1

MICHAEL OKONKWO C.

PG/MBA/08/47519

PG/M. Sc/09/51723

THE NIGERIAN CAPITAL MARKET AS AN INSTRUMENT FOR THE

MOBILIZATION OF CORPORATE FUNDS

(A CASE STUDY OF THE NIGERIAN STOCK EXCHANGE)

MARKETING

A THESIS SUBMITTED TO THE DEPARTMENT OF MARKETING, FACULTY OF

BUSINESS ADMINISTRATIO, UNIVERSITY OF NIGERIA ENUGU CAMPUS

Webmaster

Digitally Signed by Webmaster’s Name

DN : CN = Webmaster’s name O= University of Nigeria, Nsukka

OU = Innovation Centre

2011

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CHAPTER ONE

1.1 BACKGROUND OF THE STUDY

The financial system of any society is the framework within

which the capital formation takes place. It is within this framework

that savings of some members of the society are made available to

other members of the society for productive investment.

The process is made possible by the intermediation of

financial institutions like commercial banks, insurance companies

and other such institutions which are under the umbrella of Capital

Market for the process of financial intermediation to take place.

Every society needs two major category of financial institution as

follows:

Class A: Primary market institutions

Class B: Secondary market institutions

The primary market institutions are those that provide the

means for directing savings into new investment outlets. In this

category we may distinguish the two main functions.

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(a) New Directing Investment and

(b) New Landing Activities.

By new direct investment, we mean the process whereby

investors pass on their resources to institutions which will either

invest these funds directly or will hand such funds over to those

institutions that have outlined their investments.

Financial institutions in this category perform the function of

standing between the investor and the ultimate users of fund. Their

function is usually that of a broker bringing buyers and sellers

together. The most important example of this is the sale of shares

through new issues.

Examples of institution in later category are:

i. Issuing Houses: - Stock and shares

ii. Mortgage Banks - Mortgage and Deposit account and

iii. Other banks - Sales of commercial paper and

acceptance.

The lending activity is performed by commercial banks,

merchant banks, insurance companies and other financial houses.

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The difference between this category and the one noted earlier is

that institutions are actually taking risks of direct investment.

Banks take these risks every time they lend money to

individuals or institutions. On the other hand, secondary market

institutions are those that perform the function of providing the

mechanism whereby financial claims or assets created by the

primary market institutions are transferred from one buyer to

another.

The institutions of the secondary market are:

- The Securities and Exchange Commission (SEC)

- The Nigerian Stock Exchange (NSE)

- Merchant Banks (Issuing Houses)

- Stock Brokers

- Discount Houses

- Share Registrars

These institutions provide the framework for investors to

exchange ownership of shares, mortgage and other financial

assets to enable institutions on which the assets are claims to

transfer them from person to another.

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In Nigeria, the Securities and Exchange Commission is

empowered with registering investments and security business,

and it was established by the Decree 71 of 1979 whereas the

Nigerian Stock Exchange is a market for the sale and purchase of

securities (stocks and shares). A major significance is that, it is the

machinery for the mobilization of the country’s resources for

productive investment and economic development generally.

The merchant bank (issuing houses) activity in the financial

market is to raise new or additional equity, debt or other

appropriate instrument and placing of these with investor in order

to generate the required funds.

The stock brokers on their own are of stock and they are

linked between companies and the stock exchange.

The discount houses finance companies and institutional

customers in buying of shares and stocks.

The share registrars deal with the book keeping and logical

aspects of statutory companies.

In Nigeria, only the Stock Exchange itself is a continuous

auction market, but it is not yet developed to the extent that

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exchange ownership can be affected with some speed as in the

developed Capital Market of the world. However, significant gains

have been made in recent times. It is against this background that

the researcher decided to access the Nigerian Capital Market as

an instrument for corporate fund mobilization with particular

reference to the Nigerian Stock Exchange.

1.2 OBJECTIVES OF THE STUDY

The objectives of the study include:

i. Appraise the level of development of the Nigerian Capital

Market with particular reference to the Nigerian Stock

Exchange.

ii. Examine the role played by the Nigerian Capital Market

mobilizing funds and resources needed for the development

through the Nigerian Stock Exchange.

iii. Examine theory for Capital Market efficient as it relates to the

Nigerian Stock Exchange.

iv. Make recommendations that can be useful in ensuring an

efficient Capital Market in Nigeria.

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1.3 RESEARCH HYPOTHESIS

The following hypotheses were formulated in view of the

study.

1. HO: The Capital Market in Nigeria has not developed.

2. HO: The Capital Market in Nigeria has not played much role

in mobilizing funds.

3. HO: The Nigerian Capital Market has not been efficient.

1.4 STATEMENT OF PROBLEMS

A cardinal point for expressing a nation’s power and

potentials in the exchange system is economic buoyancy

measured by considering both market efficiency, provocation of

individuals and national well-being and prosperity as well as

promoting national economic development. A hopeless, well known

many about the Nigeria circumstances is that in spite of robust

natural material under pinning its economy remains undeveloped in

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crucial sense of that word. While a recent World Bank

representative classified it as one of the world 20TH

poorest nation,

which in everyway has affected it exchange system or so to say it

Capital Market. The economic model of capitalism or free market

and private enterprises requires among other things an efficient

Capital Market that allocate invisible funds where they are needed

most and will be used most productively, and it was probably

become of these attraction that the emerging Nigerian nation in

1961 elected for the establishment of Stock Exchange in Lagos

and the extent to which the institution may have fulfilled

expectation especially in mobilization of funds for economic

development is the main focus of this study as well as ensuring

higher quality effective and efficient capital market.

1.5 SIGNIFICANCE OF THE STUDY

The Stock Market is a market place but to many people, it

appears as a complex mysterious institution with it own jargons

and unique methods of trading. Some see the Exchange as an

elastic club which belongs to only few literates or financially literate

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people. It is hoped that this research work the same time demystify

the working of the Stock Exchange, so that at the same time

people understand how it works or what it does. They would see

more clearly the vital functions of economy.

Secondly, it will show general success and failure of the Stock

Exchange and the problems encountered in its day-to-day

operations. In this regard, comparism can be made showing how

the Nigerian Capital Market has fared in relation to other emerging

Capital Market of the world such a result can be used to make

useful inference about the performance of stock exchange and

other co-operating institution such as the Securities and Exchange

Commission [SEC]. Moreover, it is hoped that this work will

enlighten Nigerian investors more on the need to speculate on the

income and also from capital gains.

Finally, the conclusions drawn from the analysis of data

collected would form a useful springboard for making

recommendations to the public, the Nigerian stock managers, the

stockbrokers, the government and future researchers in the area. It

will be in addition to existing literature in the field.

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1.6 SCOPE AND LIMITATION OF THE STUDY

The major scope of this study is to examine how the Nigerian

Capital Market has fared in the mobilization of fund and also to

examine how efficient, effective and sound the Capital Market is

doing for proper growth and development of our economic system.

Due to the similarities in operation and the volume of

transaction obtainable at the Kaduna, Port Harcourt, Onitsha,

Ibadan and Abuja trading floors of the exchange, our study shall be

limited or restricted to the activities in the Lagos Office.

Furthermore, it is quite clear and generally known that the

market is still developing and has thus not achieved its expectation

and for this reason, we could only empty a questionnaire and some

statistical tools in analyzing our data.

Time and financial constraints of the study, documents of

relevant data has mot inhibited by the non-availability of data and

by the bureaucratic long processes it takes to obtain the required

information. All these not withstanding satisfactory efforts were

made to ensure unbiased conclusion. However, the issue of

finance in any research work cannot be overemphasized. Money is

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the backbone of any research work. This project will be constrained

by financial resources.

1.7 DEFINITION OF TERMS

INVESTMENT: To buy property, shares in a company etc in the

hope of making profit/returns.

SHARES: None fixed income securities sold by companies

to individuals who then buy and become share

holders of the company.

STOCKS: Fixed income securities sold by government and

companies to individuals or co-operations.

CAPITALISM: An economic system in which a country’s

business and industries are controlled and run for

profit by private owners rather than by the

government.

MORTGAGE: A legal agreement, by which a bank or similar

organization lends to individuals to buy houses

etc. and the borrower pays over a particular

period.

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FINANCIAL ASSET: These are acceptance claims on income to be

generated by real assets of which are buildings.

DIVIDEND: A portion of the net profit that has been declared

by the board of directors for distribution to

shareholders. A dividend is paid at a fixed amount

for each share of stock held by the stockholder.

BROKER: A number of a stock exchange firm or any

exchange member who handles orders to buy and

sell securities and commodities for a commission.

SECURITIES: Any bonds or stock that have been admitted for

trading on a stock exchange market whose

issues have been complied in every way with the

requirement of the exchange.

CSCS: This is an abbreviation for “Central Securities

Clearing System”. It is the authorized clearing

system for sale and purchase of Capital Market

instrument and settlement among stockbrokers.

DIVERSIFICATION: The process of reducing risk by increasing

the number of securities in a portfolio.

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GROWTH STOCK: A stock selling at relatively expensive prices

as compared to accounting numbers such as

sales, cash flow, earnings and book values.

PORTFOLIO: A basket of securities that yield optimum

contributions of risk and return to the investor.

REGISTRAR: An organization that pays dividends warrants,

update the registers of quoted companies and

issues bonus scripts to shareholders.

