deregulation and capital market development: the ...

DEREGULATION AND CAPITAL MARKET DEVELOPMENT: THE NIGERIAN EXPERIENCE By AUGUSTINE A. MOMODU, Ph.D Department of Banking and Finance Rivers State University of Science and Technology Port Harcourt - Nigeria

SETH ACCRA JAJA, Ph.D, FCIA, CPA Department of Business Administration Rivers State University of Science and Technology Port Harcourt - Nigeria And

DONALD I. HAMILTON, Ph.D Department of Business Administration Rivers State University of Science and Technology Port Harcourt - Nigeria

ABSTRACT The study was designed to assess the developments in the Capital Market in the periods of regulation and deregulation. Performance indexes used to assess developments in the Capital Market were: price index, market turnover, market-capitalisation dealings and growth in securities on the stock exchange, and the contribution of the Capital Market to the growth on Gross Domestic Product (GDP). Secondary data were used for this study. Data were extracted from Nigerian Stock Exchange, Securities and Exchange Commission, Central Bank of Nigeria and various publications for the period of eighteen years (1984 2001). The evidence suggested by the data profile was weighted using the t-test and Pearson's Correlation Coefficient. It was found that deregulation has no significant impact on price, but it does improve the market capitalisation and stock turnover. It is also revealed that there was a positive change in investors' shareholding from government to the industrial sectors/private sector in terms of structure, content and compositions. On this strength, it was recommended that deregulation should be supported by government efforts to move the Capital Market towards the achievement of its objectives. While appropriate policies should be formulated to enhance the development of a healthy market for securities.

Nigerian Business and Social Review Vol. 2. No. 2 (July) 2003

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INTRODUCTION The word market basically represents a place where exchange takes place. According to Nnabue (1993), in the traditional society or following the normal course of events a market is locatable and operates within specified or stipulated time frame. In law market necessarily signifies some places where goods can be sold. Nnabue (1993) argues that an available market merely means that the situation in particular area was such that the particular goods could be sold. In modem transactions, developments have shifted this concept of traditional market being based in a specific place. Advancement in technology has made it possible for a market to become less and less of a place and more and more of an arrangement by which buyers and sellers get together to effect the exchange of commodities. Within the financial system is the framework called the financial market which principally consists of two segments, to wit: the Capital Market and the Money Market (Nnabue, 1993). Capital, like any other commodity is sold and bought in the Capital Market. The Capital Market is where long-term financial assets are traded. The Capital Market also represents a network of Institutions, Individuals and Instrument (the 3 Tes) that make funds available from surplus sector to deficit sector for production. It arranges for long-term financial assets like shares, debenture stocks and mortgages. Within this framework are primary markets which duties include the issuing houses and the secondary market that concerns itself with the Stock Exchange activities proper. The role of Capital Market in an economy cannot be overemphasized. It is based on this that Nnabue (1993) lamented the principal obstacle to rapid economic growth in the backward countries is the way in which their potential economic surplus is utilized. Since the emergence of Capital Market in Nigeria in 1961, its activities have been highly regulated (and even directly controlled) and monitored by the government to achieve desired results . Since its inception, succeeding governments have closely watched it and regularly . introduced regulatory measures within the framework of Acts such as: Income Tax Management Act, 1961; the Nigerian Enterprises Promotion Decree, 1972; etc. to guide its operations for enhanced efficiency. A valid question at this point is whether these regulations have achieved their desired objectives. Without regulation of Capital Market activities, it would mean invariably that the operators might engage in acts capable of retarding · progress in the market. The financial institutions would also operate without geographic or portfolio restriction, free to go where they please and possibly borrow and make investments as they deem fit. Following the

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desire by government to ensure a development-oriented Capital Market in Nigeria, steps have been taken to ensure that set standards are strictly adhered to by market operators. Another economic argument by government for Capital Market regulations is to avoid market failure (a tendency to avoid economic instability). There is yet another support of government regulation of Capital Market activities. It argues that the primary functions of every Capital Market regulation authority are to ensure the protection of investors. It is reasonable to argue that investor's protection is of so much importance that a market which makes no serious efforts at ensuring this stands the risk of collapsing from lack of investor's confidence in it. However, it is evident that the percentage contribution of the Nigerian Stock Market to Gross Domestic Product (which is the basis for the measurement of economic growth) is low. As Nigeria's economy continues to adjust to the fundamental changes that we are experiencing locally and globally as a result of recent depreciation of the naira and the accompanying inflation which has resulted in under-valuation of stocks quoted on the Nigerian Stock Exchange and the decline of foreign exchange earnings, the necessity for government involvement in the economy which enjoyed widespread support up to the 1960's, was seriously challenged about the close of the decade. Regulations of Capital Market activities have remained a constant source of worry for the market participants. To them, the regulatory function of government of the market is seen as an attempt to stifle their businesses. It also inhibits successful activities in securities. The ultimate aim of every government across the world is to improve allocation of resources and efficient delivery of public service. Ahmed (1992) argued that it would be more salutary and beneficial if increased competition is achieved without recourse to much legislation or over-regulation. This is the ideal but as we all know that the ideal is often unattainable in average situations. Better still known is that many situations (economic situations that is) are rather far below average, with a lot of manifest distortions and gaping loopholes. Free Market Thinkers argue that government has no business in the economy except to maintain and control money supply. They buttress their arguments by reference to the corrupt practices and general inefficiency in government efforts at economic management which impose heavy welfare costs on the rest of the society. The Free Market Experts enumerated some regulations which fact they attributed directly to ' government policies. These include: (1) interest rate ceilings; (2) price controls or subsidy in production; (3) restrictions on entry and expansion; (4) restrictions on pricing of securities; (5) high cost

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of floating stocks and shares on Capital Market; and (6) restnct1ve legislations. Opponent of market regulation argued for reducing the role of the government in the economy and downsizing government generally. The argument led to market reforms such as deregulation. Deregulation is one of the major developments that affect the Nigerian financial system in recent years. The policy includes both reduction in regulation and a change in the nature of regulations, which might be properly referred to as deregulation and liberalization. Deregulation as defined by Oladele (1991) means removal of official restrictions on consumer choice and the introduction or extension of competition on the supply side of the market. It must be emphasized that deregulation does not mean any regulation but it means extension of consumer right and the extension of production base. The argument for privatization of public enterprises (which is an instrument under a policy to deregulate) is still on. The expectation everywhere was that privatization of enterprises and general deregulation of the economy would permit the market mechanism to allocate resources efficiently and therefore promote social welfare. The aim of a deregulation process is to reduce or eliminate distortion, which drive a wedge between prices and marginal costs, such as trade restrictions, price control, etc. And that pricing and production decisions are expected to be more efficient when the invisible hand doctrine is allowed to sufficiently dictate the behaviours of economic agents. The Nigerian Stock Market needs a strong tonic for re-vitalization to enable it face the challenges of large financial involvement which is mostly needed for the over-all development of the economy. The study therefore is to determine the effect of deregulation of the Capital Market development in Nigeria. In operationalising the study variables the questions we are asking are: (1) what are the differences in share prices between pre-deregulation and post-deregulation; (2) what is the effect of deregulation on Market Capitalisation and Market Turnover; (3) what is the direction of Structural Change on investors share holdings; and (4) what is the relationship between Market Capitalisation and GDP. In providing answers to these questions, we are hypothesising that:

Ho 1:

There is no significant difference between share prices in a pre and post-deregulated period

Ho2:

Deregulation h.as no significant Capitalisation and Market Turnover.

effect

on

Market

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Ho3:

There is no significant relationship between Market Capitalisation and GDP.

LITERATURE REVIEW In the views of Alile and Iyare (1992), the Financial System of any economy is the framework within which capital formation takes place. They argued that it is the framework which the savings of some members of the society are made available to others for productive investment. This process according to them is made possible by the existence of two markets: (1) money market; and (2) capital market. According to CBN Briefs (1998: 1), a Financial System is a conglomerate of various institutions, markets, instruments and operations that interact within an economy to provide financial services. Such services may include resource mobilization and allocation; financial intermediation and facilitation of foreign exchange transactions to enhance international trade, among others. The Financial System thus plays important roles in the process of economic growth and development of a country. In Nigeria, the financial system has undergone.remarkable changes in terms of ownership structure, the depth and breadth of instruments employed, the number of institutions established, the economic environment, and the regulatory framework within which the system operates. The Nigerian Financial system comprises the regulatory/supervisory authorities, banks and non-banks financial institutions. The Central Bank of Nigeria (CBN) is the apex regulatory authority of the financial system The Nigerian Money Market Money, like any other commodity, is bought and sold in a market, called the money market. The major function of the market is to facilitate the raising of short-term funds for the deficit sectors of the economy from the surplus sectors. The deficit units, which could be public or private, obtain funds from the market to bridge budgetary gaps as well as meeting working capital requirement by trading in short term securities. Alile and Iyare (1992) argued that financial claims of less than one year are found in the money market, and these include treasury bills, commercial papers, acceptances, certificates of deposit, banker's unit funds, time deposits and call money. According to CBN Briefs (1998), the institutions that operate in the market include discount houses, commercial and Merchant Banks, low income and rural sector target institutions. While Alile and Iyare (1992) grouped these institutions into two namely: Commercial Banks and Central Bank.

