock market (MCAP) at 5 percent significant level. The paper concludes that the Nigerian capital market needs to create more confidence to investors, especially in terms of transparency and accountability, for sustainable and increasing capitalization necessary for sustainable economic growth in the country. Furthermore, the paper recommends expansion of the Nigerian Stock Market by the government creating an enabling investable environment, that will increase both the volume of transactions and number of stocks traded in the market. This will improve their ability to mobilize resources and efficiently allocate them to the most productive sectors of the economy. ___________________________________________________________________________ Keywords: Capitalisation, Economy, Growth, Stock Market, Sustainable.

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Page 1: Impact of Nigerian Capital Market Capitalisation on the Growth of …globalbizresearch.org/economics/images/files/52035_ID_D543_JEIEF… · liberalization of capital movement, and

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB) An Online International Research Journal (ISSN: 2306-367X)

2015 Vol: 4 Issue 2

1513 www.globalbizresarch.org

Impact of Nigerian Capital Market Capitalisation on the

Growth of the Nigerian Economy

Zainab Dabo,

Faculty of Social and Management Sciences,

Department of Business Admistration,

Kaduna State University, Nigeria.

E-mail: [email protected]

___________________________________________________________________________

Abstract

The study examines the impact of capitalization of the Nigerian capital market and it’s on the

growth of the Nigerian economy. The paper employs annual time series data from 2001 to

2012(12 year period) collected from various issues of Central Bank of Nigeria’s Statistical

Bulletin and Annual Report and statements of Accounts of Nigeria Stock Exchange. A

regression analysis was adopted in computing the interaction between the capitalization of the

Nigerian capital market and Nigeria’s economic growth. The empirical results showed that,

there was unidirectional causality between capitalization of the stock market and economic

growth, which ran from economic growth (GDP) to capitalization of the stock market (MCAP)

at 5 percent significant level. The paper concludes that the Nigerian capital market needs to

create more confidence to investors, especially in terms of transparency and accountability, for

sustainable and increasing capitalization necessary for sustainable economic growth in the

country. Furthermore, the paper recommends expansion of the Nigerian Stock Market by the

government creating an enabling investable environment, that will increase both the volume of

transactions and number of stocks traded in the market. This will improve their ability to

mobilize resources and efficiently allocate them to the most productive sectors of the economy.

___________________________________________________________________________

Keywords: Capitalisation, Economy, Growth, Stock Market, Sustainable.

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Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB) An Online International Research Journal (ISSN: 2306-367X)

2015 Vol: 4 Issue 2

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1. Introduction

Financial system has long been recognized to play an important role globally in bringing

about bringing about economic development of different countries. This recognition dates back

to the period of the 1950s. For instance, researchers such as Goldsmith (1955), Cameron (1967),

Mckinnon (1973) and Shaw (1973), have demonstrated that financial system could be a catalyst

of economic growth and sustainable development if it is well harnessed and developed. On the

other hand Fergusson (2006) views financial markets as the single sector most important market

in which many economic institutions exist. This is because of the financial link and contract in

the sector which has the channels of short and long term sources of fund which gives rise to a

better consolidated financial market.

Reforms (including banking sector consolidation) are predicated upon the need for

reorientation and repositioning of an existing status quo in order to attain an effective and

efficient level of operation. There could be fundamental bottlenecks that may inhibit the

functioning of institutions for growth and the achievement of core objectives in the drive

towards enhancing and sustaining the economic and social imperatives of human endeavour

(Ajayi, 2005).

Soludo (2004) considers the main objective of banking sector reforms, for instance, as

guaranteeing an efficient and sound financial system. The reforms are designed to enable the

banking system develop the required flexibility that is needed to support the economic

development of the nation by efficiently performing its functions as the pivot of financial

intermediation. Lemo (2005) opines that banking sector reforms were to ensure a diversified,

strong and reliable banking industry where there is safety of depositors’ money and position

banks to play active developmental roles in the Nigerian economy.