THE EXCHANGE: The Nigerian Stock Exchange referred to as

“The Exchange” provides an avenue for trading of

securities through licensed stockbrokers.

TRANSPARENCY: The degree to which trading information is

made publicly available.

SHARE INDEX: A list that shows the current value of value of

shares on the Stock Market, based on the prices

of shares of a particular companies.

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REFERENCES

Ibenta Steve Nkem (2000): Nigerian’s Money and Capital Market,

Academic Book Press, 2nd Edition.

Odife Dennis [1985]; Understanding the Nigerian Stock Exchange

Market, New York vantage Press Ind. P.41

Okigbo P.N.C [1981]: Nigerian Financial System Structure and

Growth Essence, Nigerian, Longman Group, P.213

JOURNALS

SEC ‘’Securities Market Journals’’ Several Issues, SEC [1991]

SEC Monthly Vol.1 No. 1

MAGAZINES

Jato T. (August 1956]: Stock Exchange Fails to Keep its Promise’’

African Business, P.49, No. 96.

NEWSPAPER

Onyiuke N.O [September 1991] ‘’Role of the Stock Exchange,

Business Time, P. 10.

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CHAPTER TWO

2.0 LITERATURE REVIEW

A Stock Exchange market has been defined as a market

where large and small investors alike buy and sell through the

stockbrokers, the stocks and shares of companies and government

agencies. The Stock Exchange provided the essential facilities for

companies and government to raise money for business expansion

and development of projects through investors who own shares in

cooperation for the ultimate economic benefit of all Nigerians.

A lot has been written on the activities of the Nigerian Stock

Exchange (NSE). Its role in the mobilizing funds for economic

development funds necessary for the efficient operation of any

Stock Market. However, the view of different writers remains

divergent and inclusive as the discussion on the issue progresses.

The Nigerian Capital Market been an instrument for

cooperate fund mobilization inspires on its operational efficiency.

Thus, it would be necessary to define an efficient Stock Market.

Discuss necessary factors necessary for efficiency of the Stock

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Market in order to improve on the literature of former writer on

these particular issues.

Rally, (1984) defines an efficient Stock Market as one in

which security prices adjust rapidly to the infusion of new

information and current stock prices fully reflect all available

information including the risk involved.

According to Francis (1960), firms require external and

internal market efficiencies in order to grow and prosper. He

maintains that external efficiency implies the existence of outsiders

who can quickly and accurately appraise the true economic value

of an enterprise so that they know what price to pay for a share in

it.

Lorie and Bready (1997) interpret this to mean that “now that

information is widely, quickly and cheaply available to investor, that

this information included what is knowledgeable and relevant for

guiding securities and is rapidly reflected in their prices”. As a

result of external efficiency the price of a security should fully

reflect available information.

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Furthermore, they state that internal operational efficiency

requires that allocation of fund that is carried out with minimal cost

of transfer and there is rapid turnover of outstanding securities.

As a market where long-term financial assets and liabilities

are traded, the efficiency of the Capital Market is of immense

interest and concern to investors and policy market alike.

The extent to which the Capital Market is efficient both

internally and externally can be judged by looking at a number of

efficiency criteria as enumerated by Ogbolu;

1. The availability of wide range of financial instruments in the

market.

2. The existence of adequate facilities for effective mobilization

of funds in all economic sectors and within all geographical

area of the country.

3. Some elements of stability in the financial rules and

regulations governing financial transactions in the economy.

4. Adequate and timely flow of information through the entire

market, such that participants are fully informed of the

investments and financial opportunities available.

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5. The existence of payment system that is suited to the needs

and stages of development of the economy.

If any of the above criteria is violated, the efficiency of Capital

Market will be greatly improved for instance, a situation where for

any reason, there is shortage of listed security in the stock

exchange or where the pricing mechanism of the stock exchange

results in an unfair price for both primary and secondary market

this inevitably leads to market inefficiency.

In evaluating the adequacy and efficiency of the Capital

Market, Okigbo (1981) dismisses the issue on the premise that

Nigeria Capital Market is still young on account of non-existence of

articulated flow of funds. Although it is true that Nigerian Capital

Market is relatively young, does not agree that the volume of data

now available in the market is adequate and effective in mobilizing

funds as Okigbo expressed. Perhaps Okigbo ran into conclusion

by supposing that the efficiency of the Capital Market can be seen

only on flow of funds. There are obviously other ways of measuring

the efficiency of the market.

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The factors militating against the efficiency of the Nigerian

Stock Exchange in mobilization of funds properly are many and

varied. One of them is the combination of jobbing and brokerage

function in the Nigerian Stock Exchange. According to Obot “an

issue of regret is the combination of jobbing and brokerage

function in the Nigerian Security Market, a situation which does not

gouge well for the development of the market. As a result of this

situation, pricing appears very artificial and hence the dull aid

inactive nature of the Nigerian Stock Exchange.

Nwankwo (1983), maintains this by saying that it is usually

wrong for members to operate dual capacity, the selling and buying

of securities of the stock exchange if by too many actions that is

bid and offer.

Okafor (1970) said that “participation is un-functional in some

exchange markets like the London Stock Markets (LSE) where the

single capacity members operate either as a broker or as a jobber

(dealer). This however is not obtainable in Nigeria” from the point

of view of Ojo and Adiwunmi (1976), the stock broker in the

Nigerian Stock exchange performs dual function of stock brokering

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and stock jobbing because of the present peculiarity of stock

transaction. Thus, the scope of the services performed by the

stockbrokers is not restricted and differentiated is in some more

advanced Capital Market where there are jobbers who deal only

with the Stock Exchange members, specialist who only deals with

stock exchange securities or floor brokers who buy and sell shares

for other persons on the floor of the exchange.

According to Jat (1981), most companies in Nigeria are family

businesses which are often unwilling to admit outsiders into the

field unless as employed. He observed that while Capital Market

aims at diversity ownership of companies the firms themselves are

not prepared for it. As a result, only few of them get quoted in all

the market.

If all these outlined are adequately considered there would be

efficient and effective Capital Market, which will enhance adequate

mobilization of cooperate funds.

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2.1 HISTORICAL PERSPECTIVE

The development of a formal Capital Market in Nigeria dates

back to 1946, when the first government security was floated. The

institutional facilities for the operation were however absent and did

not commence until fifteen years later when the Lagos Stock

Exchange (now the Nigeria Stock Exchange) was established i.e.

in 1961 when an Act was passed. It was created to make available

facilities for dealing in stocks and shares i.e. to serve as a forum

where the instruments of the new Capital Market would be traded.

The delay of the institutional facilities and the existence of

exchange could be attributed to a lot of reasons among which are:

1. The capital requirement of the government were met either

by loans or by grants from foreign sources mostly from

colonial masters.

2. The capital requirements of the organized private sector were

not largely from external private source or from banks.

3. There was no sizeable organized corporate sector to provide

a regular supply of securities and there was no mechanism

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for either the issue of or trading in such securities, even if

they were then available.

More so, investors seem to make it with the informal Capital

Market, as the degree of monetization in Nigeria prior to

independence was very low and there were hardly any financial or

relevant institutions capable of bringing together savers and

investors.

Akamokhor (1963), noted that the delay to the rudimentary

nature of the economic system and the need to financing the

growing budget as from 1958 (by issue of many of Capital Market

instruments). The deteriorating balance of payment position as

from the government desires to facilitate the reparation of funds

invested abroad as was as the need to mobilize finance to embark

on development into undertaking the initiative of establishing a

formal Capital Market.

Consequently, in 1958, the federal government set up a

committee under Professor R.M. Barback to advice on the means

of fostering share market in Nigeria. The Barback Committee

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Report was published in 1959 and it recommended among other

things:

1. The establishment of rules regulatory transaction

2. The creation of facilities for dealing in shares.

3. Measures to encourage savings and issue of securities of

government and other organization.

As a follow up to this report Lagos Stock Exchange was

incorporated 15th September, 1960 through the collection effort of

the business community, the Nigerian Industrial Development Bank

(NIDB) and the Central Bank of Nigeria (CBN).

The need for government recognition and protection led to

the passing of the Lagos Stock Exchange Act 1961. The Act

restricted the business of stock broking to members of the

exchange.

The Lagos Stock Exchange was transformed into the

Nigerian Stock Exchange in December, 1977 with branches initially

in Lagos, Kaduna and Port Harcourt. Recently other branches

have been opened in Onitsha, Kano, Abuja, Aba and Ibadan.

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2.2 FUNCTIONS OF THE NIGERIAN STOCK EXCHANGE

(NSE)

Generally, the Nigerian Stock Exchange Market (NSE)

performs most of these under listed functions as contained in its

Memorandum and Articles of Association:

1. To provide opportunities for the continued operation and

attraction of foreign capital for Nigeria’s development.

2. To promote increasing participation by the public in the

private sector of the economy through acquisition of shares

and stocks.

3. To provide appropriate machinery to facilitate trading in

stocks and shares.

4. Facilitation of long term capital into commerce and industries.

5. Maintenance of fair price for securities through supervision of

activities connected with dealings in securities.

6. Investment is encouraged through a variety of sources of

funds with projects in which borrowed funds are committed.

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7. Funds are efficiently allocated. The funds in the market flow

to the most productive uses. Unprofitable projects are always

starved of funds.

8. Intermediation encourages savings through the provision in

financial markets of various institutions with a variety of

financial securities and plans which differ in risk, yield and

maturity.

