FINANCIAL SECTOR DEVELOPMENT AND STOCK MARKET PERFORMANCES IN NIGERIA: 1980-2023

1.1 Background to the Study

As the backbone that facilitates investments, resource mobilisation, and wealth creation, the financial sector is an essential component in the economic development of any nation. It plays a key part in the country's overall economic development. Since 1980, the financial industry in Nigeria has seen tremendous change, which is a reflection of the country's shifting political and economic situation. During the course of the last four decades, Nigeria has undergone a number of different financial reforms, structural changes, and policy shifts with the intention of strengthening financial intermediation, increasing efficiency, and stimulating the growth of capital markets. The expansion of Nigeria's financial sector, in particular the stock market, has been a focus point in discussions regarding the distribution of wealth and the maintenance of sustainable economic growth. However, the relationship between the growth of the financial sector and the success of the stock market has continued to be a topic of discussion and investigation within the academic community. At the beginning of the 1980s, commercial banks were the dominant players in Nigeria's financial sector. These banks were also the industry leaders when it came to the distribution of credit to important sectors of the economy. In its early days, the Nigerian Stock Exchange, which is now known as the Nigerian Exchange Group, was a very underdeveloped market. It included a small number of publicly traded businesses and a restricted level of participation from both institutional and retail investors. The introduction of the structural adjustment program (SAP) in 1986 was a pivotal moment since it liberalised the financial system and encouraged private sector engagement in the capital market. This was a crucial turning point. According to Kolapo and Adaramola (2012), the liberalisation of the currency rate and the deregulation of interest rates led to the creation of an atmosphere that was conducive to the expansion of the international stock market.

With the founding of the Securities and Exchange Commission (SEC) and reforms aimed at boosting transparency and governance within the capital markets, the decade of the 1990s witnessed a further deepening of the financial sector for the first time in history. Despite the fact that these reforms contributed to a rise in market capitalisation and listings, the industry continued to struggle with regulatory inefficiencies and economic instability. The consolidation of the banking sector and the influx of foreign direct investment (FDI) that followed the return of the country to democratic governance were the primary factors that drove the stock market boom that Nigeria saw at the beginning of the 2000s (Mamudu & Gayovwi, 2020).

The global financial crisis of 2008, on the other hand, brought to light vulnerabilities in Nigeria's financial system, which led to a significant decrease in the capitalisation of the stock market and a subsequent loss of trust among investors. These post-crisis measures included stricter regulation, improvements in corporate governance, and the introduction of new financial instruments. The overarching goal of these reforms was to stabilise the financial sector and improve the performance of the stock market. In recent years, technical improvements such as online trading platforms have enhanced market accessibility. Additionally, the expansion of financial instruments such as bonds and derivatives has extended investment opportunities (Ngare et al., 2014). Both of these factors have contributed to the expansion of market accessibility. Despite these progressions, the relationship between the development of the financial sector and the performance of the stock market in Nigeria continues to be a complicated one. Challenges such as political instability, corruption, and regulatory inefficiencies continue to impede the full realisation of this potential (Nzotta, 2004). Empirical evidence demonstrates that a well-functioning financial sector has the capacity to stimulate growth in the stock market and expansion of the economy. In addition, the COVID-19 epidemic brought to light the necessity of investing in more robust financial systems. This was due to the fact that stock markets all over the world, including Nigeria's, suffered unprecedented levels of volatility.

The objective of this investigation is to investigate the correlation between the performance of the Nigerian stock market and the development of the financial sector from 1980 to 2023. This research endeavours to provide insights into the extent to which the development of the financial sector has influenced the performance of the stock market over the course of time by analysing important variables such as market capitalisation, liquidity, financial depth, and the involvement of financial intermediaries.

1.2 Statement of the Problem

Despite the financial reforms and growth in Nigeria’s stock market over the past four decades, the correlation between financial sector development and stock market performance remains inconsistent. There is evidence that while the financial sector has grown in terms of financial depth, credit availability, and market capitalization, the stock market’s contribution to overall economic growth has fluctuated (Hyacinth et al., 2023). Moreover, Nigeria’s financial sector faces persistent challenges, including regulatory inefficiencies, political instability, and economic volatility, which impact stock market performance. This study aims to address the gap in understanding how these factors have influenced the stock market over time and whether financial sector development has resulted in sustainable improvements in stock market performance in Nigeria.

1.3 Research Questions

1. How has financial sector development influenced stock market performance in Nigeria between 1980 and 2023?

2. What are the key challenges affecting the relationship between financial sector growth and stock market performance in Nigeria?

3. To what extent has financial reform contributed to stock market growth in Nigeria over the study period?

1.4 Objectives of the Study

1. To analyse the relationship between financial sector development and stock market performance in Nigeria from 1980 to 2023.

2. To identify the challenges hindering the effective impact of financial sector development on stock market performance.

3. To evaluate the impact of financial reforms on the growth of Nigeria’s stock market during the period under review.

1.5 Research Hypotheses

Ha1: There is a positive relationship between financial sector development and stock market performance in Nigeria.

Ha2: Financial sector inefficiencies negatively impact stock market performance in Nigeria.

Ha3: Financial reforms have significantly contributed to stock market growth in Nigeria.

1.6 Significance of the Study

This study is significant for policymakers, financial analysts, and investors seeking to understand the dynamics between financial sector development and stock market performance in Nigeria. It contributes to the existing body of knowledge by providing empirical evidence on the long-term trends and challenges affecting Nigeria’s financial markets. The findings could inform future financial reforms and policies aimed at improving market efficiency, transparency, and overall economic development. Additionally, this study provides insights into how financial intermediaries can better mobilize resources for productive investments, thereby enhancing stock market performance.

1.7 Scope and Delimitation of the Study

The study covers the period from 1980 to 2023, focusing on the development of Nigeria’s financial sector and its impact on stock market performance. The scope includes an analysis of key financial indicators such as market capitalization, liquidity, and credit availability, as well as the role of financial reforms and regulatory changes. The study is limited by the availability of data and the challenges of measuring the informal financial sector’s impact on the stock market.

1.8 Definition of Key Terms

Financial Sector Development: The growth and expansion of financial institutions and markets, including banks, non-bank financial institutions, and capital markets, aimed at improving financial intermediation.

Stock Market Performance: The measurement of how well the stock market is doing, often evaluated through indicators such as market capitalization, trading volumes, and stock price indices.

Market Capitalization: The total value of a company's shares of stock, calculated by multiplying the share price by the number of outstanding shares.

Financial Reforms: Changes in financial policies and regulations aimed at improving the efficiency, transparency, and functioning of the financial system.