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There were no money markets in Nigeria in 1959 when CBN was established. The absence of such market left some lasting impact on the economy of the country. It means first that Nigeria's business-men and nascent industrialist had no market where they could raise capital for the construction and operation of their business. The implication of this statement is that available capital was repatriated overseas especially London, because those who had funds surplus to their immediate needs did not have a market for them. This resulted in a net export of capital from Nigeria at a time when the country badly needed all the capital it could lay its hands upon for development. This development led to the desire to establish money market in the country. To Nigerianise the credit base, it was thought necessary to provide local investment outlets. A fundamental difference between the money and capital market rests on the driving force for dealings in bothmarkets. Despite the difference, the similarities are that investors perceive both markets as alternative investment outlets with the __ result that when one is booming the other is experiencing a hill and viceversa. The Nigerian Capital Market In any economy, as the quest for economic development becomes more urgent the need for an organized and well-developed Capital Market arises to encourage investment and provides opportunity for sellers to pml icipate in the ownership and/or return of business enterprises. The Nigerian Capital Market performs the traditional role of mobilizing medium to longterm funds for development purposes. A Capital Market consists of primary and secondary market units. Also, it can be differentiated from the perspective that it is the market for equity instruments and the market for debt instruments. The types of instruments that are bought and sold in the Capital Market include: federal government notes and bonds, state government and local government securities, mortgages, corporate bonds and corporate equities. These instruments have differing yields and maturity and also possess different characteristics. Pointing to the characteristics or features of Capital Market instruments, Oparaji (1995) stated that characteristics of the major instruments of the Capital Market differ widely in terms of credit risk, interest rate risk, marketability, taxability and the other factors that influence relative yields. In establishing the Nigerian Capital Market in 1961, it was intended to perform specific functions toward in establishing formal financial markets. Among these issues were: (1) provisions of local borrowing and lending avenues for long term purposes; (2) mobilize long term capital for the economic development of the country; (3) provide facilities that would

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enable expatriate firms to offer their shares as well as Nigerian public to invest and also participate in the shares and ownership of such firms; (4) to serve as an avenue for quotation and marketabili_ty of stocks and shares; and (5) establish a code of conduct to guide the attitude of market participants (Oparaji, 1995). The development of the Nigerian Capital Market has been greatly enhanced by government legislations, such as Income Tax Management Act, 1961; the Insurance Act, 1976; the Nigerian Enterprises Promotion Decree of 1972, 1977 and 1989; as well as the privatization and commercialization Decree No. 25of1988, which induced the listing of more securities on the Nigerian Stock Exchange. Also, the Federal Government in various policy statements including the 1991 budget has reiterated the advantages to state and local governments to explore the potentials of the Capital Market for their long-term financing requirements. Does this mean that all is well and we can fold our arms and watch? No, because the market has numerous potentials yet untapped. Majority of states, local government, corporate bodies, seem either averse or indifferent to sourcing funds from the Capital Market. This may have been caused by inadequate awareness and other problems, which have restricted their recourse to the Nigerian Capital Market. The main institutions in the market include Security and Exchange Commission, the Nigerian Stock Exchange, the CBN, among others. Instruments in the Capital Market Capital Market is logically a market for instruments other than money or near monies. Financial claims, instruments or securities obtainable in the market are broadly classified into four types: loan stock/debenture/bond, debt conversion, mergers and acquisition, and equity securities. This study will consider the first two- Debt and Equity. Firstly, debt instruments are financial claims with an obligation by the issuer to pay interest at stated intervals and to redeem the issue at a future date. The types available on the Nigerian Stock Market are divided into two groups: Federal Government Development Stocks (FDS); and Industrial Loan, Preference Stocks and Bonds, (Alile and Anao, 1986). The Federal Government Development Stocks (FDS) usually issued with maturity ranging between 4 and 25 years. This is an instrument designed to enable the Federal Government raise long term loan from the Capital Market They are floated by government to assist monetary policy or for financial defined projects. Industrial Loans, Preference Stocks and Bonds, being corporate loan claims used for financing long-term capital requirements by large firms.


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The industrial bonds are designed to enable the issuing company borrow from public towards financing capital projects. These can take the form of redeemable, mortgage, and unsecured debentures, including preference shares. The characteristics of both grnups are similar, however, while the formal is issued by the Federal Government the latter is issued by, Companies, Government Parastatals and state governments issue the latter. Debt securities issued by governments are usually backed by the taxing power of the issuer and/or pledge of other tangible assets or revenues. Corporate loan stocks, however, are more dependent upon the earning power of the issuer. They are relatively riskier but provide higher yields than government bond (Alile and Anao, 1986). Secondly, equity capital is refers as the capital of the owners of the firm i.e. ordinary shares. The ownership of a share confers on the holder some rights including the right to receive notices of meeting and to attend and vote at such meeting. Equity claims are viewed, usually, as a source of permanent capital with no contractual payments by the firm. However, the shareholder expects a specific after-tax return from investment. For the efficient functioning of these instruments, there are institutions that administer the affairs of the Stock Market.

The Stock Exchange and the Capital Market Ali le and Anao (1986) see the Stock Exchange as really not just a financial institution but the very hub of the Capital Market; the pivot around which every activity of the Capital Market revolves. It is not only crucial but central to the entire capital mobilization process. This is chiefly because of the opportunity, which it offers for the continuous, trading in securities issued by fund users. It is doubtful if there will be any incentive or motivation to invest in securities, without this facility and the chance which is thus availed to investors to liquidate their investment. It can be said that without Stock Exchange, the level of savings carried out in aggregate terms would be much low because most savers would carry their fund in cash or bank as opposed to investment. The marketability of securities which the Stock Exchange imparts therefore, has extreme important implications for the individual savers, the investors or fund user as well as the nation as a whole. As Alile and Anao (1986) stated, there is within or annexed to the Stock Market, a market for a new issues and a market for existing securities. There is again a market for debt securities and a market for equities. There is also, a market for each of the major categorizations of the economy, for instance, _the petroleum sector, for food and beverages. Nnabue, (1993) also indicated that the various activities that go on in the

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Nigerian Stock Exchange in the process of mobilization and distribution of capital can be broadly grouped into three markets namely: (1) the Market for new issues (Primary market); (2) the market for existing securities (secondary market); (3) the second-tier securities market (SSM). But in the views of Nze (2001), the Capital Market operations are structured into three broad categories, namely: (1) the primary market; (2) The secondary market; and (3) the derivatives market. Regulations Affecting the Capital Market The Stock ExcliangeAct, 1961 Formerly known as the Lagos Stock Exchange and latter changed to the Nigerian Stock Exchange, the Act mandated members of the exchange to submit q mu 1erly reports of its activities to the governor of the Central Bank of Nigeria who takes same to the financial minister. Tlte Excltange Control Act, 1962 The main purpose of this Act was to obtain prior approval from either the Finance Minister or CBN before the transfer of funds from Nigeria to overseas. This move not only slowed down activities in the market but also discouraged foreign investment in Nigeria. Suffice to say that the repeal of this Act has brought some increase in economic activities in the market. The repeal of the Exchange Control Act, 1962 is laudable and should be seen as the first step towards setting up a conclusive investment environment (Oparaji, 1995) The Securities and Exchange Commission Degree 1988 (SEC) This commission was established as the apex institution of the Capital Market. It also amended the capital issues Decree of 1973. This commission overseas and protects investors while ensuring Surveillance in securities dealings, including pricing, timing and allotment of new or primary shares, using the parameters considered by SEC. Alile and Anao (1986) argue that one of the major aspects in which the commission's operations has attracted the greatest comments or criticism is with respect to its responsibility 'for fixing issue or offer price. The pricing and allotment of shares can better be handled by price mechanism. A market could not be thought to exist in the Capital Market because the demand and supple market forces were not allowed to operate freely. In most cases, the prices fixed were contested by listed firms and in most if not all cases, the decision of SEC prevailed. But the year 1993 was indeed water shed for the Nigerian Stock Market. It was a year that the government started

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implementing the long expected deregulation of the economy. CBN Briefs (1998) in the course of the deregulation of the Capital Market, function of price determination has been transferred to the issuing house.