9. The Stock Exchange acts as an easily accessible means of

efficiently trading in (old) securities and as a means of

ascertaining security prices.

10. Offers enterprises, new and wider opportunities for obtaining

funds for investments.

11. Acts as financial intermediation from funds surplus (units) to

funds deficit institutions or units. Efficient intermediation

separates the saving and the investment functions, such that

those who save need not to be those who invest.

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2.3 MEMBERSHIP IN THE EXCHANGE COMMISSION

There are three (3) categories of membership in the

Exchange Commission. These include:

- The Foundation Members

- The Ordinary Members

- The Dealing Members

2.3.1 THE FOUNDATION MEMBERS

These are original subscribers in the Memorandum and

Article of Association of the Stock Exchange in 15th September

1960 when the Stock Exchange was incorporated under chapter

37 of the Nigerian Companies Act.

2.3.2 THE ORDINARY MEMBERS

An ordinary members is a person or an institution who is not

an original subscriber, but was licensed by the council to subscribe

for stocks, shares and bonds on the Stock Market and who will

abide to the rules and regulations of the exchange.

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2.3.3 THE DEALING MEMBERS

A dealing member of the exchange is a person or an

institution who in addition to being an ordinary member is licensed

by the council to trade in stocks, shares and bonds on the Stock

Market and accept to be bound by the rules and regulations of the

Exchange. Such a member does not receive any dividend but only

remunerations in the form of brokerage commissions. Other

sources of income include fees from investments, counseling and

issuing houses fees.

2.4 INSTRUMENTS USED IN MOBILIZATION OF

CORPORATE FUNDS IN THE CAPITAL MARKET

THROUGH THE NIGERIAN STOCK EXCHANGE

The instruments listed on the Nigerian Stock Exchange are,

the Federal Government development stocks, debentures,

company shares and stocks.

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2.4.1 FEDERAL GOVERNMENT DEVELOPMENT STOCKS

Government especially the federal government rouses most

of their long-term finance through the issuing of loans or

development stocks. The money mobilized by government from

this way is used to finance long-term capital projects such as

airports, hospitals, roads etc. These loan stocks are redeemable,

that they are been repaid at a determinable future date and they

bear fixed rates of interest usually they are floated through the

CBN, which serve as the agent of the government like ordinary

shares and stocks, the investors decided to dispose of holding or

some parts of it and sell them through the stock exchange.

2.4.2 COMMERCIAL AND INDUSTRIAL LOAN STOCKS AND

DEBENTURES

In addition to raising long-term capital through the issue of

shares, many companies raise part of debentures. These are

different from share in that they represent debts due from issuing

companies to the holders and do not center ownership or part of

the company to holders. Interest is paid on them and the holder is

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entitled to receive the interest irrespective of whether the company

makes profits or not. In the stocks and debentures, stocks are

regarded as creditors to the company and have preference over

the shareholders. In other words, they have the right tro have their

money repaid in full before any distribution can bne made to the

shareholders. These debt instruments are issued either through

public underwriting or private placement like other liability of

company; they provide funds that support their expansion and

other capital expenditure.

2.4.3 COMPANY SHARES AND STOCKS

Company shares and stocks remains one of the most

important instruments in the Capital Market. In Nigeria, there are

three (3) types of shares:

(a) Ordinary shares

(b) Preference shares

(c) Deferred shares

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(a) Ordinary Shares: They are not most common type of shares.

Ordinary holders bear the main risks in business. When high

profits are made, they receive high dividends, but when poor

profits or losses are made. They receive less or no dividend.

In the event of a company going out of business, the ordinary

shareholders will be last to receive any repayment of capital

in their shares in return for the higher risk which ordinary

shareholders undertook. They have power to control

business through voting at annual general meetings.

(b) Preference Shares: They are shares that has fixed rate of

dividends or interest which are paid in preference to any

payment to the ordinary shareholders. However, the interest

is only paid if the company makes profit. In the event of

winding up, preference shares will also have preference over

ordinary shareholders in repayment of capital. There are

three types of preference shares:

- Cumulative preference share

- Redeemable preference share

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- Participating preference share

- Cumulative Preference Share: In the case of cumulative

share if insufficient profit is made during a certain year to pay

dividends to these holders, the arrears are carried forward

each year until they can be paid in a given year.

- Redeemable Preference Share: Are shares which the

company can buy back after issuing them out.

- Participating Preference Share: Shareholders can

participate in further dividends after the ordinary shareholders

have been paid a specified percentage. This means that in

successful year when high dividends are paid, the

participating preference shareholder will also participate in

the company’s prosperity.

(c) Deferred Shares or Founder Shares: These are now rarely

issued. The shareholders share the remaining profit (if any)

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after all other shareholders have been paid. These

shareholders are usually promoters of the company. This

means that they do not receive any dividend until adequate

dividends have been paid to both the preference and ordinary

shareholders.

2.4.4 BONDS

A bond is a long term debt instrument which carries a definite

understanding of the issuer (borrower) to repay. The amount so

borrowed on a given date with interest. It carries a fixed interest.

2.5 OPERATIONS OF THE NIGERIAN STOCK EXCHANGE

The council of the exchange approves quotation of securities

on the exchange after companies have complied fully with the

regulation and requirements of the exchange. In this section, a

brief outline of the listing requirements and different forms of

dealing on the exchange will be mentioned.

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2.6 CLASSIFICATIONS OF MARKETS IN THE NIGERIAN

STOCK EXCHANGE

Market operations in the Nigeria Stock Exchange are

classified in two ways. These are the listing requirements for

companies, the exchange has two arms; the First –Tier Security

Market and the second-Tier Security Market. When classified by

type of security, we have the primary (first issue) market and the

secondary market.

2.6.1 FIRST TIER SECURITY MARKET AND SECOND-TIER

SECURITY MARKETS

The First-Tier Security Market is the main Stock Exchange. It

has more stringent conditions to be met before company is listed in

the exchange. What does it mean to be listed? A company is said

to be listed or quoted when that company is formally admitted into

the official list of companies whose securities are qualified to be

traded on the floors of the Exchange. The First Tier Securities

Market was established and reserved for companies that are big

enough to withstand the stringent listing requirements of the

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Securities and Exchange Commission (SEC). The share of the

company cannot be sold in the exchange unless it is listed, hence,

mainly corporate equities are traded in the First Tier Securities

Market. The Companies and Allied Matters Decree 1990

authorizes companies whose securities are listed to add the letters

“PLC” to their names as Public Limited Company. Moreover,

trading in this market is highly restricted to compare with the

restrictions in the Second Tier Securities market. The First Tier

Securities Market provides a forum for buying and selling of shares

of companies in the market.

The First-Tier markets are for well established large scale

companies. The minimum capital issued in this market is N1 million

and the amount to rise is limitless depending on the size of the

company. Buying and selling of securities in this market are done

by the stockbrokers, commercial and merchant banks and also the

listed companies because of the difficulties which the Small Scale

Enterprises (SMEs) had with the requirements of the First Tier

Market.

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The Second Tier was carved out and established on the 30th

April 1985 as an arm of the NSE following the approval of the

Nigerian Securities and Exchange Commission as an alternative to

the main market to cater primarily for Small-Scale and Medium

sized companies wanting to raise funds through the Capital Market

and also carter for the Small and Medium Scale Enterprises

(SMEs) by the Securities and Exchange Commission (SEC). As

Small and Medium sized Companies are usually unable to fulfill all

condition for a conventional listing on the Stock Exchange. It was

thought that an the Second Tier Market with less stringent

conditions and entry requirements would be highly beneficial to the

economy, it was set up for small and medium scale companies that

want to raise money through the Stock Exchange but are not able

to meet the conditions for listing in the main stock Exchange (the

First-tier Market). The condition for listing in this market is less

demanding than that of the major Stock Exchange. This market,

however, helps to prepare companies for full listing and however,

the amount of capital to be raised in this market is limited.

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Trading on the Second Tier Securities Market is less

restricted than in the First Tier Market, but the activities in the

Second Tier Market are properly regulated. Companies in the

Second-Tier Market are under an obligation to maintain informal

market for their securities by entering into a formal relationship with

the Second Tier Market operators the same way as the First Tier

Market by providing a forum for buying and selling of shares of

companies in the market. Buying and selling can be done through

stockbrokers, merchant and commercial banks in the same way as

for listed companies. All the normal dealing rules and regulations

are also applicable to the Second Tier Market with full protection

extended to the investors on the same terms as investors in the

First Tier Securities Market.

2.6.2 PRIMARY (NEW ISSUE) MARKET AND SECONDARY

MARKET

The primary market is the market where securities that are

being issued for the first time are traded for this reason; the market

is also called New Issue Market. Securities to be issued for the first

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time must first pass the request on to the council of the stock

exchange ad then to the Securities and Exchange Commission for

approval and registration.

The Secondary market is a market for the trading of

securities that has been previously issued or sold. It is a market

where the present owner of a security which he does not want to

hold again, exchanges it with another investor who is interested in

holding such securities. It is a market for the Second-Tier

Securities, but unlike secondhand cloths, their value is not

reduced. This exchange may be done at a premium or at a

discount.