Soludo,(2004) poised on the Nigeria’s banks reformation programme to be the

transformation exercise of which among others the minimum requirement for capital base of

banks to be N25 billion with a deadline mark to be end of December, 2005. In line with this,

consolidation of banking institutions, especially through mergers and acquisitions was required,

which apparently used the Nigerian Capital market as the platform for the recapitalization

activities of the banks which ultimately increase the capitalization level of the Nigerian Stock

Exchange itself.

This development necessitated banks to consider ways through which they could achieve

the stated objective of increasing their capital base to the authority’s requirement. In their effort

they embarked on different strategies which included the increase in capital base by initial

public offer (IPO), sale of their assets, Mergers and Acquisitions and reducing their stake in

other investments. This is done by adopting two or more of the above stated strategies. This

reformation programme on banks with a link to the impact of the Nigeria capital market

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Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB) An Online International Research Journal (ISSN: 2306-367X)

2015 Vol: 4 Issue 2

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sustained capitalization on the Nigeria’s economic growth is the main issue of discussion in

this paper.

Many researchers have focused on financial sector reforms and economic growth, towards

improving the body of knowledge but this paper is focusing on the capitalisation of Nigerian

capital market and the overall economic growth. It is at this back drop that research seeks to

evaluate the impact of the Nigerian capital market capitalisation strategy on the growth the

economy. The paper tests the impact of capitalisation of the capital market on the Nigerian

economy via the Nigerian Stock Market as motivated by the consolidation exercises that were

conducted in the banking, insurance and some other businesses in the recent past in Nigeria.

The study covers a period of 10 years (2000-2010). This period is the period when the entire

financial system (banking, insurance, etc) witnesses transformation in the form of financial and

institutional restructuring, policy, and regulatory and legal frameworks.

The paper is divided into five sections with the introduction above as section one. The second

section of the paper reviews literature on consolidation of banks and financial intermediaries

across the world. The third section is on the methodology. Section four presents and discusses

the results obtained, while section five concludes the paper.

2. Literature Review

In developing countries, particularly in Sub-Saharan Africa, financial markets are

dominated by commercial banks, which have not been reliable sources of long-term financing

and also non-bank sources of medium and long-term financing are generally underdeveloped.

The short-term nature of commercial banks’ assets and liabilities as well as regulatory reserve

requirements in many countries render the (banks) incapable of supplying long-term capital

(Edward, 2004). Therefore, the need becomes necessary to inject funds through different forms

of capital formation. This type of financial sector reforms is adhered by many countries when

faced with banking liquidity and other related problems.

The Nigerian financial sector reform encompasses all facets of the Nigerian economic

system that deals with the funding of the economy. The broad objectives of the financial sector

reforms are to promote financial savings, reliable payment system, increase the level of

domestic investment by providing effective intermediation between lenders and borrowers and

diversifying risk. In order to achieve these objectives, measures that were adopted include the

reform of the financial structure, monetary policy reform, foreign exchange market reforms,

liberalization of capital movement, and capital market reforms. The capital market institutions

in particular are in the position to encourage investment, as investors are able to borrow funds

and invest more than they would have done without such institutions Babalola and

Adegbite,(2000).

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The reform in the Nigerian Financial sector facilitated to develop a reliable sector that will

revolve around to emerge an enabling environment which will allow competition to flourish.

Ajayi (2005) considers the banking sector reforms to be spurred by the requirement to deepen

the financial sector and reposition it for growth, at the same time integrating it into the global

financial architecture. This will evolve a banking sector that is consistent with regional

integration basics which fits into best international practices of banking system.

