Financial Sector Liberalization and Capital Market Development in Nigeria

Financial Sector Liberalization and Capital Market Development in Nigeria


Financial Sector Liberalization and Capital Market Development in Nigeria


Abstract of Financial Sector Liberalization and Capital Market Development in Nigeria

This Research study was carried out to find the link between financial sector liberalization and capital market Development. As part of the Structural Adjustment Programme (SAP) of 1986, the Nigerian Government initiated a large scale restructuring


Of the financial sector and the liberalization of the regulations concerning financial institutions and markets. This was justified on the basis of existing market failures which

arose from externalities and lack of information

Using the econometric techniques, we found, that financial liberalization increased the real deposit ratio and also will lead to a substitution into financial asset resulting in a greater supply credit to finance real investment for capital market development and economic growth. Consequently, we recommend that for macroeconomic stability, efficiency and proper development of the financial system, direct control should be discouraged while indirect control should be encouraged through the market mechanism.


Chapter One of Financial Sector Liberalization and Capital Market Development in Nigeria



Just like other African Economies, Nigeria’s financial sector is underdeveloped and unorganized. It is characterized by dualism, market segmentation and spatial fragmentation [Iyoha, 2002]. Financial sector facilitates the conduct of trade transactions, the efficient use of financial resources, mobilization of savings and risk taking which are central to sustained Economic Growth and Development.

According to T.W. Oshikoya and Osita Ogbu [1995], financial liberalization in several African countries has been implemented largely through Structural Adjustment Programs. In Nigeria, until the adoption of structural adjustment program in 1986, financial repression and bureaucratic control of interest rates were the order of the day.

Economic Development creates demands for particular types of financial arrangements and the financial system responds automatically to these demands. Finance, is argued to act as a catalyst in the process of Development but if repressed could become fetters or obstacles to the Growth process [Ikhide, 1997].

Even though the money and capital markets in Nigeria are not as deep as desirable, a start seems to have been made in the late 1980s and early 1990s to develop a more robust and balanced financial structure that would improve the ability of the domestic financial system to mobilize savings and contribute to self sustained Economic Growth [Iyoha, 2002].

The objectives of the liberalization are to build more efficient, robust and deeper financial systems, which can support the growth of private sector enterprise. Efficiency entails two components; which are improved credit allocation and more or higher quality financial services for a given level of inputs [Brown Bridge and Gayi, 2001].

The role played by the financial sector is an Economy can be important in determining Economic Growth. A growing empirical literature demonstrates that the Development of the financial system has positive effects on the long run rate of Economic Growth and the volume and efficiency of investment [Fry, 1995 Philip Arestis et al, 2002], through the removal of the elements of financial repression, particularly controlled interest rates, financial sector liberalization is expected to lead to higher nominal and real interest rate [Emenuga, 2001].

The capital market is divided into two segments: the primary market where companies’ shares are issued for the first time before being quoted on the stock exchange and secondary market where is trading is done in existing stocks. The capital market has served as a source of long- term fund to finance investment in the private sector of the Nigerian Economy.

The liberalization of the financial sector involved liberalization of interest rates, promotion of market based system of credit allocation and enhancing completion and efficiency of the regulatory and supervisory framework [Ikhide, 1997]


This study attempts to examine the extent to which the liberalization policy has resolve the problems existing in the system which are direct controls, the pervasive Government intervention in the financial system and the resultant stifling of competition and resource misallocation.

This study attempts to find out the extent to which the liberalization policy has resolve the problem of externalities, which relates to the distortions caused by high and volatile inflation.

This study is concerned with the impact of the liberalization policy on the information problems, which is in the form of informational asymmetries between the suppliers and uses of financial services.


This study will undertake an analysis of the financial liberalization policy with a view to identifying the reason that led to the adoption of the policy. The focus will be on measuring the influence and effects of financial sector liberalization on some capital market Development indicators as far as the availability of Data permits. The period of the study is from 1970- 2004 in order to carry out a trend analysis on the before the liberalization period [1970 – 1985] and after the liberalization [1986 – 2004].


Financial sector reforms in Nigeria has embraced a number of policies designed to increase the size, improve the efficiency and raised the diversity of the financial system. This goal is achieved through financial liberalization which is viewed as the process of moving towards market- determined prices on all classes of financial products, characterized by symmetric entry and exit conditions to all participants increasing internationalization as represented by the opening up of domestic markets to international competition [Ikhide, Yinusa, 1998].

The liberalization of financial institutions and markets is an improvement in financial intermediation, which is considered a necessary condition for stimulating investment, raising productive capacity and fostering Economic Growth and Development.


The general objective of this study is to determine the extent to which financial liberalization have led to the development of the capital market in Nigeria. To achieve this general objective, the following specific objectives will be examined.

1. To provide a comprehensive insight into the structure of the capital market in Nigeria.

2. To examine the impacts of liberalization on the Development of the capital market.

3. To access the impact of reform policies like debt conversion programs.


This study will be based on the following Research Questions:

1. Has the financial sector liberalization measures been effective in achieveing its stated objectives?

2. Has the financial sector liberalization measures been able to solve the repressed nature of the Nigerian capital market?

3. Has financial sector liberalization measures improved the efficiency in resource allocation and quality of investment in Nigeria?


Ho: financial sector liberalization does not have a positive impact on capital market


Hi:  financial sector liberalization does have a positive impact on capital market                    Development.

Ho: capital market development does not have a positive impact on Economic Growth.

Hi:  capital market developments do have a positive impact on Economic Growth.


The study will adopt Econometrics techniques to estimate the Models. We will use the Ordinary Least Squares (OLS) method of estimation and the Cochrane- orcutt correction method.


The Data used for this study are obtained essentially from the publication Central Bank of Nigeria statistical bulletin and Central Bank of Nigeria Annual Statement of Accounts. Others may be obtained from Nigeria Stock Exchange and other International Economic Journals.


The final report will be organized into five chapters.

Chapter 1     Introduction.

Chapter 2     Literature Review

Chapter 3.   Theoretical framework and Research Methodology for the Study.

Chapter 4.  Data Analysis and Interpretation Empirical Result.

Chapter 5.    Summary, Policy Recommendation and Conclusion.