2.6.3 LISTING REQUIREMENTS

The Nigerian Stock Exchange maintains quotation for large,

medium and small scale enterprises. The term quotation is

synonymously used with the term listed, but this entitles the

securities to be traded on the Exchange. For the purpose opf being

listed on the exchange, a company must belong to either First or

Second Tier Securities Markets. Large and Medium size

38

companies are listed on the First-Tier Market while small scale

industries are listed on the Second – Tier Securities Market.

A general requirement is that all applying company must be a

public company.

2.7. CONDITIONS FOR QUOTATION

FIRST – TIER SECURITIES MARKET

- Companies must be public companies

- Minimum issued capital must not to be below N1 million.

- Application for listing must be sponsored by one of the

dealing members of the exchange.

- Date of the last and used report must not be more than nine

(9) months.

- Not less than 25% of the issued capital must be made

available to the public.

- The Company must have five years trading record.

- Annual quotation fee is based on the share capital of the

company.

39

- The amount that can be raised is limitless depending on the

borrowing power of the company.

- The number of shareholders must not be less than 500.

- Companies are required to submit quarterly. Half yearly, and

annually their statements of accounts.

- Unallocated securities must be sold on the NSE trading floor.

- Provision for issue of mergers, acquisitions, unit trusts and

mutual trust.

- Must submit to the exchange financial statements of past 5

years.

2.7.1 SECOND TIER SECURITIES MARKET

- Not less than 10% of share capital must be offered to the

public.

- The company must have three trading records.

- A flat annual charge of N30,000 is payable as quotation fee.

- The amount that can be raised cannot currently exceed N20

million.

- The number of shareholders must not be less than 100

40

- Companies are required to submit only half yearly and

annually statements of accounts.

- Unallocated securities must be sold on the NSE trading

floors.

- No provision for issue of mergers, acquisitions, unit trusts and

mutual trusts have been made.

- Must submit to the exchange financial statements of past 3

years.

- Minimum issue capital requirement of N0.6 million.

Source Olowe (1996) methods of raising equity capital for

proper mobilization of funds via the stock exchange includes:

(i) Offer of sale

(ii) Direct issue or offer for subscription

(iii) Offer for sale by tender

(iv) Private placement

(v) Right issue

41

2.7.2 OFFER FOR SALE

A company offers its share to an issuing house. The issuing

house then offers the shares to the general public by advertising a

prospectus showing details of the company and terms of issue.

This may involve new issues or old issues in the later,

shareholders Act an agreed price. The issuing house then resells

them to the public at a slightly higher price. In the case of new

issues, the issuing house unwritten undertakes to buy the

unallocated shares if the offer is undersubscribed and in this case,

the issuing house is a principal rather than an agent offer for sale is

frequently used in indigenization and private exercise in the

country.

2.7.3 DIRECT ISSUE OR OFFER FOR SALE OF SUBSCRIPTION

Offer for subscription is a direct issue to the public by floating

of shares of stocks offer for subscription or direct issue is

commonly used by quoted companies to raise new loans capital

and in most places practically all government and public authority

issues are made by this method the issue may still be administered

42

by an issuing house and is made at a fixed price and the invitation

is made by advertising a detailed prospectus on the issue offer for

subscription or direct issue is different from an offer for sale where

the corporate issuer is already a public company with its shares

quoted on the exchange. Offer for subscription is relatively prone to

market failure and generally need to be underwritten by an

investment banker or issuing house.

2.7.4 OFFER FOR SALE BY TENDER

Shares are offered to the public and potential investors who

are invited to the bid for the price. Usually the company will put for

the price. Usually the company will put a reserve on the minimum

price below which will not sell the price at which the shares are

eventually sold will be highest price which will dispose all the

shares.

2.7.5 PRIVATE PLACEMENT

Shares are said to be placed when they are sold privately to

selected individuals or clients at the issuing house or brokers such

43

as high network individual or institution investors. This method is

also applied by unquoted companies to increase their

shareholding. The cost of raising funds is relatively very low. This

differs from direct issues and offer for sales. In that it is not an

invitation to the public to subscribe, rather the stocks are placed

with a broker who then seeks for prospective purchasers. In this

method the company can choose or reject subscription to private

placing.

2.7.6 RIGHT ISSUE

A right issue/offer issue is an offer of a company’s share to its

existing shareholders. It gives them the first opportunity to

purchase a new issue of shares, as the terms of offer are that each

new existing shareholder has the right to be allotted a percentage

of his existing shares upon payment of his existing shares upon

payment of the asking price.

44

2.8 WHY COMPANIES SEEK LISTING ON THE STOCK

EXCHANGE

There are several reasons why companies quote their

securities on the stock exchange. From the funding point of view, it

is often cheaper to raise equity from the market than borrowing

from other financial institutions to finance a company’s operations.

A quoted company is well known to the market and thus betters for

raising equity funds.

Furthermore, a listed company by virtue of its being, gives

fund suppliers the necessary confidence to risk their fund and even

find it easier to lend to these companies whose financial and

operational transactions are open to public scrutiny as required by

the stock exchange.

During the merger negotiations, a listed company seeking to

acquire another company can use its shares to fund the

acquisition, as the shareholders of the acquired company are more

likely to accept stock as consideration.

As far as shareholders are concerned, the listed company’s

shares have known prices and can easily be liquidated in the Stock

45

Market at anytime. This makes them more attractive as investment

outlets.

Listing also gives a company a wider shareholder base and

broadens its exposure in the market. A listed company finds it

easier to attract and retain better quality employees who are more

willing to work in an institution with status that has been enhanced

by the listing. A listing also makes a company’s share more

attractive to employees as part of their compensation package,

since the listed shares will be more marketable.

2.9 BENEFITS OF LISTING

The following are the advantages listing on the stock

exchange provides to the companies:

(i) Listing enhances the marketing of shares by increasing the

marketability of the shares. The company’s share can be

traded and valued easily and can be used as collateral for

bank loans. This greatly increases the potential of the

business and personal benefits of its owners.

46

(ii) Listing ensures the continuity of a business even after the

death of the founders, as the listed company will continue to

exist perpetually.

(iii) Listing engenders public confidence in a company both from

its investors and other financial institutions who find it easier

to open credit lines to a listed company than to an unlisted

one.

2.10 NIGERIAN SECURITIES AND EXCHANGE COMMISSION

(NSEC)

No discussion on the Nigerian Stock Exchange would be

made without mentioning the Nigerian Securities and Exchange

Commission (NSEC) which is an institution in the exchange whose

role is fixing of prices at which issues can be made and determined

time and volume of such issues.

The forerunner of the NSEC was the Capital Issues

Commission which came into existence on July 1962 it was

essentially an Ad-hoc committee that was operating before the

capital issues commission was established. Ad-hoc committee

47

handled about twenty issues between 1962 and 1973. Although its

decisions were accepted by the investment issues, but it lacked

legal backing to enforce its decisions and this led to the

promulgation of Capital Issue Commission by an Act on March

1973. The Act empowered the commission with the following

functions:

(a) The price at which the shares or debenture of a company are

sold are to be determined.

(b) The timing and amount of sale.

(c) In the case of a company whose securities have been

quoted, the commission regulates the securities and

investments on the exchange.

(d) Register and regulate securities exchange capital trade point,

future option and derivative exchange and any other

recognized investment sale to the public.

(e) Register securities to be for subscription of sales to the

public.

48

(f) Prepare adequate guidelines and organize training

Programme and disseminate information necessary for the

establishment of security exchange of a capital trade point.

(g) Perform such other function and exercises such other powers

no inconsistent with the Act as to the provision of the Act.

One of the main objectives of NSEC is to compliment the

activities of the Nigeria Enterprise Promotion Board to ensure that

the correct proportion of shares in foreign companies were

transferred to Nigerians in accordance with schedules, I, II and III

of the Enterprise Promotion Act.

In April, 1978, following the recommendations of the

committee on the Nigeria financial system the Capital Issues

Commission was replaced by the Securities and Exchange

Commission as the apex institution of the Nigerian Capital Market.

The board membership of the commission is made up of:

(i) A representative of the CBN as chairman.

(ii) A representative of the Nigerian Stock Exchange

(iii) A representative of the Nigerian Enterprise Promotion Board.

49

(iv) One representative from these:

- Ministry of Finance

- Ministry of Trade and

- Ministry of Industries.

(v) The executive director of the commission.

(vi) For private members who by reason of their ability,

experience and specialized knowledge of the Nigerian Capital

Market or because of their business or profession in market

or because of their professional attainment have been

considered capable by government of making effective

contribution to the working of the commission.

2.11 MANAGEMENT OF THE NIGERIAN STOCK EXCHANGE

The supervision and management of the Stock Market are

under the Securities and Exchange Commission (SEC) and the

Nigerian Stock Exchange (NSE) respectively. The Federal Ministry

of Finance and the Central Bank of Nigeria are two other

government bodies that provide additional regulations in terms of

official guidelines, monetary policies and special directives.

50

2.12 OPPORTUNITIES IN THE NIGERIAN STOCK EXCHANGE

The benefits derived from the Nigerian Stock Market are as

follows:

(i) The Stock Market is a ready source of capital for the

corporate sector. With current market capitalization of over

N2.112 trillion ($15.90 billion), the market stands out as a

vehicle mechanism for resource mobilization.

(ii) The Stock Market is an opportunity for investment

diversification. Without the Stock Market, a large part of the

nation’s wealth currently invested in the Nigerian Stcok

Market (over $15.90billion) would have been diverted to

foreign countries. The market further remains a viable

institution for holding back capital flight, which has been

identified as one of the causes of the country’s economic

under development.

