Stimulating Economic Growth Through the Development of Efficient Capital Markets

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The role of financial intermediation in the economic growth process was recognised as far back as the 17th century when Walter Bagehot, in his classic Lombard Street, argued that it was England’s efficient capital markets that made the industrial revolution possible. Centuries later, modern day economists hold largely the same view that access to investment capital, through well functioning financial markets, is crucial for growth and development, particularly in capital-scarce developing countries. They maintain that stock markets facilitate the pricing and diversification of risk, aid in the price-discovery process of financial assets and enhance the operations of the domestic financial system. By mobilising savings from surplus pending economic units to the deficit spending units, a capital market provides avenues for effective and optimal utilisation of funds for long-term investment purposes. In addition, capital markets encourage the inflow of foreign capital by creating a platform for foreign companies or investors to invest in domestic securities; provide needed seed money for capital development; and act as a reliable medium for broadening the ownership base of family-owned and dominated firms. Also, increasing evidence suggests a strong positive relationship between the size of an economy and the size of its financial market. In other words, Stock Exchanges the world over are used as a barometer of the economy in which they are domiciled. According to Taba Peterside, head, Listings Sales and Retention at the Nigerian Stock Exchange (NSE), local and international investors follow the Exchange’s major index as it reflects the overall confidence in all sectors of the economy. Therefore, as Nigeria seeks to join the ranks of the 20 most developed economies by year 2020 (and toppling South Africa as the largest economy in Africa), there is need for the nation’s capital market to evolve to a higher level of sophistication and depth to provide additional...
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