Nigerian Enterprises Promotion Act 1989 In recognition of the advantage of the economic self-reliance of the Nigeria economy, and also of the dangers posed by heavy reliance on foreigners, the government of Nigeria has encouraged Nigeria not only to manage but also to effectively own these companies. This move led to the indigenisation policy. This transfers the management from foreigners to Nigerians. The intention of this Act was hardly realized as it brought about severe economic dislocations through poor management by people mainly appointed based on political loyalty than knowledge and experience. However, according to CBN Briefs (1998), following the promulgation of the Nigerian investment promotion commission Decree No. 16 and the foreign exchange monitoring and miscellaneous provisions Decree No. 17, both of 1995, provide for foreign participation in the Nigerian Capital Market, the SEC released guideline on foreign investments to guide potential investors in the Nigeria Capital Market. The Insurance Act, 1976 This Act modifies extensively the earlier insurance Act, 1964 as it affects all aspect of the business of insurance companies to invest a prescribed proportion of their funds in selected securities listed on the Stock Exchange. However, the proportion to invest would depend on the nature of business carried out by the company. In other words, the Act forced a choice on insurance companies in cases where they would ordinarily have a different option. It must be pointed out that the move effectively increased the volume of business on the Stock Exchange trading floors. Appraising the Impact of Regulation on the Economy There is hardly any scheme with advantage, which does not also have disadvantages, and vice versa. As a first step to improve the efficiency of the market, it is necessary that government occasionally niakes periodic publications of easily digestible information on listed companies. The restriction on pricing of securities by the capital issues commission was intended to ensure a fair price of the securities. It is only natural that the forces of demand and supply be allowed to determine prices. We must be aware that the peculiar nature of the market and the pivoting role of government in using it to achieve stipulated objectives to stimulated

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growth in the economy calls for certain checks to prevent abuses if the prices of securities are left unchecked. On the other side of the argument, Alile and Anao (1986) see the intervention of a Central Authority to adjudicate on prices, whatever its intentions may be, as running counter to the tenets of a free market and would be bound to have adverse long term consequences for the development of the Capital Market. What some critics postulate rather is that the central authority should introduce measures to protect the market forces. Speculatively, companies might fear unfavourable prices for their securities and dread listing in the Stock Exchange. In 1995, the government deregulated the Capital Market giving it free hand to operate in consonance with demand and supply forces. It may be argued that the tremendous increase in the market capitalization of listed companies may not be unconnected with Capital Market deregulation.

Restriction on Entry and Expansion Barriers to entry reduce competition while investment ceilings could be pernicious to growth and survival. Also, the various condition stipulated before a member is listed on the exchange tend to affect membership adversely. The various conditions range from specified share capital to limitation on membership for large and medium/small companies. No wonder, the Exchange revised the listing requirements and amongst other things lowered the issue capital of applying companies from Nl .0 million to N0.6 million (Alile and Anao, 1986). The listing was further amended and relaxed by the introduction of second-tier security market for medium and small companies. Even at the relaxation of listing requirement, there is still lack of interest to seek quotation. The lack of interest could be due to the fact that the problems association with listing on the Stock Exchange is not always sufficient to compensate for the disadvantages accruing from loss of control of restriction of management freedom etc.

REFLECTIONS ON ECONOMIC DEREGULATION According to Fubara (1998), the necessity for government involvement in the economy, which enjoyed widespread support up to the l 960's, was seriously challenged about the close of the decade. The challenge was brought by depression and inflation. Critics mainly the Free Market Thinkers whose doctrine was ovellhrown by Keynesian ideas, blamed the problem on governments attempt to manage the economy, and therefore on Keynesian prescriptions. Reliance on the market mechanism is superior to Keynesian demand management they argue and that the problems of

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unemployment and inflation that market economies faced in the short run would be resolved in the long run through the self regulating mechanism of the market. According to these critics, the government has no business in the economy except, as the monetarists among them maintain, to control money supply. This is so as a result of the general inefficiency, corrupting practices of government efforts at economic management which imposed heavy welfare cost on the rest of the society. The argument against Keynesian economic ideas led to questioning the role of government in the economy and this eventually led to the "campaign for privatization of public enterprise" about the close of 1970s and the removal of government controls on some aspect of the economy. For instance, price determination, which became widespread in the early 1980's. The structural Adjustment programme (SAP) of 1986 was in response to this campaign for free market. The expectation everywhere according to Fubara (1998) was that privatization of enterprises and general deregulation of the economy would permit the market mechanism to allocate resources efficiently and therefore promote social welfare. Ordinarily, deregulation means no regulation. One would therefore define deregulation as the removal of all regulations: official and nonofficial, internal and· external from the market. But Financial Markets everywhere in the would have to be strictly policed to protect the unsophisticated investor by trying to ensure that he/she is given a fair price All markets are guided by standards intended to protect the rights of investors while keeping financial environment safe and soilnd. This is done by setting standards for market participants to adhere to. There must also be close monitoring of transaction such that investors will have a form for airing complaints and obtain redress where appropriate. The standard set could be in the form of rules and regulations, laws or legislations. Alile and Iyare (1992) in clarifying the concept of deregulation emphasized that deregulation does not mean no regulation. Nnabue (1993) sees Jaw making as not just the process of making rules but the process of adopting the procedures in ensuring that a law is made by the appropriate body duly created for such function. The capacity of the law-maker understands the society that will eventually observe such a law. This is to ensure that the laws made are not obnoxious, moribund at inception, observable, practicable and in fact acceptable to the public. Closely linked to the process of law making is the capability to avoid over-regulation. It is on this premise that deregulation is favoured as a policy to diversify the production base and the extension of consumers' right.

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For Oladele (1991), deregulation as an economic policy means removal of official restrictions on consumer choices and the introduction or extension of competition on the supply side of the market. From the ·definition above, there are two sides to de-regulation; extension of consumer right and the extension of production decision. Privatization is an instrument under deregulation. Olashore pointed out that deregulation is often used synonymously with liberalization but differs from the often substituted term privatization which like commercialization may be an instrument under the policy to deregulate. The abolition of monopoly and the extension of consumer rights do not necessarily imply the transfer of state assets to the private sector that is why deregulation differs from the often substituted term privatisation. Since 1995, Nigeria has been practicing guided deregulation which · is commonly still known as deregulation. Therefore, the word Deregulation will be interchangeably be used Guided deregulation. Guided deregulation is the process in which the economy is moved gradually, but steadily away from being state directed to being market directed. The process requires that the steps to be taken are carefully planned and systematically implemented, and that each step that is taken is consolidated before the next one is attempted. This process give~ the country the opportunity to check every step it takes towards its obje~tives - in this case the objective of building a truly market based economy which is crucial for success, Fubara (1998). Fubara (1998) indicated further that our choice of the policy of guided deregulation is influenced by the history of economic management efforts in this country, and by the experiences of some of the more successful countries. As people who have witnessed the several unsuccessful attempts to build a market economy in the country, particularly the immediate post-independence~(1986- 1993) attempt at economic deregulation and structural adjustment, we believe that a policy of guided deregulation is what we need to achieve our objective of economic prosperity. According to him, an analysis of the failure of our past efforts shows clearly that the main culprit is the very weak structure of the economy. It is the weak structure of the country that makes us unable to create large enough job opportunities needed to significantly reduce unemployment. Also, it is the weak economy that explains the persistent inflationary pressures in the country, the level of poverty, and the external dependence of the economy. Given this kind of economy, a rush to deregulate economic activities is bound to be counter productive we would be trying to get the economy to perform functions for which it has no capacity.


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The events in Albania and some other parts of Eastern Europe are an eye opener. These countries were compel 1ed to attempt to change from a tightly regulated economic system to a market-directed economic system almost overnight. The consequences are well known, Albania is now in a state of chaos, and things are not much better in most of the other countries in the region. Perhaps it is too late for Albania. Our analysis and the experiences of some other countries show that in our situation we need to be more pragmatic and less dogmatic if we wish to be successful in building a strong economy.