(iii) A major role of the Stock Exchange relates to the

privatization exercise. Privatization of public enterprises aims

51

at reducing the size of the public sector and correspondingly

increasing private sector activities in the economies.

The Stock Market enables mass participation in the

privatization exercise and thus ensures that larger number of

Nigerians benefits from ownership of the divested assets. It should

be noted that even without economic growth, a more equitable

distribution of wealth, which the exercise facilitated, is a desirable

end in the quest for economic development. In other words, in the

absence of a Stock Market, the sale of public wealth through

privatization would have benefited only few rich men, thereby

worsening income in equality.

2.13 THE ESTABLISHMENT OF THE STOCK EXCHANGE AS A

PRE-REQUISITE FOR THE SUCCESSFUL

IMPLEMENTATION OF A COUNTRY’S INVESTMENT

PROGRAMME

In modern economies, the bud of productive activity and

services are undertaken by joint stock firms or public institutions.

The importance of Stock Exchange lie in its beings a meeting place

52

for investors and borrowers. It is at the market that the stocks and

shares are brought and sold and since the prices of such stocks

and shares may rise and fall, the stock exchange acts as a

thermometer recording the pulse of the economy or the outlook of

business, the extent of confidence in various shares or industries.

Government can also affect states of economic activity and

investment through their policies on interest rates operating via the

Stock Exchange. By fixing the officials rate or interest (the Bank of

Rate) and the policies in directions (e.g. hire purchase regulations,

leasing regulations, open market operations (OMO), the

government can make either for a cheap money policy or a clear

money policy. A low rate of interest is generally adopted to make

borrowing cheaper and thus promote investment while the reverse

is adopted for a dear money policy.

At the moment, the volume of business at the Nigerian Stock

Exchange is not great given the size the country’s population and

the need to mobilize resources nor is the number of branches

considered adequate. However, with development in banking

habits and the decline of the business sector, the Exchange will

53

increase its importance as an organ of Nigerian Economic

Development.

2.14 WHO SHOULD NOT INVEST IN THE STOCK MARKET?

The following criteria will reveal who should not invest in the

Stock Market:

(i) An investor who cannot wait a reasonable length of time.

(ii) If an investor cannot afford a reasonable amount, he cannot

make tangible money from shares. The reason is that money

is a prerequisite for investing in stocks.

(iii) If an investor does not have the necessary quality time to

conduct research, study the Stock Market etc and cannot

afford the services of a fund manager, then, the Stock Market

is not meant for him.

(iv) A person who has just retired from active service need not to

put all his gratuity money into the Stock Market unless his

pension allowance is adequate for his maintenance or has

other sources of income.

54

2.15 THE ROLE OF THE STOCKBROKER IN THE NIGERIAN

STOCK EXCHANGE

The Securities and Exchange Commission and the Nigerian

Stock Exchange license stockbrokers. They act as intermediaries

for the purchase and sales of shares and stocks of the Stock

Exchange.

Their functions among others include:

(a) Stockbrokers act as agents for the public receiving and

executing the buying and selling of shares orders for shares

according to the instructions of their clients.

(b) They perform advisory services to their clients in the selection

and administration of the investments.

(c) Stockbrokers arrange listing or quotation of company shares

on the Exchange.

(d) Issuing house, if a stockbroker is so registered by SEC.

(e) Stockbrokers match ‘bids’ and ‘offers’ on the trading floors on

the Nigerian Stock Exchange.

(f) The determination of prices for new issues is done by issuing

stockbrokers.

55

Dealing with stockbrokers is strictly on trust as transactions

are by verbal agreement, which are later backed by

documentation, hence, their motto: “my word is my bond”.

2.15.1 GOOD STOCKS AND BAD STOCKS

A firm with a highly capitalized stock, good financial

performance (i.e. sufficient cash, high return on capital and stability

of profits), competent management and a winning culture will

command good/growth stocks. Growth stocks sell at relatively

expensive prices as compared to accounting numbers such as

sales, cash flow, earnings, and book value.

On the contrary, a firm with poorly capitalized stocks, low

liquidity and high gearing, poor performance (i.e. insufficient cash,

low return on capital and instability of profits) and incompetent

management will have bad stocks. If the market is sending a share

down, it is probably bad and has to fall further.

Good firms with strong competitive positions and culture will

probably always be goods medium to long terms investments,

whereas firms with a poor record of earning growth and poor share

56

performance are more likely than not to continue down a

disappointing track, Akindipe (2002).

2.15.2 BUYING AND SELLING OF SHARES IN THE STOCK

EXCHANGE

Investors buy shares listed on the NSE through stock broking

firms. When a potential investor approaches a stock broking firms,

an account is opened and discussion takes place with one of its

stockbrokers about the proposed investment. Decision needs to be

made about the shares to be purchased and the amount to be

invested, taking into account the fundamental of the shares such

as the quality of the company, the price/earnings ratio (PIE ratio) of

the share, the quality of the company’s board of directors etc.

Shares are normally traded in multiples of100. Special

provisions are made for the trading of odd lots, that is, shares

quantities under 100. A specialist firm is appointed which

administers all odd lots trading, and this ensures that trades take

place at current market price.

57

As an alternative to doing the transaction at one given price,

the client may have imposed certain price limits within which the

dealer must buy or sell the shares, but these limits should be

reasonable with regard to times and ruling price (normally the price

at which the last transaction was done). From the date of

purchase, there are seven business days within which he is

excepted to pay for the shares, and a share certificate will follow

later. The transfer secretary who records share ownership also

issues share certificates. The client will receive an invoice or a note

from the broker, with details of the transaction.

Selling shares is almost a reverse of buying shares. The

seller may ask his stockbroker to sell all the part of his

shareholding at the best price possible or within certain limits.

Buying or selling limits are usually set when the client wants to

obtain a certain price for the shares and is prepared to wait until

this price is met. Seller hand over their share certificates to the

stock broking firm and sign a transfer deed, which allows the

shares to be transferred to the buyer. Once the sale is executed

sellers receive the proceed from the sale within seven working

58

days. When the order is executed, the client will receive a broker’s

note containing relevant details of the transaction and will then be

asked to pay for he shares or deliver the shares and signs a

transfer deed.

2.16 HOW THE NIGERIAN CAPITAL MARKET CURRENTLY

AIDS BUSINESSES / ECONOMY

It includes the following ways:

1. Through the second tier securities market by promoting small

and medium sized industries.

2. Through the bondification of the domestic national debt-by

promoting a bond’s market to specifically cater for domestic

national debts. This is also called securisation which makes

the debts negotiable via the Central Bank of Nigeria (CBN) to

provide liquidity to tenders who would wish to encash their

bonds.

3. Through financing downstream activities in the oil and gas

industries specifically hydrocarbon (petrochemicals and liquid

natural gas).

59

4. Through the privatization and commercialization of

government controlled enterprises through offer for

sale/subscription on the Capital Market based on Decree 25

of 1998.

5. Through the internationalization of the Capital Market by daily

beaming worldwide via link-up of the Stock Exchange’s

computer to the renters international communication network

of the names, shares prices and other financial information of

all quoted companies on the exchange.

6. This encourages foreign inflow of capital through enquires.

This last role helps to advance the course of the president‘s

policy in extending invitation to foreign and local investment and or

capital funds.

60

REFERENCES

Francis, J.C (1980), Investment Analysis and Management.

York, Mc Grand Rill Book Company. P. 60

Nwankwo G.O (1987), The Nigerian Financial System, London,

Macmillan Publisher Ltd, P. 35

Ojo A.T. and Adewunmi .W. (1982), Banking and Finance in

Nigeria, UK, Graham Burn, P. 236.

JOURNALS

NSE (2000) “Nigerian Stock Exchange Fact Book”

MAGAZINES

Oboto J.B. (1982) “Security Market as a Source of Finance for

the Public Sector in Nigeria” The Financial, 3rd Edition,

Pp.33.

61

CHAPTER THREE

3.1 INTRODUCTION

This chapter is to highlight the research strategy, sources and

techniques of analysis of data. Thus, this chapter examines

methodological issues adopted in the research work.

The methodology used in any research has an important role

to play as the result of and from such study will greatly depend on

suitable research approach.

Research is simply the process of arriving at a definable

solution to problem though planned systematic collection, analysis

and interpretation of data.

Accounting to the world encyclopedia, research is the use of

systematic method of evaluate ideas or discover new knowledge. It

is a new approach to problem solving by man.

3.2 RESEARCH DESIGN

Research design in the structuring of investigation aimed at

identifying variables and their relationship to one another. This is

used for the purpose of obtaining data to enable the research test

62

hypotheses or answer research question. It is an outline or a

scheme that serves as a useful guide to the researcher in his

efforts to generating data for this study.

Both explorative and explanatory designs were used in this

study. Explorative design is a descriptive design geared towards

the collection of data hypothesis testing.

Explanatory design is geared towards collecting data to

answer research questions or explain in relationship among

variables.

3.3 SOURCES OF DATA

There are mainly two sources of data used for this study.

(a) Primary Sources

(b) Secondary Sources

3.3.1 Primary Sources:

Personal observations/enquires were the methods employed

in the data collection. Questionnaires and interviews were used as

63

well. The researcher visited the following regulatory bodies of the

Nigerian Capital Market.

i. The Nigerian Stock Exchange, Onitsha.

ii. Central Bank of Nigeria (CBN)

iii The Securities and Exchange Commission, Onitsha.