Deccan (2004) views reforms in the banking industry to be aimed at addressing issues such as

governance, risk management and operational inefficiencies, with the vortex of the reforms to

be around in forming up capitalisation. This had gone in line of reformation programme which

the banking system in Nigeria witness in the last decade. Capitalization is an important

component of reforms in the Nigeria financial sector, owing to the fact that effect is both on

banks and the Nigerian Stock Market. This necessitated banks a strong capital base that will

have the ability to absolve losses arising from non performing liabilities which will save guard

against banks becoming distress. Attaining the capitalization requirements may be achieved

through consolidation of existing banks or raising additional funds through the capital market

(Adegbaju and Olokoyo 2008). In views of Pat and James,(2010) they identified capital market

to be an institute that contributes to the socio-economic growth and development of emerging

economies, this is in line with Nigeria’s urge to build a capital market that will participate in

accelerating the growth of the economy. Alile,(1997) posits on the development of capital

market to be made possible through some of the vital roles played such as channelling

resources, promoting reforms to modernize the financial sectors, financial intermediation

capacity to link deficit to the surplus sector and a veritable tool in mobilization and allocation

savings among competitive uses which are critical to the growth and efficiency of the economy.

Soludo (2004) posits on banking sector reforms as an action which was done as due to low

capitalization of the banks that made them less able to finance the economy, and more prone to

unethical and unprofessional practices. These practices include, poor loan quality, of up to 21%

of shareholders’ funds which when compared with the 1%–2% in Europe and America (as at

that time), and this had made Nigerian banks prone to have liquidity problems. In addition also

to the practices are overtrading in banking business by abandoning the true function of banking

to focus on quick profit ventures such as trading in foreign exchange dealings and tilting their

funding support in favour of import-export trade instead of manufacturing, heavily relaying on

unstable public sector funds for their deposit base among others.

In a study developed by Nyong,(1997) in adopting the use of aggregate index of Stock

market measurement variables to determine the of the market in relation to economic growth

in the long-run in Nigeria. The study employed a time series data from 1970 to 1994. Four

measures of capital market development-ratio of market capitalization to GDP (in %), ratio of

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total value of transactions on the main stock exchange to GDP (in %), the value of equities

transactions relative to GDP and listing were used. The four measures were combined into one

overall composite index of capital market development using principal component analysis. It

was found that the capital market development is negatively and significantly correlated with

the long-run growth in Nigeria. Also a study conducted by Ewan et al. (2009) appraised the

impact of the capital market efficiency on the economic growth of Nigeria using time series

data from 1961 to 2004.They found that the capital market in Nigeria has the potential of growth

inducing but it has not contributed meaningfully to the economic growth of Nigeria because of

low market capitalization, low absorptive capitalization, illiquidity, misappropriation of funds

among others.

On the other hand the examination conducted by Levine and Zervos (1996) on whether

there is a strong empirical association between stock market and long run economic growth

development. The study used pooled cross-country time-series regression of forty-one countries

from 1976 to 1993 to evaluate this association. The study goes in line with that of Demirgüç-

Kunt and Levine (1996) by conglomerating measures such as stock market size, liquidity, and

integration with world markets, into index of stock market development. The finding indicates

an existence of a strong correlation between the overall stock market development and long-

run economic growth. This means that the result is consistent with the theories that imply a

positive relationship between stock market development and economic growth.

Demirguc-kunt and Levine (2003) argument on the recapitalization banks through mergers

and acquisitions as a motive which increases banks’ concentration, Stock market performance

and these goes hand-in- hand with efficiency and improvements in the financial system. But

Boyd and Runkle (1993), and Imala (2005) buttressed this argument. They stressed further that

consolidated banking system enhances profits efficiency, and lower bank fragility not only

efficiency. More importantly, high profits arising from this provides a buffer against adverse

shocks and increases the franchise value of the banks. Turning to the effectiveness of

recapitalization and its overall economic implications, Schumpter (1934), Bayraktar and Wang

(2006), King and Levine (1993) have examined relationship between banking sector and

economic growth or financial sector development and economic growth, in which these views

had contention among the economist.

