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PROJECT TOPIC: AN EVALUATION OF THE CONTRIBUTION OF CAPITAL MARKET TO DEVELOPMENT FINANCE IN NIGERIA

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CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND TO THE STUDY

The capital market is a subset of the financial system that serves as the engine of growth in modern economies. It is that part of financial system that is involved in providing long-term funds for productive use. The role of long-term capital in economic development of a nation cannot be over emphasized. Most economic managers recognize that a well organized capital market is crucial for mobilizing both domestic and international capital. In many developing countries like Nigeria, however, capital has been a major constraint in economic development. The domestic capital has so far fallen short of expectations inspite0 of great potentials for financing development.  These countries have thus resorted to external borrowing that has brought those very excruciating foreign debt problems and inability to raise additional funds from international financial markets. Thus, the capital market provides option for the construction of bridges, schools, factories and equipments. This compares with the money market, which represents the short-end of financial system that provides facilities for claims and obligations whose maturity vary one day to one year. The capital market provides government at all levels an effective way of financing public projects. It has been shown that internally generated revenue and statutory allocation are not sufficient to finance recurrent and capital expenditures.

This perhaps explains the high incidence of abandoned projects in Nigeria. There are many advantages that accrue to Federal, State and Local Governments that patronize the Capital Market. First, more capital projects can be completed as more resources are available for government capital expenditures. Secondly, there will be better accountability for use of funds as financial report must be produced regularly on projects funded by capital market. Thirdly, raising funds from the capital market releases government subventions for socials projects. Finally, the tendency to spend money on “white elephant projects” will be curtailed as only economically viable projects could be financed from the capital market.

1.2 STATEMENT OF THE PROBLEM

Many factors affect the development of the capital market which tends to have a resultant effect on the finance of development in the Nigerian economy.

The identified problems are as follows:

1) Inadequate implementation of the monetary, fiscal and debt management policies which have significant impact on the cost and availability of credit in the market.

2) Lack of long-term capital which invariably discourages investment in long-term projects and thereby impedes economic development.

3) Inability of Government to mobilize long-term capital for economic development of the country.

4) Inadequate development of both primary and secondary markets, which helps companies raise capital in the form of initial public offerings or by issuing seasoned stocks and bonds to investors.

     In the light of the above, financing economic development cannot but respect the truth in the dictum that “investment is equal to savings”. Though engineering the right environment for the investment required for development is necessary condition for economic development, it is not by itself a sufficient condition. The right environment must also be created for the formation and flow of savings required funding such investments. 


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