3.3.2 Secondary Sources:

The sources of data are mainly gathered and processed by

previous researchers. Data were also collected from relevant text

book, journals and newspapers. Specifically my sources of

secondary data came from the following:

i. Libraries: The researcher visited the following libraries in the

course of the data collection:

- The University of Nigeria Enugu Campus Library.

ii. National Library, Enugu

iii. Newspapers, in particular the Business and Financial Times

published by the Daily Times of Nigeria Plc.

iv. Banking and Finance Library, UNIZIK

64

v. Journals/Magazines especially the journal of the Nigerian

Stock Exchange, Securities and Exchange Commission of

Nigeria.

vi. Textbooks on Finance and Capital Market.

v. Publications on Finance and Nigerian Economy, especially

the Financial Review, the Bullion and Annual Report of the

Central Bank of Nigeria.

The secondary sources ere largely relied upon by the

researcher to produce this work.

3.5 DETERMINATION OF POPULATION

Population means the totality of all the individuals in your

area of stud, who will likely be interviewed with special regard to

the Nigeria Stock Exchange.

It comprises of all the staffs of the Nigerian Stock Exchange

on Onitsha, but to collecting data is not possible. Therefore, the

population will be limited to only the top officials-from investigation.

It is found that the total number of the top management of the

Stock Exchange Onitsha Branch amounts to 33.

65

3.6 DETERMINATION OF SIMPLE SIZE

The process of selecting a portion of a population is called

the sampling process.

Okigbo (1981:38), sees sampling as one involving the

selection of a number of study elements from a defined study

population.

In this study, even though the population was finite, yet it was

practically impossible to take a complete a comprehensive study of

the population because of the nature and pattern of the distribution

of the elements of the populations, hence the need for a sample

from the population for ease of data collection and analysis.

The sample size was determined by the formular shown

below:

n = N 1 + N (e

2)

where:

n = The desired sample size

N = The population

1 = Mathematical constant

e = margin of acceptable error estimated

at 5% or 0.05

66

N = 33, e = 0.05

Thus n = 33 1 + 33 (0.05)

2

33 1 + 33 (0.05)

2

= 33 1.0825 = 30.484 approx. 30

3.7 SAMPLING PROCEDURE/TECHNIQUES

The technique used in this study was the systematic random

sampling. This method of selecting a sample in a research study is

defined as any sampling procedure whereby the population

element are selected by the research after he has determined a

rationale on the elements for guiding the selection has been clear

the researcher is compelled to be guided by that criteria so that he

moves from judgment and a relatively probable judgment criteria.

The must popular known procedure for systematic selection is for

the researcher to alphabetize the target population and to select

every Kth (every 10th, 5

th or 4

th element as case may be).

67

Osisoma (1986) defined systematic random sampling as a

system whereby we select every Kth number from a defined

population. He further stated that a systematic sample is obtained

by randomly selecting one element from the first “K” element in a

list of sample units and then choosing every “K” element thereafter.

To obtain the “K the target population (N) is divided by the

overall sample size (n). So the researcher randomly puts the first

number which falls between I and K, after this, adding K to the first

number gets subsequent numbers and the exercise continues until

the target samples is obtained.

3.8 METHOD OF ADMINISTERING QUESTIONNAIRES

The questionnaire was structured based on the objective and

hypothesis stated. The researchers’ supervisor helped in

structuring these questions to suit the objectives of the study. The

staff of the Exchange (Research Department) and some of the

stockbrokers had a clear understanding of the question asked and

that the questions asked were valid for the research and could be

relied on.

68

3.9 DATA ANALYSIS TECHNIQUES

The method of data analysis used was the simple percentage

and satisfied for chi-sqaure (X2). Percentage was used for analysis

of responses gotten and for the secondary data obtained from the

selected Capital Market and other sources. The statistical tool of

chi-square (X2) was used in testing the hypothesis formulated in

chapter one of the work.

The formular for chi-square is:

X2 (Oi – Ei)

2

Where

X2 = chi-square

Oi = Observed Frequency

Ei = Expected Frequency

3.10 DECISION RULE

Accept the alternate hypothesis (Hi) if X2 calculated is

higher/greater than the critical value of X2 of the chi-square,

otherwise accept the hypothesis.

69

CHAPTER FOUR

4.0 DATA PRESENTATION AND ANALYSIS

In this chapter, the researcher analyzed the information

gotten from her research work. The objective is to determine how

the Nigerian Capital Market helps in the mobilization of corporate

funds.

Questionnaire is one of the methods of gathering information

from the targeted audience for research purpose. In administering

the questionnaires, closed ended questions were structured and

shared to the targeted personnel of the Nigerian Capital Market

Onitsha Branch.

A total of 30 questionnaires were shared and all were

collected by the researcher. It is these responses from the

respondents that formed the bases upon which the researcher now

carries out his research work. Thus, the figures obtained were used

for analysis.

70

4.1 FORMULAS USED AND DECISION RULE

As earlier stated in chapter three, the chi-square method of

testing hypothesis will be used.

In using chi-square method the formular is:

X2 = (Oi – Ei)

2

Where;

X2

= Chi-square

Oi = Observed frequency

Ei = Expected frequency

The degree of freedom formular is:

(C-1) (R-1)

where:

C = No of columns

R = No of rows

Operational Assumptions: We assumed that 5% or 0.05 will

be our level of significance for testing our hypothesis.

71

DECISION RULE

Accept Ho if the chi-square X2 value is greater than the

calculated value, otherwise reject.

4.2 TEST OF HYPOTHESIS

HYPOTHESIS I

Ho: The Capital Market in Nigeria has not developed.

Question: Has the Nigerian Capital Market developed?

TABLE 1: RESPONSE TABLE

Responses NSE Officials Stockbrokers Total

Yes 10 3 13

No 5 12 17

Total 15 15 30

72

Calculation of Expected Frequency (Ei)

YES

Ci Ri = 13 X 15 / 30 = 6.5

Ci Ri = 13 X 15 / 30 = 6.5

NO

Ci Ri = 17 X 15 / 30 = 8.5

Ci Ri = 17 X 15 / 30 = 8.5

TABLE 2: COMPUTATION OF THE CHI-SQUARE

Oi Ei Oi – Ei (Oi- Ei)2

(Oi – Ei)2Ei

10 6.5 3.5 7.0 1.08

3 8.5 -5.5 11.0 1.29

5 6.5 -1.5 3.0 0.49

12 8.5 3.5 7.0 0.82

Calculated Value = 3.62

Degree of Freedom = 1

Level of Significance = 0.05

Chi-Square = 3.841

73

From the above table, the chi-square value is greater than

the calculated value. Therefore, accept Ho and reject Hi which

indicates that the Nigerian Capital Market has not developed.

HYPOTHESIS II

Ho = The Capital Market in Nigeria has not played

much roles in mobilizing funds and resources needed

for development.

Question: Has the Nigerian Capital Market played much role in

mobilizing funds in the economy?

TABLE 3: RESPONSE TABLE

Responses NSE Officials Stockbrokers Total

Yes 4 6 10

No 11 9 20

Total 15 15 30

74

Calculation of Expected Frequency (Ei)

YES

Ci Ri = 10 X 15 / 30 = 5.0

Ci Ri = 10 X 15 / 30 = 5.0

NO

Ci Ri = 20 X 15 / 30 = 10.0

Ci Ri = 20 X 15 / 30 = 10.0

TABLE 4: COMPUTATION OF THE CHI-SQUARE

Oi Ei Oi – Ei (Oi- Ei)2

(Oi – Ei)2Ei

4 5.0 -1.0 1.0 0.2

6 5.0 1.0 1.0 0.2

11 10.0 1.0 1.0 0.1

9 10.0 -1.0 1.0 0.1

Calculated Value = 0.6

Degree of Freedom = 1

Level of Significance = 0.05

Chi-Square = 3.841

75

From the above table, it shows that chi-square (X2) value is

greater than the calculated value. Therefore, accept Ho and reject

Hi, which indicates that the Nigerian Capital Market has not played

much role in mobilizing funds in the economy.

HYPOTHESIS III

Ho: The Capital Market in Nigeria has not been efficient.

Question: Has the Capital Market in Nigeria been efficient?

TABLE 3: RESPONSE TABLE

Responses NSE Officials Stockbrokers Total

Yes 10 8 18

No 7 5 12

Total 17 15 30

Calculation of Expected Frequency (Ei) YES Ci Ri = 18 X 15 / 30 = 9.0 Ci Ri = 18 X 15 / 30 = 9.0 NO Ci Ri = 12 X 15 / 30 = 6.0 Ci Ri = 12 X 15 / 30 = 6.0

76

TABLE 4: COMPUTATION OF THE CHI-SQUARE

Oi Ei Oi – Ei (Oi- Ei)2

(Oi – Ei)2Ei

10 9.0 1.0 1.0 0.1

8 6.0 2.0 4.0 0.6

7 9.0 -2.0 4.0 0.4

5 6.0 -1.0 1.0 0.1

Calculated Value = 1.3

Degree of Freedom = 1

Level of Significance = 0.05

Chi-Square = 3.841

From the above table, it shows that the chi-square (X2) value

is greater than the calculated value. Therefore accept Ho and

reject Hi, which indicates that the Nigerian Capital Market has not

been efficient.

