CHAPTER
ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Foreign
Exchange is viewed as a medium to encourage savings, help channel savings into
productive investment, and improve the efficient and productivity of
investment. The emphasis on the growth of foreign exchanges for domestics‘
resource mobilization has also been strengthened by the need to attract foreign
capital in non-debt creating forms. Abu (2009)
A
viable equity market can serve to make the financial system more competitive
and efficient. Without equity markets, companies have to rely on internal
finance through retained earnings. Large and well established enterprises are
in a privileged position because they can make investment from retained
earnings and bank borrowings, while new companies do not have easy access to
finance. Without being subjected to the scrutiny of the foreign exchange, big
firms get bigger, and for the emerging smaller companies, retained earnings and
fresh cash injections from the controlling
shareholders may not be able to keep pace with the needs for more equity
financing which only an organized market place could provide. Adam (2012)
The corporate sector would also be strengthened by the
requirements of equity markets for the development of widely acceptable
accounting standards, disclosure of regular, adequate, and reliable
information. While closely held companies can camouflage poor investment
decisions and low profitability, at least for a while, public held companies
cannot afford this luxury. The availability of reliable information would help
investors make compares‘ of the performance and long term prospects of
companies; corporations to make better investment and strategic decisions; and
provide better statistics for economic policy makers. Shobalowu (2016)
Success in capital accumulation and mobilization for
development varies among nations, but it is largely dependent on domestic
savings and inflows of foreign capital. Therefore, to arrest the menace of the
current economic downturn, effort must be geared towards effective resource
mobilization. It is in realization of this that consideration is given to
measure the development of capital market as an institution for the
mobilization of finance from the surplus sectors to the deficit sectors.
Levine (1991) showed a positive relation between financial Foreign
Exchange management and economic growth by issuing new financial resources to
the firms. The financial Foreign Exchange facilitates higher investments and
the allocation of capital, and indirectly the economic growth. Sometimes
investors avoid investing directly to the companies because they cannot easily
withdraw their money whenever they want. But through the financial foreign
exchange, they can buy and sell stocks quickly with more independence. An
efficient Foreign Exchange contributes to attract more investment by financing
productive projects that lead to economic growth, mobilize domestic savings,
allocate capital efficiently, reduce risk by diversifying, and facilitate
exchange of goods and services (Mishkin 2001; and Caporale et al, 2004).
1.2 STATEMENT OF
THE PROBLEM
There is abundant evidence that most Nigerian businesses lack
medium and long –term capital. The business sector has depended mainly on
short-term financing such as overdrafts to finance even long-term investment.
Based on the maturity matching concept, such financing is risky. All such firms
need to raise an appropriate mix of short- and long-term capital (Demirguc-Kunt
and Levine 1996). Most recent literatures on the Nigeria Capital Market have
recognized the tremendous performance the market has recoded in recent times.
However, the vital role of the capital market in economic growth and
development has not been empirically investigated thereby creating a research
gap in this area. This study is undertaken to examine the contribution of the
capital market in the Nigerian economic growth and development. Aside the
social and institutional factors inhibiting the process of economic development
in Nigeria, the bottleneck created by the deficiency of finance to the economy
constitutes a major setback to its development. As a result, it is necessary to
evaluate the Nigerian capital market.
1.3.0 OBJECTIVES OF
THE STUDY
The broad objective of this study is to examine the effect of
Foreign Exchange Management on the growth process of the Nigerian economy.
However, the specific objectives are as follow:
i. To determine the nature of relationship between Foreign
Exchange management and economic growth.
ii. To determine the causality between Foreign Exchange
management and economic growth.
1.3.1 RESEARCH
QUESTIONS
In the light of the research problems, this study attempts to
answer the following:
i. What is the nature between foreign exchange management and
economic growth?
ii. What is the causality between Foreign Exchange management
and economic growth?
1.3.2 HYPOTHESIS OF
THE STUDY
i. Ho: Foreign exchange management has a negative
relationship with economic growth.
Hi: Foreign exchange management
does not have a negative relationship with economic growth
ii. Ho:
There is no causal relationship between Foreign Exchange management and
economic growths.
Hi: There is causal relationship between Foreign
Exchange management and economic growths.
1.4 SIGNIFICANCE
OF THE STUDY
The study will explore the effectiveness of capital market
instruments on Nigerian economic growth. Though the scope of study will be
limited to the capital market, it is hoped that the exploration of this market
will provide a broad view of the operations of the capital market. It will
contribute to existing literature on the subject matter by investigating
empirically the role, which the capital market plays in the economic growth and
development of the country. The main importance of this study is that it will
provide policy recommendations to policy – makers on ways to improve operations
and activities of the capital market.
1.5 SCOPE OF THE
STUDY
The economy is a large component with lot of diverse and
sometimes complex parts; this research work will only look at a particular part
of the economy (the financial sector). This work will not cover all the facts
that make up the financial sector, but shall focus only on the capital market
and it role as it impacts on the Nigerian economic growth. The empirical
investigation of the role of the capital market on the economic growth in
Nigeria shall be restricted to the period between 1980 and 2010 a period of
thirty (30) years.
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