For Schumpter (1934) views the banking sector to be a stimulant in economic growth as

the banks have the way they play the role between of those who wish to form new combinations

and the possessors of productive means. While Bayraktar and Wang (2006) posits on banking

sector and economic growth to have direct and in direct effect on the economy through the

combination of improving access to financial services and the efficiency of the financial

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intermediaries. He based these as both views have a lowering a cost of finance in which is a

stimulant on capital and economic growth.

Raghbendra,(2003) assessed the theory which maintains that financial development as

determinant of economic growth. According to the proposition of the school of thoughts he

followed, making an argument that financial development is a precondition for economic

growth while another argument was on the financial system that is so sophisticated which helps

to strengthen the atmosphere for rapid economic growth provided that there are no other

hindrance to economic development. The theoretical expositions done so far indicate that the

role of financial sector reform or development in stimulating economic growth is controversial.

Because, the role of finance in economic growth is an empirical one and also the reform of the

financial sector as an attempt to achieve financial development may attract cost. Literalised

views focus on financial sector reforms and economic growth, but towards improving the body

of knowledge this paper is focusing on capital market ecapitalisation and economic growth in

Nigeria. This was motivated by the need to provide a study on the link between the

recapitalization of banks in Nigeria, which led to activities in the capital market and therefore

leading to activity in the economy. Since the two players of financial sector are involved.

Aurangzeb (2012) investigates the contributions of banking sector in the economy of

Pakistan by using ordinary least square and granger causality test. The use of the test confirms

the bidirectional causal relationship of deposits, advances and profitability with economic

growth. In the views of Bakare,(2000) he defines capitalization rate as the discount rate used to

determine the present value of future earnings. It is one of the major determinants of the market

size of any stock exchange. The size of the market capitalization and its growth rate pose a

major influence on the growth and development of the economy. Moreover consolidation

recreated the Nigerian capital market by stimulating activities in both primary and secondary

through increase in aggregate market capitalisation and new issues of bank stocks.

Bitzenis and Misic(2008) investigated and made some evaluation on the banking reforms

in Serbia by using surveyed data results. The study uses the approach of pre and post -

performance through many factors which are relevant to reformation of banking systems. The

study concludes the different problems and challenges faced by the system but reforms in the

industry are positive with growth of the economy. Contrary to this, Malik(2010) posits that

banking industry of Pakistan has challenges which hinders it’s growth. Malik’s conclusion was

based on an increase on cost of borrowings, high risk of investment local currency

depreciation(Rupees) and low return on investment all as a result of financial crisis that affect

the global economy. A similar study conducted by Nzue(2006) who investigated the

relationship between the development of Ivorian Stock Market and the country’s economic

performance. He employed the stock market control variables which the results reveal that

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there is a long-run relationship between the Gross domestic product and stock market with a

uni-directional causality running from the market development and economic growth.

While a model which was also specified by Balogun, (2007) was more expansive and included

money supply, minimum rediscount rates, private sector credit, ratio of banking sector credit

to government, ratio of stock market capitalization to credit to the private sector, and exchange

rates.

Adegbaju, and Olokoyo, (2008) poised on the issue of capitalization to be a major reform

objective; and defining capitalization literarily to mean increase on the amount of long term

finances used in financing the organization. They reviewed the capitalization process to entail

an increase in the debt stock of the company or issuing additional shares through existing

shareholders or new shareholders or a combination of the two. It could even take the form of

merger and acquisition or foreign direct investment. Whichever form it takes the end result is

that the long term capital stock of the organization is increased substantially to sustain the

current economy trend in the global world. Asedionlen (2004) opines on recapitalization as an

issue which may raise liquidity in short term but will not guaranty a conducive macroeconomic

environment required to ensure high asset quality and good profitability’’ Ezrim and

Muoghahi,(2004) examined the effect of financial sector reforms on commercial banks

operations in Nigeria by making a comparison of two decades. All literatures covered use

financial sector which comprises of banks and other financial institutions including insurance

companies. This paper examines the Capital Market capitalisation as a result of recapitalisation

exercise of banks in 2005 and its impact of growth on the economy.