RESEARCH METHODOLOGY AND FINDINGS The study investigates the share prices, the impact of deregulation on the Capital Market Capitalisation and Stock Turnover, structural changes in investors' shareholdings, arid the relationship that exist between Market Capitalisation and Gross Domestic Product (GDP). Data of these variables were collected for eighteen years period (1984 - 2001) and dichotomized into two groups, viz: pre and post deregulation period. The data were used to answer the Research Question or verify the hypotheses. Secondary data were collected for this study. The data are: Market Capitalisation; Market Turnover; Prices (Common Stock Index); Dealings and growth in securities on the Stock Exchange; and Gross Domestic Product (GDP). These data were collected from the Stock Exchange (NSE), Security and Exchange Commission (SEC) and Central Bank of Nigeria, via their Annual Report and Accounts, Bulletins, and other data base documents of the institutions. In order to verify the various hypotheses of the study, the data collected were presented in Tables to check whether there is a significant difference between share prices in a pre and post deregulated period. The prices (Common Stock Indexes) were presented for 1984 to 2001. The period of 1984 to 1992 was tagged "pre-deregulation or regulation" and 1993 to 2001 as "post-deregulation or deregulation." The prices were compared in absolute terms as well as in percentages and also illustrated in graphs. The evidence suggested by the data profile was weighted using the t-test, which is given by: teal = A-B .· Se Where Se = - 1 + -1 x S NA nB And S = S A(nA - 1) + S B(nB - 1) NA + nB - 2

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S2A --

r:x'

2 A-

·,

S

2

B

=

IX

(L;)W

nA nA- 1

2

B-

(LX12f n

nB-1

In the formula: A = Mean index for pre-deregulation B = Mean index for post-deregulation Se = Standard En-or nA, n8 = Nwnber of years in pre and post deregulation, respectively. S = Weighted standard deviation S2A, S213 = The pooled estimate of the population variance for pre and post deregulation X2A, x2B = The 1st and 2nd sample I = summation teal

was test at the 5 per cent level of significance.

To verify whether deregulation has a significant effect on Market Capitalisation and Stock Turnover, the Market Capitalisation, and Turnover of securities of listed companies from 1984 to 2001 were collected and presented. The data were observed for trends and patterns using simple percentages and graph. The average proportions of the two periods (pre and post deregulation) were compared using the t-test at the 5 per cent level. To assess the shift in investment holdings from Government to the Industrial Sector due to deregulation, data on the growth of listed securities and the frequencies of deals on securities were collected and presented in absolute term as well as graph, these data were analysed in terms of contents, compositions, and holdings of securities. Finally, the relationship between Capital Market and Gross Domestic product (GDP) were tested using Pearson r of con-elation coefficient. The Capital Market was operationalized with Market Capitalisation. The values of GDP in naira were also presented and graphically illustrated. The data were observed for direction and strength of relationship. The Pearson r is given by: Ixy - nxy r = ~ (Ix - nx ) (Iy2 - ny2) 2

2


269

Where x = market capitalization values Y = GDP values r = output of the model n = number of years in pre and post deregulation I = summation The strength and direction of the Pearson r was judged significant using Herbert guides, reported (Avwokeni, 2003).

Share Prices in a Pre and Post-Deregulation The study investigates the performance of Capital Market in a pre and post deregulation, the Common Stock indexes were used as the operational measure of price performance. The argument advanced in this section is that in a deregulation economy, prices are determined on the strength of the forces of demand and supply. Given this premise, it is plausible to assert prices in a deregulation should improve when compared with price performance during a pre-deregulation period. This is the only way a deregulation programme is justified in our economy. The data collected to substantiate this argument are presented at Table 1 and 2. TABLE 1

COMMON STOCK INBEX (1984 - 2001)

Pre-deregulation Index(' Million') Year

Post-dere2ulation Index ('Million') Year

1984 1985 1986 1987 1988 1989 1990 1991 1992

1993 1994 1995 1996 1997 1998 1999 2000 2001

104.0 128.4 -163.8 190.9 235.4 325 .3 513.8 784 .0 1,107.6

1,543.8 2,205.0 5,092.6 6,992.1 6,400.5 5,672.8 5,266A . 8, 11. 0 10,962.1

SOURCE: NSE, Annual Report and Accounts, various issues. An inspection of the data profile at Table 1 and 2 revealed that performance of price on the Capital Market fell during deregulation. In absolute terms, the price indices during deregulation are higher. However, the increases in price indices are expected given the trends in the index during pre-deregulation.

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TABLE 2:

YEARLY INCREASE (DECREASE) IN PRICE, 1984-2001

Pre-deregulation Year Index(' Million') 1984 24 1985 1986 28 1987 17 23 1988 38 1989 58 1990 1991 53 41 1992 31.3% Average SOURCE: Computed from Table 1

Post-deregulation Year Index ('Million') 1993 39 1994 43 1995 131 37 1996 (8) 1997 (12) 1998 (7) 1999 2000 54 2001 35 Average 31.2%

For example, the increase in the index from 1989 to 1990 is 58 per cent. This fell to 53 per cent in 1991 to 41 percent in 1992. Deregulation in 1993 did not improve performance as the index decreased further to 39 per cent. However, deregulation seems to make meaningful improvement in performance during 1994 to 1995 as the index increased to 43 and 131 per cent, respectively. The periods of 1997 to 1999 witnessed drastic worst performance. The indexes for these years were negative, signaling an unwanted atmosphere. Performance of the Capital Market seems to have revived in the periods 2000 and 2001. The Common Stock index was 8,111.0 and 110,963. l representing an increase of 54 and 35 per cent, respectively. It must be stated that, the average price performance of the Capital Market as measured by the Common Stock Index during period of preand post- deregulation are respectively 31.3 per cent and 31.2 per cent. The finding emanating here is that performance of Capital Market price is better in a period of pre-deregulation. This finding is substantiated by the result of the t-test (teal= 5.63 and 1tab ~ 2.31) as shown in Table 3.

Momodu, Jaja and Hamilton TABLE3

271

SUMMARY OFT-TEST RESULT (PRICECOMMON STOCK)

Source of Mean Variability Pre-deregulation 394.8 5,809.7 Post-deregulation 5,414.9 All Legend: S-Significant

Variance

teal

ttab

Remark

119,303.74 8,208,675.68 4,163,989.71

5.63

2.31

s

Statistically, the difference in performance over the period of pre and post deregulation is significant to warrant the conclusion that performance of the Capital Market price was relatively better during the period of pre-deregulation.

The Effect of Deregul~tion on the Market Capitalization and Market Turnover A principal instrument 'o f deregulation is the Capital Market. In essence, deregulation should induce improved Capital Market performance. This is expected given the fact that in the process of deregulation, the SEC withdrew from the pricing of new issues. The function now rests with the market operators - Stockbrokers and Issuing houses. And the prices are determined by the strength of the forces of demand and supply. Deregulation induces a shift in desired foreign portfolios towards the home market. The Federal Government internationalised the Capital Market on deregulation so as to allow for foreign participation. Exchange controls were relaxed as well as other rigidities and hurdles. On deregulation the Nigerian Investment Promotion Commission (NIPC) Decree 16 of 1995 was promulgated to liberalise the investment climate in the country. The Decree allows unrestricted foreign interest in Nigerian quoted companies and accords foreigners and residents the same rights, privileges and opportunities of investment in the country's Capital Market. Beside this, the Foreign Exchange (Monitoring and Miscellaneous Provision) Decree 17 of 1999 was promulgated to replace the Exchange Control Act, 16 of 1962 to ease the mechanism for Foreign Investment flows. As it stands, there are no limits anymore to the percentage of foreign holding in any company registered in the country. The question that most cynics ask is, "has all the efforts Government put in to deregulate economic activities improve or develop the Capital Market?"

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Developmental effort did not come from the Government alone: the Stock Exchange itself has improved its faciliti·es to enhance performance. For instance, the Exchange now operates an Intranet System, known as CAPNET. With this Network, one can assess key market information without necessarily having to come to the Exchange. The Exchange has also gone from the Call-Over Trading System to an Automated Trading System (ATS). With this, dealers trade through a network of computers rather than a market organized by auction. A more serious effort from the Stock Exchange is the incorporation of a Central Securities Clearing System (CSCS) as a subsidiary of the Nigerian Stock Exchange. The CSCS has reduced the settlement and delivery time lag to just three working days in accord with the T + 3 formula. Before the CSCS, it took between three to twelve months to receive share certificates. In essence, CSCS was incorporated to speed up the delivery system of the Capital Market. Stock position can now be obtained on the spot. It is therefore plausible to ask whether these efforts from both Government and Exchange had any meaningful effect on the market operations. It is on the basis of this that the study seeks to appraise the developments on Capital Market caused by d,eregulation. In line with Anyafo (1999), we examine the market turnover: and market capitalization in the period of regulation and deregulation. The Market Turnover for the period of eighteen year (1984 to 2001) was presented at Table 4. The yearly increase or decrease in Market Turnover for the period under study was also presented at Table 5.