77

4.3 DATA SOURCED FROM THE NIGERIAN STOCK

EXCHANGE

TABLE 7: LIST OF QUOTED SECURITIES ON THE EXCHANGE

1992 - 2006

Year Equities Government

Securities

Industrial

Loan

Total

1992 131 43 43 217

1995 145 45 45 235

1997 156 48 45 249

2001 164 52 48 264

2003 175 50 50 275

2004 178 51 52 281

2005 184 56 54 294

2006 191 60 56 297

Sources: Nigerian Stock Exchange.

78

From the above table, it can be seen that the exchange

from1990 was at an increase. The distribution in the tables reveals

some features such as a steady increase and active role of the

government all through the year. But between 2000 and 2001, the

number of securities in the exchange was negligible, but was again

looked upon from 2002 and 2003.

TABLE 8: CAPITAL ISSUES, MARKET CAPITALIZATION

VALUE OF TRANSACTION AND NUMBER OF

COMPANIES LISTED (1992 – 2006)

Year Value of

Capital Issues

(NM)

Market

Capitalization

(N M)

Value of

Transaction

(N M)

No of Listed

Companies

(SMES

inclusive

1992 1,315,166 12,134.9 558.3 138

1995 1,41,178 12,152.2 561.3 141

1997 1,482,124 13,076.1 603.2 145

2001 1,505,032 13,104.7 820.5 162

2003 1,502,014 13,333.2 832.5 168

2004 1,600,033 13,702.3 850.3 171

2005 1,630,210 14.745.9 914.0 186

2006 2,809,560 19.006.8 1024.2 206

Sources: Nigerian Stock Exchange.

79

It is worth pointing out here that as at 1992, that the capital

issues, market capitalization values of transaction and number of

companies listed on the exchange was 1,315,166 million 12,134.9,

558.3 and 138 respectively and till 2003, there was a steady

increase of capital issues, market capitalization value of transaction

and number of listed companies. This result was encouraging

which shows that the Nigerian Stock Exchange is improving.

80

REFERENCES

Ojo A.T and Adewunmi . W (1982) Banking and Finance in Nigeria,

U.K

Francis J.C, (1980), Investment Analysis and Management

Ibenta Steve Nkem, (2000), Nigerian Money and Capital Market.

Vanguard Newspapers

Guardian Newspapers

81

CHAPTER FIVE

SUMMARY OF FINDINGS, RECOMMENDATIONS AND

CONCLUSION

5.1 SUMMARY OF FINDINGS

In this research project, we have tried to bring out and

describe the operations, activities and workings of the Nigerian

Stock Exchange (NSE) in particular in mobilizing of corporate

funds. Chapter four provided an opportunity for us on how the

market has fared in so many years of corporate existence. The

result of this assessment reveals that, though the market has

recorded significant growth and development, it is still lagging

behind in some vital aspects of markets in the world. Specifically,

the analysis reveals that the Nigerian Stock Exchange still has a

long way to go in.

i. The mobilization of savings and investments, especially the

medium and small scale industries into the market in the

process of capital formation.

ii. That even though the exchange now has eight trading floor.

Only about 2 million individuals (out of a population of over 88

82

million) and institutional investor still invest though the

exchange.

iii. That the number of companies and securities quoted on the

exchange are still less than 500 for over many years now.

iv. That resources allocation of distribution of income is far from

being efficient.

v. The exchange has not made much impact economy as well

as the investment habits/culture of many Nigerian. Above all,

there is yet no meaning risk between the Nigerian Capital

Markets and International Capital Markets in order to allow for

inflow of foreign portfolio investments. In fact as there are

now. The market is not in a position to attract such

international portfolio investment.

Having summarized our findings, it is now time to suggest

some feasible solutions to tackle these problems as shown above.

83

5.3 CONCLUSION

The Nigerian Capital Market has come a long way. The

efforts of government business community and even private

individuals who have variously contributed to make it what it is

now, deserve communication. But as this research had revealed

that the journey is still far and that the destination is not yet in sight.

And if we must get there, all hands must be on deck to transform

the Nigerian Capital Market.

This research among others is our own little contribution to te

various efforts and for it to be meaningful, the findings and

recommendations contained herein should be implemented with

zeal.

When this is done, it is hoped that within the nearest future,

that the Nigeria Capital Market will not only be ranked among the

developed markets, it will also play a prominent role in the

development of the Nigerian economy (by mobilizing corporate

funds) which ultimately is the main reason for its establishment.

84

5.2 RECOMMENDATIONS

1. As we make fresh recommendations arising from the findings

of the research, there are other few of the authors’ cities in this

work which have already been mentioned. But because some of

them have not been implemented and even the implemented ones

have not yield the desired results due to poor handling. It may still

be relevant to state them here for the sake of emphasis and

importance. Thus, we recommend the followings:

1. The government should speed up measures to deregulate

the Capital Market, just as it has done to the Money Market in

recent times. By this, market sources should be allowed to

determine the prices of securities, but with close monitoring

by the Securities and Exchange Commission (SEC).

2. The government should now heed to the repeated call to

grant certain tax incentives to some companies for seeking

and being quoted in the Market. This will encourage more

companies to seek quotations in the Stock Exchange.

3. The government should abolish both the capital gains tax and

withholding tax on securities investment traded on the Capital

85

Market. Thus, it will ginger many people to channel their

investment through the market.

4. The government should also come out with a policy that will

make it mandatory for some of the indigenous companies in

Nigeria to seek quotation on the Stock Market. This policy

could set a cutting on a company’s share capital, level of

turnover, number of years of operation, after which the

company must seek quotation on the exchange. Otherwise, it

will loose some privileges. It is a common knowledge that

there are many indigenous companies that are qualified to be

listed on at least the Second Securities Market (SSM) of the

Exchange but are not.

5. The federal government should not withdraw its patronage on

the market through the floatation of its annual development

loan stock. In fact, the interest rate of this instrument should

be raised to make it more attractive. Similarly, state

government should be made to finance certain projects

through funds raised on the Capital Market. This will also

86

ensure their regular patronage and consequently, increase

the level of securities and activities in the market.

6. The government should resist the temptations of running the

market since, this will not auger well for the development of

the market. The government controls regulations though its

agencies should be flexible as possible. Infact, the

government should concentrate more on providing the right

atmosphere that will encourage operations and investors in

the market.

7. The Securities and Exchange Commission (SEC) should find

a way of making its seminars, symposiums and public

enlightment campaigns more appealing so as to carry along

to the market operators and members of the importance of

investing in securities.

8. As for the duty of the surveillance, the SEC should endeavor

to maintain a high standard in order to guard against any

future occurrence of insider trading and other ways of

manipulations before the operators as the market develops

further.

87

9. Other ways and means should be provided to increase the

number of securities on the Exchange especially now that the

Unit Trust Scheme has taken off. Otherwise, the scheme

could produce adverse effects, since additional funds

mobilized through it would create the tendency to build the

prices of existing stocks which can hardly meet the demand

presently; a situation that will create inflation in the market.

10. During the period of development there is need to constantly

access, evaluate and if necessary read just the markets

machinery to keep pace with the dynamism which

characteristics modern development process. To this end,

relevant existing laws need to be reviewed to see if there are

areas that are now inimical to development of the market,

and if found, appropriate steps should be taken to make

corrections.

88

BIBLIOGRAPHY

Francis, J.C (1980), Investment Analysis and Management.

New York, Mc Grand Rill Book Company. P. 60

Ibenta Steve Nkem (2000): Nigerian’s Money and Capital Market,

Academic Book Press, 2nd Edition.

Lories J. Brealey R, (1972), Management Development in

Investment Management; New York; Praeger, P.107.

Nwankwo G.O. (1987), The Nigerian Financial System,

London, Macmillan Publisher Ltd, P. 35

Odife Dennis [1985], Understanding the Nigerian Stock Exchange

Market, New York Vantage Press Ind. P.41

Okafor F.O (1983). Investment Decision Evaluation of Projects

and Securities. London; Cassel P. 89-90

Okigbo P.N.C [1981]: Nigerian Financial System Structure and

Growth Essence, Nigerian, Longman Group, P.213

Reilly, R.A, (1979); Reading and Issues in Investment; Illinois;

Dryden Press, Part 1, P.62.

89

JOURNALS

Akamiohor, (1984) Financing Small Scale Enterprises Through

the Stock Market”. The Bullion, pp. 14, 15 and 17. April/June.

NSE, (2000) “Nigerian Stock Exchange Fact Book”

SEC “Securities Market Journal” Several Issues

SEC (1991) “SEC Monthly”, Vol. 1 No.1

SEC (June 1992) “SEC Quarterly” Vol. 10, No. 2

MAGAZINES

Jato T. (August 1956]: Stock Exchange Fails to Keep its Promise’’

African Business, P.49, No. 96.

Oboto J.B. (1982) “Security Market as a Source of Finance for the

Public Sector in Nigeria” The Financial, 3rd Edition, Pp.33.

NEWSPAPERS

Onyiuke N.O [September 1991] ‘’Role of the Stock Exchange,

Business Time, P. 10.