3. Methodology

The population of this study is the Nigerian financial system with its contribution to

Nigerian economy. Although, the financial system comprises of money market and the capital

market, but the population covers the deposit money banks and the capital market. Therefore

the research is focusing on deposit money banks and the Nigerian Stock Exchange with its

contribution to Nigerian economy after the recapitalisation exercise of banks. The paper

obtained data from several sources; this included the annual statistical Bulletin of the Central

Bank of Nigeria, the Stock market quarterly and annual report of the consolidated banks. It

should be noted that the recapitalisation exercise of banks had affected the banks to the extent

that it has reduced their number from 89 banks to 25 mega banks on the Nigerian capital market.

Along the period covered by the paper, a merger between Stanbic bank and IBTC took place.

This brought the total number of banks under the period of review to be 21 in number. The data

collected for a period of 12 years from 2001 to 2012.

The model specifies on the socio-economic development of the economy by using the proxy of

gross domestic product which significantly influenced by capital market indices (market

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2015 Vol: 4 Issue 2

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capitalisation, new issues, value of transaction and banks total assets). In other words economic

growth proxied by GDP is significantly influenced by the capital and money market indices

which are proxied by the market capitalisation, new issues, value of transactions and banks total

assets. Also the use of Granger test was to show the causal relationship.

GDP = Gross Domestic Product (Dependent Variable), MCAP = Market capitalization,

(Independent Variable), TNI = Total New Issues (Independent Variable), VLS = Total value of

transactions (Independent Variable), BTA = Bank Total Assets, µ = Disturbance Term, a =

Intercept, a1 – a4 = coefficient of the independent variables.

4. Results and Discussions

The empirical analysis is presented in this section with the presentation of the unit root tests

of the variables used in the analysis. In the first table, the estimates of the ADF are presented.

The result confirmed that all the variable (market capitalization, Total new issues, Value of

transactions, listed equities and government stock) were stationary at levels, except Bank total

asset and gross domestic product that became stationary after first difference since the series

here integrated of order one i.e. I (1). The optimal lag leg length, which is a guide for model

selection are reported in column two and where selected on the basis of Schwardz criterion,

which provides a basis for the test for co-integration relationships among the stationary series.

Table: 1

Variable Lag ADF

stationery

Level 1st Diff. Order of

stationery

Remark

GDP 1 -5.9352 -3.0263 -3.0613 1(1) Stationery

MCAP 1 -4.8154 -3.0416 - 1(0) Stationery

TNI 0 -4.6322 -3.0211 - 1(0) Stationery

VLS 0 -5.5213 -2.0403 - 1(0) Stationery

BTA 0 -5.6312 -2.0403 - (1) Stationery

LEGS 0 -3.5312 -3.0213 -3.0341 1(0) Stationery

For the causality test reported in table two, both market capitalization and total new issues

have a unidirectional causal relationship with GDP. It should be noted that the causality runs

from GDP to the two variables at 5 percent level of significant. Although, a weak unidirectional

causality was found between value of transaction and GDP, running from GDP to value of

transaction at 10 percent level of significant. Also bank total asset was found to granger with

market capitalization, which is very strong at 5 percent significant level, while a bi-directional

causality exists between value of transaction and total new issue that is very strong at 5 percent

significant level.

The granger causality result is presented in table two below. It shows that there is

bidirectional causation between GDP and bank total assets BTA and a unidirectional between

the GDP and the market capitalization. All other variables have no significant causation with

the GDP except for listed equities and government stock that has a reverse relationship.