TABLE 4.

MARKET TURNOVER OF NIGERIAN STOCK EXC:tµ.NGE (1984-2001)

Pre-deregulation Dere 'Ulation Year Turnover ( N) Year Turnover (N) 1984 249,818,401 1993 662,000,000 1985 311 ,863,472 1994 986,000,000 1986 495,746,427 1,839,000,000 1995 368,559,734 1996 7,063,000,000 1987 250,314,665 1997 11,072,000,000 1988 1989 653,600,000 1998 13,571,000,000 306,000,000 1999 14,082,000,000 1990 28, 154,000,000 255,000,000 2000 1991 1992 492,000,000 2001 57,637,000,000 SOURCE: Stock Exchange Annual Report and Account, Various Issues. Turnover is in terms of Value ofShares Traded on the NSE.

Momodu, Jaja and Hamilton TABLES

Year

273

YEARLY INCREASE/(DECREASE) IN MARKET TURNOVER OF EQUITY SECURITIES Pre-deregulation % Increase (decrease)

1984 20 1985 37 1986 (34) 1987 (47) 1988 1989 62 (1.14) 1990 (20) 1991 1992 48 SOURCE: Computedfrom Table 4

Year

1993 1994 1995 1996 1997 1998 1999 2000 2001

Deregulation % Increase (decrease) 26 33 46 74 36 18 4 50 51

The data profile on Tables 4 and 5 revealed that deregulation has a meaningful impact on Market Turnover. For instance, the Turnover increased by 20 per cent from 1984 to 1985. This increased to 37 per cent in 1986. However, there was a drastic decrease in turnover in 1987 and 1988. The decrease was experienced also in 1990 and 1991, except in 1989 and 1 992 when performance in terms of Market Turnover increased. Impressive enough, no decrease in turnover was experienced in the period of deregulation. The increase in turnover speed from 26 per cent in 1993 to 74 per cent in 1996. However, the rate increased to 36 per cent in 1997 and dwindled to 18 per cent and 4 per cent in 1998 and 1999' respectively. Since 2000, the direction of increase has moved up to 50 per cent and more. As can also be observed from Table 4, the mean Turnover Value of the market in the period of deregulation was higher. The difference in mean was significant at the 5 percent level (teat = 2.42 Vs ttab = 2.31) Thus, deregulation has significantly improved the Market Turnover of the Capital Market. TABLE 6:

SUMMARY OFT-TEST RESULT (STOCK TURNOVER)

Source of Variability Pre-deregulation Post-deregulation All

Mean

Variance

teal

t1ab

Remark

375,878,077-!/ 15,007,333,333.0 1, 124,855,255.0

2.00357E+ 16 3.30929E+20

2.42

2.31

s

SOURCE: Computed from Appendix C, Table 3.

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Another index often used to assess performance of the Capital Market is the Market Capitalization. In this i: regard, the Market Capitalization of all listed companies on the Stock Exchange. was presented at Table 7. The presentation was segregated between the two periods under study. In the period of regulation, Market Capitalization was increasing. This continued into the period of deregulation. It is not clear whether Market Capitalization increases faster in the period of deregulation than regulation. However, one fact is clear from the data profile at Table 7. When Market Capitalization in regulation period was increasing, Market Capitalization in deregulation period was also increasing. In fact, a high positive correlation coefficient (r = +. 95) was reported in Table 7. Inspection of the percentage increases at Taple 8 and the graphical illustration at revealed that Market Capitalization irtcreased to 17 per cent from 1984 to 1985. The increase rate fell to 14 per tent in 1986 and 13 per cent in 198 7. The rate increased to 19 Percent in 198 8 but fell again to 8. 3 percent in 1989. From that period, there had been an upward increase in the growth rate of market capitalization from 25 percent in 1990 to 31 percent in 1993. However, this fell to 28 perce~t in 1994 and 8 percent in 1995. A spiral growth was recorded in 1996 up to 75 percent. This decreased to 2 percent but drastically reduced to 11 percent in 1998. Since then, the increase had been substantial from 12 percent in 1999 to 35 percent in 2001.

TABLE 7

MARKET CAPITALISATION OF LISTED COMPANIES (1984- 2001)

Pre-dere2ulation Dere2ulation N'000.000 ' Year N'000,000 Year 5,500 1993 46,900 1984 1994 65,500 6,600 1985 71, 100 7,700 1986 . 1995 1987 1996 285,600 8,900 1997 292,000 1988 11,000 1998 263,260 12,000 1989 299,979 1999 15,900 1990 428,600 2000 22,660 1991 662,561 2001 32,500 1992 SOURCE: NSE Annual Report~ and Accounts, Various Issues.

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operators and investors. With the privatization programme in place, whereby four banks, six Cement Companies and three Oil Marketing Companies have been privatized, it is also expected that the composition and content of securities in the Stock Exchange should change. The study seeks to know the changes in shareholdings in terms of the number of foreigners' shareholdings and the changes in securities from Government to industrial sector. An inspection of Table 10 revealed that there are changes in security's composition and content at the Stock Exchange Market in the period of deregulation. During the period of regulation, there was a remarkable growth rate of Government Stocks over Industrial Bonds, (1984 to 1989). In 1990, the numbers of Government Stocks were equal to the number oflndustrial Bonds. From the period of 1991 to 2001, growth rate of Industrial Bonds exceeds Government Stocks. By 2001, the growth rate of Government Stocks has fallen to 11 percent from 56 percent in 1984. On the other hand, Industrial Bonds have grown from 27 percent in 1984 to 56 percent in 2001 . TABLE 10

GROWTH IN THE NUMBER OF LISTED SECURITIES, 1984-2001

Year· ,

Government Stock

Industrial & Bond

Equities including SSM

Total

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

56 57 58 54 51 47 43 40 36 32 29 28 24 22 19 15 12

27 28 29 31 35 40 43 57 62 66 70 67 69 60 59 58 53 56

93 96 99 100 102

176 181 186 185 188 198 217 239 251 272 276 276 276 264 264 269 260 261

11

11

131 142 153 174 177 181 183 182 186 196 195 194

Momodu, Jaja and HamiJton

TABLE 8:

Year 1984 1985 1986 1987 1988 1989 1990 1991 1992

275

YEARLY INCREASE (DECREASE) IN MARKET CAPITALISATION, 1984-2001

Pre-deregulation % Increase (decrease)

Post-Deregulation Year % Increase (decrease) 1993 31 1994 28 1995 8 1996 75 1997 2 1998 11 1999 12 2000 30 2001 35

17 14 13 ' 19 8.3 25 30 30

SOURCE: Computed from Table 4 TABLE9

Mean Variance t -cal 1 tab Remark Pearson r

SUMMARY OFT-TEST RESULT (MARKET CAPITALISATION) Pre-deregulation 13,640,000,000 7.81749E+l9 4.04 2.31

Post-Deregulation 2.68389 E+ 11 3.90077E + 22

s +95

~

However, the t-test result at Table 9 revealed that the difference 10 performance between the regulation and deregulation period is statistically significant (teat· = 4.04 Vs t.05, 16 = 2.31). The findings which emanate from the data analysis are that deregulation has improved the Market Turnover of securities in the Capital Market as well as the Market Capitalization listed companies.