Vanguard Newspapers

90

Guardian Newspapers

UNPUBLISHED WORKS

Ogbolu C.O (1984) “Estimating the Capitalization Rate of

Quoted Companies in Nigeria” Enugu; Department of

Finance, UNN, pp.2-3

91

APPENDIX I

Accountancy Department University of Nigeria,

Enugu Campus. 13

th September, 2009

Dear Sir/Madam,

REQUEST FOR COMPLETION OF QUESTIONNAIRES

The researcher is a final year student of the University of

Nigeria, Enugu Campus, in the above-mentioned department,

carrying out a research project on the Nigerian Capital Market as

an Instrument for Corporate Fund Mobilization with particular

reference to the Nigerian Stock Exchange.

You are therefore requested to complete the questionnaire

with the appropriate required information.

The researcher promises all respondents confidentiality and

security of all the information provided.

Thanks for your anticipated co-operation and understanding.

Yours faithfully

……………………… Michael Okonkwo .C.

Student

92

APPENDIX II

QUESTIONNAIRE

INSTRUCTION: Please mark () in the appropriate boxes for

choice of decision or (X) if no.

SECTION A:

1. Official of the NSE or a broker?

(a) (b)

2. Occupying any post in the Exchange?

(a) Yes (b) No

SECTION B: Answer (Yes or No)

3. Has the Nigerian Stock Exchange developed?

(a) Yes (b) No

4. Has the Capital Market achieved the purpose for which it was

established? (a) Yes (b) No

5. Has the Capital Market in Nigeria played much role in

mobilizing funds in the economy?

(a) Yes (b) No

93

6. Has it provided enough resources needed for development?

(a) Yes (b) No

7. Has the Capital Market played any role in the ongoing

privatization processes?

(a) Yes (b) No

8. Has the Exchange played any role in the ongoing

commercialization process?

(a) Yes (b) No

9. Is there any signs of efficiency in the market?

(a) Yes (b) No

10. Has the Nigerian Capital Market reached to the level of

comparing it with other developed Capital Markets?

(a) Yes (b) No

11. Has there been any awareness created by the Exchange to

companies to be quoted on the Exchange?

(a) Yes (b) No

12. Has the government involvement in the market yielded any

positive change?

(a) Yes (b) No

94

13. The modern facilities like the computers, telephone and other

electronic gadgets provided for the Exchange has they

improved the dealing system on the Exchange?

(a) Yes (b) No

14. Has the Exchange been fully internationalized?

(a) Yes (b) No

15. Has the Exchange developed a new Management

Information System (MIS) on its information management?

(a) Yes (b) No

95

THE NIGERIAN CAPITAL MARKET AS AN INSTRUMENT

FOR THE MOBILIZATION OF CORPORATE FUNDS

(A CASE STUDY OF THE NIGERIAN STOCK EXCHANGE)

BY

MICHAEL OKONKWO C. PG/MBA/08/47519

DEPARTMENT OF ACCOUNTANCY FACULTY OF BUSINESS ADMINISTRATION

UNIVERSITY OF NIGERIA ENUGU CAMPUS

JULY, 2010

96

CERTIFICATION

The work embodied in this project report is original and has not

been submitted in part or in full for any other diploma of this any other

university.

………………………………. MICHAEL OKONKWO C.

PG/MBA/08/47519

This is to certify that MICHAEL OKONKWO C. a postgraduate

student in the Department of Accountancy and with Registration

Number PG/MBA/08/47519 has satisfactorily completed the

requirements for project research in partial fulfillment of the

requirements for the award of Masters of Business Administration

(MBA) in Accountancy.

..………………………. ……………………………. MR. C.M. ODOH DR. MRS. R.G. OKAFOR SUPERVISOR HEAD OF DEPARTMENT

DATE…………………. DATE……………………….

97

DEDICATION

I dedicate this work to my creator, God Almighty for His infinite

mercies and grace upon my life, and also to my beloved parents,

brothers and sisters who made me to ascend this height.

98

ACKNOWLEDGEMENT

I am grateful to my supervisor, Mr. C.M. Odoh, who at a very

short notice accepted the challenges to take over that supervision

of this project work despite his numerous official and domestic

works and engagements.

I am also indebted to all the lecturers of Accountancy

Department and Mrs. Joyce Nkem Igwillo for their pieces of advice

that made this research work and the entire programme possible.

I acknowledge the assistance of the entire staff of the

Nigerian Stock Exchange, Onitsha Branch. Again, I appreciate the

kind assistance of my mother who always gives me the necessary

assistance whenever needed to run around for this work.

My special appreciation goes to my beloved parents, Chief

Mr. & Mrs. Chuks Michael Okonkwo and my dear brothers and

sisters and also to my entire relations for their assistance both

financially, morally and otherwise.

Finally, may all the glory, honour and majesty go to the

Almighty God for His gift of knowledge and protection during the

period of this programme and the research.

MICHAEL OKONKWO C. PG/MBA/08/47519

99

ABSTRACT

This research project concerns a critical study on the Nigerian Capital Market as

an instrument for the mobilization of corporate funds (A Case Study of the

Nigerian Stock Exchange). Investigations were carried out to describe the

operations, activities and workings of the Capital Market in mobilizing corporate

funds. The result of this assessment revealed that though the market has

recorded significant growth and achievements since its establishment, it is still

lagging behind in some vital aspects, thus ranking low among similar emerging

markets in the world. The main instruments used for the collection of primary

data were the structured libraries and other research units which served as the

secondary data. The researcher ensured that the questionnaires possessed to a

large extent the characteristics necessary and adequate for the purpose of

validity and reliability. Data collected were analyzed and presented in tables and

hypotheses were tested with the chi-square (X2) statistics and results were

emerged which still shows that the NSE still has a long way to go.

However, the study finally suggested ways in strengthening the operations and

achievements of the Exchange in the mobilization of corporate funds through

many ways among which includes that the government should speedup

measures to deregulate the Capital Market just as it has done to the Money

Market in recent times. It should also heed to the repeated calls to grant certain

tax incentives to some companies for seeking and being quoted in the Market

and also abolish both the Capital Gains Tax and withholding tax on securities

investment traded on the Capital Market and come out with a policy that will

make it mandatory for some of indigenous companies in Nigeria to seek

quotation on the Stock Market.

100

TABLE OF CONTENTS

Title page i

Certification ii

Dedication iii

Acknowledgement iv

Abstract vi

Table of contents viii

CHAPTER ONE

1.1 Background of the Study 1

1.2 Objectives of the Study 5

1.3 Research Hypothesis 6

1.4 Statement of Problems 6

1.5 Significance of Study 7

1.6 Scope of Study 9

1.7 Limitation of the Study 9

1.8 Definition of Terms 10

References

101

CHAPTER TWO

2.0 Literature Review 14

2.1 Historical Perspective 20

2.2 Functions of the Nigerian Stock Exchange (NSE) 23

2.3 Membership in the Exchange Commission 25

2.3.1 The Foundation Members 25

2.3.2 The Ordinary Members 25

2.3.3 The Dealing Members 26

2.4 Instruments Used in Mobilization of Corporate Funds

in the Capital Market Through the Nigerian Stock

Exchange 26

2.4.1 Federal Government Development Stocks 27

2.4.2 Commercial and Industrial Loans Stocks and Debentures 27

2.4.3 Company Shares and Stocks 28

2.4.4 Bonds 31

2.5 Operations of the Nigerian Stock Exchange 31

2.6 Classifications of Markets in the Nigerian Stock

Exchange 32

2.6.1 First Tier Security Market and Second Tier Security

Markets 32

102

2.6.2 Primary Market and Secondary Market 35

2.6.3 Listing Requirements 36

2.7 Conditions for Quotation 37

2.7.1 First Tier Securities Market 37

2.7.2 Second Tier Securities Market 38

2.7.3 Offer for Sale 40

2.7.4 Direct Issue or Offer for Sale of Subscription 40

2.7.5 Offer for Sale by Tender 41

2.7.6 Private Placement 41

2.7.7 Right Issue 42

2.8 Why Companies Seek Listing on the Stock Exchange 43

2.9 Benefits of Listing 44

2.10 Nigerian Securities and Exchange Commission (NSEC) 45

2.11 Management of the Nigerian Stock Exchange 48

2.12 Opportunities in the Nigerian Stock Exchange 49

2.13 The Establishment of the Stock Exchange as a

Pre-Perquisite for the Successful Implementation of a

Country’s Investment Programme 50

2.14 Who Should not Invest in the Stock Market 52

103

2.15 The Role of the Stockbroker in the Nigerian Stock

Exchange 53

2.15.1 Good Stocks and Bad Stocks 54

2.15.2 Buying and Selling of Shares in the Stock Exchange 55

2.16 How the Nigerian Capital Market Currently

Aids Businesses/Economy 57

REFERENCES

CHAPTER THREE

3.1 Research Methodology 60

3.2 Research Design 60

3.3 Sources of Data 61

3.4 Primary Sources and Secondary Sources 61

3.5 Determination of Population 63

3.6 Determination of Sample Size 64

3.7 Sampling Procedures/Techniques 65

3.8 Methods of Administering Questionnaires 66

3.9 Data Analysis Techniques 67

3.10 Decision Rule 67

104

CHAPTER FOUR

4.0 Data Presentation and Analysis 68

4.1 Formulas Used and Decision Rule 69

4.2 Test of Hypothesis 70

4.3 Data Sourced From the Nigerian Stock Exchange 76

REFERENCES

CHAPTER FIVE

5.1 Summary of Findings 80

5.2 Conclusion

5.3 Recommendations

BIBLIOGRAPHY

APPENDIX I

APPENDIX II