Linkage Between Capital Market Development and Economic Growth

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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Recent literatures on economic growth asserted that ex-ante development of the financial system facilitate ex-post economic growth (e.g. Rajan and Zingales). In recent time, the link between financial market development and economic growth has received much attention in the literatures (King and Levine 1993, Rajan and Zingales 1998, Calderon and Liu 2002, Sunday E. Ewah and Judey Bassey 2004, T.S. Osinubi 2000). This is not unexpected as the financial market provides the needed finance which serves as the lubricant of the economy. The capital market is an integral part of the financial system that provides efficient delivery mechanism for mobilization and allocation, management and distribution of long-term fund (Sunday O.E. Ewah and Judey Bassey). The capital market is a market for long-term debt and equity securities, where business enterprise and government can raise fund for long-term investments. It is normally divided into two broad categories: the stock market and the bond market (Central Bank of Lesotho Economic Review 2009). According to Tokunbo S. Osinubi (2000), the stock market is reported to perform some functions which promote the growth and development of an economy. It plays a pivotal role in mobilizing idle fund from surplus economic unit and channels such fund into deficit unit for investment in long-term project. The supplier of funds are basically individuals and corporate bodies who subscribe to capital market instrument as a way of adding value to their unused financial resources while the deficit unit i.e. the end users of the fund are government and corporate bodies as individual cannot approach the capital market for fund. Equally, the capital market provides ideal source for corporate bodies and government to pool monies from people and corporate bodies to finance capital intensive project which its internal purse cannot cope with. Akingboungbe (1996) opined that the importance of the capital lies in its financial intermediation capacity to link the laggard sector of the economy with the active sector. According to him, the absence of such capacity robs the economy of investment and production of goods and services for societal advancement. Capital market in any nation exists to provide long-term funds for government and corporate bodies for development purpose. It deals with long-term financial instruments which include equities or stocks, debentures, government bonds and derivatives like future options. In the capital market, the stock in trade is money which is often viewed as the lubricant of the economy and which can be raised through various instruments such as right issues, debt instrument, equity offering as well as through the stock exchange. This is a pointer to the fact that the capital market provides the wherewithal with which the goal of economic growth can be actualized, and equally held the key to economic prosperity of any nation. A virile capital market is capable of assisting a nation to muster financial resources and skills for rapid growth and development. The capital market is viewed as engine of growth in most countries. Empirical research by CBL Economic Review 2009 indicated that the capital market connects monetary sectors with the real sector and therefore facilitates growth in the real sector and economic development. The CBL economic review adduced the following as the fundamental channels through which capital market is connected to economic growth: First, capital markets increase the proportion of long-term savings (pension, funeral savings) that is channeled to long-term investment. Capital market enables contractual savings industry to mobilize long-term savings from small individual households and channel them into long-term investment. It fulfils the transfer of current purchasing power, in monetary forms from surplus sector to deficit sectors, in exchange for reimbursing a great purchasing...
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