Structural Changes in Investors' Shareholding With the abrogation of the Nigerian Enterprise Promotion Decree of 1989, it is expected that the Structure of Investments and Investors' Shareholdings, in terms of contents, compositions, and holdings, should change. This will represent a market improvement in performance. Foreigners now participate in the Nigerian Capital Market both as

MoJtWdu, Jaja and Hamilton

277

The number of equity security has also increased. For instance the growth rate increased from 93 percent to 194 percent within the period of 1984 to 2001 . The finding that emanates from the analysis of data profile at Table 1 is that deregulation has brought structural changes in terms of content and composition to the Capital Market. Equities and Industrial Securities now dominate the market. Before deregulation, the composition and content were Equities, Government Stocks and Industrial Bonds (in that order) but after deregulation, the order reversed to Equities, Industrial Bonds and Government Stocks. The number of deals has also increased. In the period of regulation (1984 to 1992) there were deals on Government Stock. From 1970 to 1976, deals on Government Stock compared favourably with Industrial Bonds were higher. However, after deregulation, deals on Government Stock have drastically reduced to 4 in 1999 and 12 in 2001. There are also changes in investors' holdings. For instance, after privatization programme, a large proportion of the investment holding shifted from the Federal Government to Nigerian Individual~ and Strategic Investors. Table 11 summarized the Current holdings of investment after privatization. ,,

TABLE 11:

STRUCTURAL CHANGES IN INVESTORS' HOLDINGS IN PRIVATIZED PARASTATALS

S/No

Enterprises

Federal Govt. Ownership

Post Privatisation Federal Govt. Ownership

1.

FSB International Bank Nal Merchant Bank Plc Afr Bank (Nig) Plc Assurance Bank (Nig) West African Portland Cement Ashake Cement Benue Cement Company Cement Cop. of Northern Nigeria Calabar Cement Company Limited Nigerian Cement Cop. African Petroleum Plc Unipetrol (Nig) Plc National Oil & Chemical Marketing Cop.

-

Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil

2. 3. 4. 5. 6.

7. 8. 9.

10. 11. 12. 13.

SOURCE:

-

30% 30% 30% 30% 40% 10% 40% 40% 40%

Privatisation Handbook: National Council on Privatization, 2001, pp 29,76-77.

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The data profile revealed that in the already i;privatized enterprises, Federal Government had relinquished her shareholdings to Nigerian Individuals and Strategic Investors. The findings emanating here is that den~gulation via privatization instrument has broken public sector monopoly and has shifted investors holdings from the Public Sector to Nigerian Individuals and Strategic Investors.

Market Capitalization and Gross Domestic Product (GDP) The Financial Sector contributes a large proportion of the Gross Domestic Product (GDP). The Capital Market is the heml of the financial sector. It is therefore plausible to assert that the Capital Market influences the growth of the GDP. To assess this, the Capital Market was operationlised with Market Capitalization. The data are presented at Table 12a and 12b respectively. TABLE 12a: Years

MARKET CAPITALIZATION AND GDP ( N) Pre-Dere2ulation Period 11984 - 1992 Market Cap (x) GDP 9Y)

63,006,400,000 1984 5,500,000,000 1985 6,600,000,000 71,368,100,000 72, 128,300,000 1986 7' 700,000,000 1987 8,900,000,000 106,883,200,000 1988 11,000,000,000 142,678,400,000 1989 12,000,000,000 222,457,700,000 15,900,000,000 257,873,000,000 1990 22,660,000,000 320,247 ,400,000 1991 32,500,000,000 544,330,600,000 1992 SOURCE: NSEAnnual Reports and Accounts, various issues. An inspection of the data profile revealed that as Market ·Capitalization increases GDP also increase. The, relationship appears J;' positive. l~ ~

'·

Momodu, Jaja and Hamilton TABLE 12b

279

MARKET CAPITALISATION AND GDP IN NAIRA (N)

Post-deregulation Period (1993 - 2001) GDP 9Y) Years Market Cap (x) 46,900,000,000 691,606,800,00 1993 65,500,000,000 911,091,300,000 1994 1,960,689,100,000 71, 100,000,000 1995 2,740,458,510,000 1996 285,600,000,000 2,834,998, 700,000 1997 292,000,000,000 2,721,510,650,000 1998 263,260,000,000 3,250,670,000,000 299,979,000,000 1999 4,842,186,000,000 428,600,000,000 2000 5,487 ,995,000,000 662,561,000,000 2001 SOURCE: NSE Annual Reports and Accounts, Various Issues.

In the period of regulation, the mean Capitalization value was N13,640,000,000 while the mean GDP stood at N200,108,122,222. However, the relationship does not appear significant. A con-elation coefficient of r = + 0.038 connotes a miriute, almost negligible relationship (Herbert M. in Avwokeni, 2003). The relationship between Market Capitalization and growth in GDP is however positive, even though the relationship is negligible. In the period of post deregulation, the mean Market Capitalization was N2.68389 E + 11 when the GDP stood at N2.8268E + 12. The relationship is also positive but negligible, with r = + 0.032 as presented in Appendix E, Table 5 and Appendix F, Table 6. The finding emanating from here is that growth in the Capital Market has little influence on the growth of the GDP but they move in the same direction. CONCLUSION, IMPLICATIONS AND RECOMMENDATIONS The essence of deregulation is to improve the performance of the economy. An important segment of the economy is the Capital Market, which contributes substantially (in terms of financial services) to the Gross Domestic Product. The study was therefore designed to assess the developments in the ~: capital Market in the periods of regulation and deregulation. The aim is to find justification for the deregulatory policy of the Federal Government. Data was collected from the Nigerian Stock Exchange (NSE), · Security and Exchange Commission (SEC) and the Central Bank of Nigeria (CBN), via their annual report and accounts, bulletins, and other data base documents of the institutions. The data

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collected were presented and analyzed. It was revealed that deregulation improved the Market Turnover of securities in the Capital Market as well as Market Capitalization of listed companies. It has brought structural changes, in terms of composition, content and holdings to the Capitals Market. Equities are the most traded security in the market, followed by Industrial Bonds and Government Stocks. However growth in the Capital Market has no significant influence on the Gross Domestic Product (GDP). Moreover there is no improvement on the price performance of the Capital Market as a result of deregulation, if we use movement in Common stock indices. The data analysis concerning the share Prices in a pre-and postderegulation revealed that performance of the Capital Market in pre-and post deregulation differs with respect to the general price movement on the Stock Market. The average Stock Exchange Weighted Index in a pre deregulation was 31.3 percent. This fell to 31.2 percent in deregulation period. Also emanating from the data analysis is \ that deregulation has improved the Market Turnover of securities in the Capital Market as well as the Market Capitalization of listed companies. The data analysis also shows that deregulation has brought structural changes, in terms of composition, content and holdings to the Capital Market. Before deregulation, the composition and .content were in the order of Equities, Government Stocks, and Industrial Bonds. After deregulation, the order reversed to Equities, Industrial Bonds and Government Stocks. Hence, public sector monopoly is broken. Finally, it was also revealed that growth in the Capital Market has little influence (if any) on the growth of the GDP. However, they move in the same direction~ This reveals that if the value of Capital Market increases, the value of GDP also increases. The data analysis revealed that price index movement trends during the period of regulation were smoother when compared with the period of deregulation. The rising unemployment, dwindling purchasing power, declining industrial prodµction, budget deficit financing, exchange rate instability and depressed demand are possible factors that explain the slow growth in index movement and negligible relationship between the Capital Market and the GDP during deregulation. It is plausible to attribute the slow growth to the uncell ain political climate in 1993 . Besides, controls, as we had it failed woefully in meeting our national economic aspiration in 1994. This is evidenced by the fall in real GDP from 2.3 per cent in 1993 to just 1.3 Percent in 1994. The growth in the index movement through 1994 to 1995 may be attributable to positive developments on the International scene. World output increased by 1.3 Percent as against 2.3 Percent in 1993. In pmlicular, growth in Nigeria improved from 2.0


281

Percent to 3.3 Percent, which was the most remarkable performance in the year. The outstanding fast movement in index in 1995 was due to guided deregulation: the deregulation was unguided as in 1994. The Autonomous Foreign Exchange Market (AFEM) was reintroduced and greater fiscal discipline was adopted. Government repealed both the Exchange Control Act 1962 and the Nigerian Enterprises Promotion Decree 1989, replacing them with the Nigerian Investment Promotion Commission Decree 16 of 1995 and the Foreign Exchange (Monitoring and Miscellaneous Provisions) Decree 17 of 1995. The Exchange Control Act 1962 and the Nigerian Enterprises Promotion Decree 1989 impaired the flow of Foreign Investment Capital into Nigeria. The repeal therefore, impact positively on the internationalization effort of the Exchanges. All these speed up developments in the Capital Market, which shoot up the index to 131 percent. From the period of 1997 to 1999, index movements were negative. This may be due to tight liquidity controls, delay in the release of quarterly allocation of capital votes, huge depreciation of naira, instability in public policy, strangulating energy crisis and very weak consumer demand. In the year 2000, index movement rise positively up to percent. This was partly due to the vigorous implementation of the privatization programme. Quotation on the Stock Exchange increases, which positively impact on index movement. In 2001, the index movement fell because there was a mismatch in monetary and fiscal policy. Besides, high interest rate during 2001 attracted funds away from the Capital Market and constrained corporate access to working capital. The data analysis also revealed that deregulation has a meaningful impact on Market Capitalization of listed companies. The point here is that the Market Capitalization of listed companies has increased as a result of deregulation. This growth was expected given the modest growth in the number of listed companies. In 1993, the number of listed securities was 272 as against 251 in 1992. This growth had continued since the deregulation in that year (1993). It is plausible however to assert that the growth in listed companies may not have influenced Market Capitalization. For instance, in 1994 the Exchange witnessed decline in the number of newly listed companies and new issues market generally, yet there was substantial growth in Market Capitalization, Market Turnover and Index Movement. The impressive performance of the Capital Market in 1996 has been acknowledged by the International Finance Corporation (IFC) whose Global Index for Nigeria (measured in dollar terms) recovered in the second qumler of 1995 after the devaluation of the Naira by 75 per cent against the dollar in the first

