Topic: MONEY MARKET AND CAPITAL MARKET AS CHANNELS TO FINANCIAL INTERMEDIATION IN THE GROWTH OF THE NIGERIAN ECONOMY.

Chapter One

INTRODUCTION

1.1 Background of the Study

Finance has been identified as the underlying requirement for input factor in economic development and also regarded as an engine of growth in any economy (Onoh, 2002). In an economy like ours which is in a hurry to develop despite serious constraints, much attention is therefore placed on the financial system and its components for the mobilization of funds for economic growth (Ogiriki&Andabai, 2014).The economic agents that are responsible for such transfers are called financial intermediaries and the process through which it is done is called financial intermediation (Umoh, 2005). Ogiriki&Andabai(2014) pointed out that financial intermediaries have become an engine of growth and development by the process of financial intermediation. Okereke (2005) stressed that; channeling of funds from surplus to deficit units of the economy will encourage productive innovation even though it is also risky. The financial system plays a key role as it makes savers’ funds more liquid, while it invests a portion of the funds into illiquid long-term investments. Furthermore, Levine (1997; 2005) explains that economic growth is closely linked to the liquidity provision function of the financial system. The link arises because some high return projects require a long-term commitment of capital, but savers do not like to relinquish control of their savings for long periods. As one of the empirical evidence linking liquidity provision and economic growth, Levine (2005) noted that isolating this liquidity function from the other financial functions performed by banks, however, has proven prohibitively difficult. Nzotta (2004) posited that, the banking sector is the dominant sector in the Nigerian financial service industry. He also described it as the most vibrant component and whatever difficulties it passes through affects the entire economy greatly. Generally, activities of the deposit money banks impact on the soundness and stability of the financial system hence the special attention accorded them by the regulatory authorities (Umoh, 2005)The capital market has been identified as an institution that contributes to the socio-economic growth and development of emerging and developed economies (Donwa and Odia, 2010). This is made possible through some of the vital roles played such as channeling resources, promoting reforms to modernize the financial sectors, financial intermediation capacity to link deficit to the surplus sector of the economy ,and a veritable tool in the mobilization and allocation of savings among competitive uses which are critical to the growth and efficiency of the economy. It helps to channel capital or long-term resources to firms with relatively high and increasing productivity thus enhancing economic expansion and growth (Alile, 1997). Okoye, Nwisienyi and Eze (2013) posit that as a result of the desire of the federal government to ensure a rapid growth in the industrial sector, the SEC decree No 71 of 1979 was promulgated which established the SEC to regulate the activities of the Nigerian capital market with the activities of SEC the Nigerian capital market has grown considerably over the years, market capitalization has grown from 1.6 billion in 1980, 1.3 trillion in 2003, 5.1 trillion 2006 and currently 6.9 trillion. According to Li, Iscan and Xu (2007), stock markets arenotoriously sensitive to changes inmonetary policy. But this sensitivity mayvary across different economies. On theother hand, Rigobon and Sack (2001) upholdthat movements in the stock market can have significant impact on macro economy and are therefore likely to be an important factor in the determination of monetary policy. Accordingly, monetary policy could be expressed as the process by which the monetary authority of a country controls the supply of money. The official goals usually include relatively stable prices and low unemployment level. In the words of Okpara (2010), monetary policy is a measure designed to influence the availability, volume and direction of money and credits to achieve the desired economic objectives. Actually, monetary policy attempts to achieve a set of objectives that are expressed in terms of macroeconomic variables, such as inflation, real output and unemployment (Abaenewe and Ndugbu, 2012). The Nigerian capital market has continued to play great role since deregulation in mobilizing money to the borrowers who are mostly quoted industries.

1.2 Statement of Problem

The Nigerian financial system comprises of various institutions, markets and operations that are in the business of providing financial services. These institutions can be broadly categorized into money and capital markets while money market is a market in which short term financial instrument are traded, the capital market on the other hand deals with long term transactions. The major players in the money market are the financial institutions The intermediation role of financial institutions such as banks ensures the mobilization of idle funds from the surplus units to the deficit sector. Just like the money market, the capital market is a major channel for mobilizing long-term funds. The main institutions are the Securities and Exchange Commission (SEC) which is the apex regulatory body, the Nigerian Stock Exchange (NSE), the issues houses, stock broking firms and the registrars, (Olofin and Udoma, 2008). However, the capital market is not void of problems: the limited numbers of available instruments traded in the market were discriminated in favour of large firms; the problems of unclaimed dividends among others have been able to hinder or draw back the swift/ function of the capital market in Nigeria. Also, considering the underdeveloped state of the Nigerian Stock Exchange, what could be done to position it strongly as its western counter parts Based on the above-identified problems, this study will therefore bring to fore the money market and capital market channels to financial intermediation in the growth of the Nigeria economy..

1.3 Aim and Objectives of the Study

The main aim of this study is to analyzemoney and capital market channels to financial intermediation in Nigeria. The specific objectives are; 1. To ascertain the role of the money market and capital market towards the growth of the Nigerian economy . 2. To examine whether the establishment of capital market in Nigeria is justifiable. 3. To identify the causes of the recent Nigeria capital market melt down .

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