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Table 2: Granger Causality test

Null Hypothesis Obs F-statistics probability

MCAP does not Granger Cause GDP

GDP does not Granger Cause MCAP

TNI does not Granger Cause GDP

GDP does not Granger Cause TNI

VLS does not Granger Cause GDP

GDP does not Granger Cause VLS

BTA does not Granger Cause GDP

GDP does not Granger Cause BTA

LEGS does not Granger Cause GDP

GDP does not Granger Cause LEGS

21 2.82021 0.05070

1.74312 0.12301

21 0.00127 0. 05210

0.53280 0. 53401

21 0.21761 0.23910

0.32132 0.05421

21 2.53101 0.03421

3.03250 0.53401

21 2.31291 0.05231

0.24911 0.58761

The regression result reveals that there is strong systematic variation in the dependent

variable as explained by the five independent variables i.e. Market Capitalization (MCAP),

total New issues ( TNI), Value of transaction (VLT), Bank total asset (BTA) and Listed Equities

and Government Stocks (LEGS) . The F –value is significant at 5% level of significance

showing that there is a linear relationship between GDP and five independent variables.

What one had deduced from this discussion is that, the economy responds favorably to

measure taken to increase total listing of equity and government stock in the Nigerian Stock

market. The result is a true reflection of the Nigerian economy and the performance of the

Nigerian stock exchange. During the banking consolidation in 2005, a huge amount capital

were mobilizes into the economy through initial public offering (IPO) by most banks.

Unfortunately, these funds were not properly channeled into the productive sector and most

international protocol in investor divested their funds as soon as return of investment collapsed

due to the financial meltdown.

Again, the negative impact of value of transactions (VLT) could be attributed to the shallow

nature of Nigerian stock exchange. The market is yet to be attractive to big-ticket local and

international institutional investors. That will inject substantial fund into the stock market.

Therefore, the study or findings agree with Ariyo and Adelegun (2005) and Ewah et al (2009)

who found that the capital market in Nigeria has not contributed meaningfully to the economic

growth of Nigeria due to low market capitalization, small market size, few listed Securities and

low volume of transactions, low absorptive capacity, Liquidity etc. Also our result supports

Demirgue- kunt (1996) and Harris (1997) who found no hard evidence and strong positive

relationship between stock market and economic growth.

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5. Conclusion

This paper evaluated the impact of the capital market capitalisation strategy on the growth

and development of the Nigerian Economy. The paper tested the significance of recapitalisation

of capital market and the impact on the Nigerian economy. The study covers the period of

12years (2001-2012). This period was the period when the entire financial system witness

transformation in the form of financial and institutional restructuring, policy, and regulatory

and legal framework. The evidence provided in this study based on the empirical findings,

showed that stock market has positive effect on economic growth in Nigeria. The Nigerian

stock market is no exception to other developing countries which are working towards

reforming and deepening their financial systems through the expansion of its stock markets in

order to improve their ability to mobilize resources and efficiently allocate them to the most

productive sectors of the economy so as to enhance economic growth. Although, during the

period of study the market had faced exogenous and endogenous problems that some were

controlled and others weren’t, then there is the need for strict compliance with the regulatory

and supervisory framework governing the markets. A number of indicators like the size of the

Stock market, volumes of trade, market capitalization, banks’ total assets, and above all the

GDP are used to show how the market has grown over the time. As indicated by the current

trends, the market seems to be saddled with low liquidity and slow growth in listings. The

market is seen as facing a lot of challenge in its development and growth so it is crucial that the

policies related to the market should be given a serious and accelerated attention. The paper

concludes that the Nigerian capital market needs to create more confidence to investors,

especially in terms of transparency and accountability, for sustainable and increasing

capitalization necessary for sustainable economic growth in the country. Furthermore, the paper

recommends expansion of the Nigerian Stock Market by the government creating an enabling

investable environment, that will increase both the volume of transactions and number of stocks

traded in the market. This will improve their ability to mobilize resources and efficiently

allocate them to the most productive sectors of the economy

References

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Alile, H. I. (1984): “The Nigerian Stock Exchange: Historical Perspective, Operations and

Contributions to Economic Development” Central Bank of Nigeria Bullion, Silver Jubilee

edition vol. II pp. 65-69.

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2015 Vol: 4 Issue 2

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