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quarter. This index grew by 52 percent in the second quarter and 42.2 percent in the third quarter. The performance of the Capital Market in 1996 should be attributable to the operations of the Central Securities Clearing System (CSCS). The CSCS boosts activity on the Exchange and enhance contribution to National Economic Development. Indeed, the commissioning of the CSCS has raised the transparency of Stock Market transactions and improved the efficiency and effectiveness of the clearing and settlement systems making it possible for all securities transactions on the market to be processed and concluded within five working days (T +5), in line with international standard for emerging market. It was this project that positioned the Exchange for a transition from the Can-Over Trading System to the Automated Trading System (ATS), which was realized in 1998. In the year 1997 Market Capitalization fen marginally by 1.3 percent. Possible explanations for the fall are the delisting and falling share prices witnessed in the year. The delisted stocks include two mature Federal Government Development Stocks, two mature State Government Bonds, and eight redeemed Industrial Loans/Preference Stocks (Goddie M. Ibru, in a Presidential Statement to the close of affairs, Annual Reports and Accounts, 1997). Therefore, deregulation is not the only factor affecting the Capital Market. Developmental efforts on the market make meaningful impact than deregulation generally. Conscious efforts have been made to promote and reform the market so as to make i} responsive to the needs and aspirations of the economy. Following the deregulation of the Capital Market in 1993, The Federal Government in 1995 internationalized the Capital Market with the abrogation of laws that constrained foreign participation in the Nigerian Capital Market. Internationalization requires opening up the market through the removal of restrictions on foreign interests through the removal of restrictions on foreign ownership of assets, relaxing of Exchange Controls and dismantling cetl ain rigidities and hurdles in its operations. Desirable statutory reform measures include the repeal of the Indigenisation Legislation of the 1970s which limits foreign patl ici pation in the Capital Market and the promulgation of the Nigerian Investment Promotion Commission (NIPC) Decree 1995 No. 16 to liberalize the investment climate in the country. The NIPC Decree allows unrestricted foreign interest in Nigerian quoted companies and accords foreigners and residents the same rights, privileges and oppOll unities of investment in the country's Capital Market, Nweze (2002). In addition, the Exchange Control Act 1962, No. 16 was repealed and replaced with Foreign Exchange (Monitoring and Miscellaneous

Momodu, Jaja and HamUton

283

Provisions) Decree 199, No. 17 to further ease the mechanism for Foreign Investment flows, Anyafo (1999). Nasir (2002) argued again that consequent upon the abrogation of the Exchange Control Act of 1962 and the Nigerian Enterprise Promotion Decree of 1989, foreigners now participate in the Nigerian Capital Market both as operators and investors. There are no limits any more to the percentage ~of foreign holding in any company registered in the country. This repeal has opened up the domestic market for capital inflow and resulted in conscious efforts on the part of the Exchange Council to meet up with international standard. Such efforts have boosts the market. Also, in November 1996 the Exchange launched its intranet system (CAPNET) as one of the infrastructure supply for meeting the challenges of internalization and achieving an enhanced service delivery. CAPNET facilitates communication among local and international participants in the market. Subscribers to the system include stockbrokers, quoted companies, issuing housed, etc. through this medium they are able to access key market information-trading results, etc. without necessarily having to come to the Exchange. According to Osundu (2001) other developments include, the introduction of the Central Securities Clearing System (CSCS). The CSCS was incorporated on July 29, 1992, commissioned on April 8, 1997 and commenced operation~ on April 14, 1997 as a subsidiary of the Nigerian Stock Exchange. The CSCS Limited serves as a central depository for all share certificates, providing sub-registry and custodian services for local and foreign investors as well as reducing the settlement and delivery timelag from about 3 months to 3 working days in accord with the T + 3 formula. By virtue of the T + 3 formula delivery and settlement of any securities transaction is expected to be fully consummated at most within 3 days after the transaction day (T). Prior to CSCS, the Nigerian stock delivery and settlement process was such that: in most cases, it took between 3 mornhs-12 months to receive share certificates; cancellation and frequent issuance and re-issuance of certificated after sales of shares; constant signature verification; capital gains was not exploited; numerous complaints on failed transactions; loss of certificates; risk was very highundue delay, manually operated, manipulations due to long transaction cycle, minimal transparency, therefore, general lack of confidence in the system. These problems were worldwide and needed solution. Thus, CSCS was established to speed up the delivery system of the Capital Market and so far these problems have been drastically reduced. The CSCS has also established a Desk for phone-in and obtain on the spot his/her stock balances or stock position. This provides further transparency on the part

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of all players, Kizito (1999). The adoption of the Automated Trading System (ATS) to replace the outdated call-over trading system from April 27, 1999 is another recent development (The cal 1-over system is similar to an organized market where goods are brought and sold by auction). Since the adoption of ATS, the NSE has been operating ~n ATS, with dealers trading through a network of computers connected .to a server. The ATS has facility for remote trading and surveillance. ·According to Kizito (1999), the improved trading activity in 1999 was in part due to the successful transition of the Exchange from the manual call-over Trading System to the Automated Trading (ATS). According to him, the transition to the ATS raised activity on the Exchange as it encouraged more stockbrokers, especially the Chief Executive Officers of market operators on the basis of the interplay of market forces. In the views of Ekemzie (1989), huge costs associated with the production of share certificates for transaction through the Secondary Market has been significantly reduced. Before CSCS, a single transaction on a certificate led to the cancel 1ation of the allotments made. This is no longer so since few shareholders request for certificates. Indeed, of the 660,000 shareholders who use CSCS system now, only 2,200 shareholders have requested for certificate to date and amalgamation of several accounts for a shareholder on the register · leading to reduction of cost to the company. Also, status (tax holidays) for five (5) years have been granted indigenous quoted companies to enable them recoup cost of quotation. Some critics argue that a market cannot be said to exist in the Capital Market because the demand and supply market forces were not allowed to operate ft-eely. But in the course of Deregulation of the Capital Market SEC has been stripped of its major functions: pricing of securities and allotment of shares and has been transferred to the issuing houses, which is now guided by the market forces of demand and supply. Goody (1999) states that Deregulation has improved the competitiveness of the market, in addition to making it more investor friendly. However, despite the advantages of deregulation to the Nigerian Stock Market, some measures of watchfulness and effectiveness has to be taken to guide against the loopholes for efficient realization of the goal. According to. Chilver (1982) when Capital Market is liberalized, deregulation induces a shift in desired foreign Portfolios towards the home market and either asset prices should rise or interest rates fall. In other words, the home currency should begin to appreciate. While this last has happened, high interest rates also come in the wake of market liberalisation. The author explained further that, this is so because Economic actors at home may pull back from the local market in a

r


285

dynamic process. Authorities might well tighten monetary policy in an attempt to keep the current account deficit under control. In the Latin American context, inflation stabilisation has been a complementary objective. But the uncomfortable high-interest-rate-and-strong-currency combination. compatible with the present model, does not provide a solid basis for improved trade performance or investment to support economic growth (Chilver, 1982)). What is worse, continuing trade deficits can lead ultimately to a dynamically unstable situation - characterized by and underestimation of risk in a classic model. At some point, the underestimation reverses, leading to a massive capital outflow, devaluation and stagflation. Mexico in 1994 and East Asia in 1997 are the most striking recent examples of this. The adverse effects of Capital Market liberalization can easily overwhelm whatever small benefit trade deregulation may bring. Chilver (1982) also argued that, in an atiicle to leading economics journal, two development economists have contended that while trade liberalization in developing countries could yield some benefits, these benefits could well be offset by concomitant Capital Market liberalization. The simultaneous liberalization. associated with high interest rates and a strong home currency, may adversely affect productivity growth and income distribution. Oladele (1991) states that, efforts at deregulating the Nigerian economy dated back to the Shagari administration when the General license was introduced to free trade from import licensing restraint. ln 1983 after the misadministration of the import license based on the debt if incurred, an interim tariff review led to a marked reduction in the level of tariff rates in the country the Nigerian naira was depreciated in 1985 and the country took step to liberalise price and production decisions in 1986. By this structural Adjustment programme (SAP) was introduced. The removal of price control on the onset of SAP freed many companies which weighed down by the price control. One promise of SAP is to free the economy from strangle-hold of regulations. Among the targets of the process of deregulating the economy was import licensing, tariff structure. Other targets of deregulation were foreign exchange control, the interest rates in the banking system and price control. A gradual deregulation of interest rates has been embarked upon since the middle of 1987, while government subsidy to many public corporations have either been withdra\\TI or seriously curtailed. In order to ease the burden of the country's external debt, several negotiations aimed at rescheduling such debts had been carried out. Deregulation of the Nigerian economy commenced in 1993. For more than a decade and half, Nigeria was traumatized so severally by

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military dictatorship. With the advent of democracy, the political landscape is now relatively peaceful'and most eager to regain the trust o( all her friends and business partners . Nze (200 l) sees the return of the law respect for human rights, transparency and consistency of government policies a skewed in favour of the private sector-led economy by already boosting Foreign Direct Investment (FDI) The basic aim of deregulation is to eliminate inefficiency in pricing and production decision_ In principle, short-run adjustment costs (e g reduced output and rising uner:nplo~ment) accompany a switch from regulation to deregulation. Oladele ( 1991) argued that ultimately, a complete re-orientation of the -economy is usually expected following a deregulatory process. However, a lop-sided gTO\\th structure could similarly accompany a process of deregulation as ec0nomic agents tend to concentrate more on only those activities considered commercially profitable. As a result, occasional market interYentions may not only be necessary but also desirable to check excesses on the part of market participants. The deregulation frequency of such interYention \\in however depends on how a liberalized economy system has been practiced, the degree of market dynamism, as well as the efficiency of policy packages. Nweze (2002) agrees with Oladele (l 991) that a lop-sided growth structure could similarity accompany a process of deregulation in his study, '·How deregulation spurs gro\\th. Balls, examined the relationship between product market regulation and capital spending. The result demonstrates that a number of measures of regulation- in particular barriers to entry and e:\.1ent of public O\mership are negatively related to 1mestment. According to him, the regulating reforms, in particular those that liberalize entry are likely to spur investment; tight regulation of product markets and restricts inYestment. The analysis of the study demonstrates a significantly positive impact of deregulation on investment in the transport, communications, and utility industries; it is robust to various controls for sector reform is liberalization of entry into markets. A reduction in entry barriers leads to a reduction in the markup of polices oYer marginal costs, and reduction in entry barriers leads to a reduction in the markup of polices over marginal costs and reduction in the penalty for expanding the capital stock and production. HoweYer, priYatization doesn't appear to affect investment significantly. PriYatization may lead to more profitable opportunities for priYate companies, but nationalized companies may over-inYest, either reflecting the pressure of politicians, or because managers of public enterprises are not constrained by the discipline imposed by financial markets

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The researcher show that the effect of deregulation on investment _depends on the extent of the deregulatory effort and on the initial level of regulation, a more decisive reform is associated with a greater marginal increase in investment. Moreover, liberalization in a more deregulated industry has a bigger impact on investment than liberalization in a highly regulated industry. Disproving a number of cited studies which tout the benefit of economic openness, Chilver (1982) has found that global deregulation of trade and Capital Markets far from successfully reducing poverty and inequality, actually harms the poor instead. According to him, trade in a more deregulated environment raises the share of the poor. The short-term effects on the income share of the poor (are) not offset by faster income growth in the long run. The results indicate that global deregulation has no measurable, robust impact on growth rates. Thus, there does not appear to be a trade-off between adverse affects in the Short-run and long-run benefits for the poor. In summary Oladele (1991) said deregulation is a policy focus which cannot only be operated in any area of economic management but which has been held out by its proponents as technically superior to any policy of control and protection, being built on the principle of a free wheeling economic system, jt proposes that naturaJ forces are more efficient than man-made efforts at beneficial resource allocation. On this strength, the study recommends that deregulation should be guided/ supported by Government effort to move the Capital Market towards the achievement of its objectives. Appropriate policies should be formulated to enhance the development of a healthy market for securities. These policies should be aimed at increasing the activities of Unit Trust, Investment Trusts and Trust Funds, with a view to further developing the speculative culture of the Nigerian Stock Market. There should be curtailment of deficit finance spending. Public spending should also be geared towards capital expenditure in the annual budget to improve growth and development of the economy. The budget should consolidate arrangement for private sector led economy. Official policies should be directed to diversifying the economy from oil dependent to agro dependent economy to improve on Foreign Reserve and help balance the budget. The laws that are governing the market operations e.g. listing requirements, should be fmlher reviewed.

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REFERENCE Ahmed, A (1992) Financing Public Projects_Through the Nigerian Capital Market. CBN Bullion, Vol. 16, No.2. Alile, H. I. and Anao, R. (1986) The Nigerian Stock Market in Operation, Lagos, Nigeria: Jeromeliaho & Association Ltd press. Alile, H. I. and lyare, 0. (1992) Pricing of Securities and Replacement Cost under Deregulation. Ikeja-Lagos, Nigeria: Publisher, the Nigerian Stock Exchange African Finance Ltd. Anyafo, AM. 0 . (1999) Nigerian Financial Market and Institutions. University of Nigeria, Enugu, Nigeria: Banking and Finance Publishing. Avwokeni, A J. (2003) Practical Research Methodology. Port Harcourt, Nigeria: Unicampus Tutorial Services. Central Bank of Nigeria (1998) CBN Brief Central Bank of Nigeria (2001) Statistical Bulletin, Vol. 12. Central Bank of Nigeria (1992) Statistical Bulletin vol. 3, No I. June. Central Bank of Nigeria (2002); Annual Report and Statement of Accounts. Chilver, J. (1982) Investing: A student- Center Approach. London: Macmillan press Ltd. Ekemzie, P. C. (1989) An Empirical Appraisal of the Recent Revelation of Common Shares of Quoted Banks. Unpublished B.Sc. project of the University of Port Harcourt, Nigeria. Fubara, B. A (1998) Project Planning and Evaluation (A Synthesis Centre for Corporate Policy and Strategy Research) . Port Harcourt, Nigeria. Goody, I. (1999) Globalisation and the Capital Market in the Next Millennium, Nigeria: The Nigeria Stock Market Annual.

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Kizito, N. et al (1999) Globalization and the Capital Market in the Next Millennium, Nigeria: The Nigerian Stock Exchange Annual. '

Nasir, A E. (2002) Privatization, competition and Anti'-Trust, Unpublished Workshop Paper Presented in Port Harcourt, Nigerfa. National Council on privatization (2001) Privatisation Handbook. Lagos, Nigeria: Longman. 3rd Edition. Nigerian Stock Exchange (19984 - 2001); Annual Report and Statement of Accounts Nnabue, U. S. F (1993) Democratization, Law Making, Deregulated Economy, and the Capital Market in the Present Dispensation Unpublished Seminar paper presented at NSE, Owerri .. Nweze, I. E. (2002) The Capital Market and Economic Growth of Developing Countries, Evidence from Nigeria. Unpublished B.Sc. project of the University of Port Harcourt, Nigeria. Nze, 0 . (2001) Investment in the Nigerian Stock Exchange: Gains and Modalities of Stock Market Quotation. Workshop Paper Presented at Nigerian Stock Exchange Owerri. Oladele, 0. (1991) Challenges of Nigeria's Economic Reform. Ibadan, Nigeria: Foundation publication. Oparaji, V. 0. (1995) Government Regulations : Effects on the Performance of the Capital Market. Unpublished B.Sc. Project of the University of Port Harcourt, Nigeria Osondu, A (2001) Citizens Meaningful Participation in the On-going Federal Government Participation Exercise. Workshop Paper Presented in Owerri: The Nigerian Stock Exchange, Port Harcourt and Allbond Investments Ltd. · SEC Quarterly Publications March, 1995. Stock Exchange handbook March, 1995.