Promoting the Capital Market for Inclusive Growth
The financial system is the axle on which the wheel of economy revolves, thus the need for an appropriate structuring and stability to drive broad- based economic growth. Over the years the Nigerian financial system has undergone critical reforms which enhanced the landscape and resulted to impressive GDP growth rates over a seven year period (2007-2013) but without a corresponding reduction in unemployment rate which rose to 23.9 per cent in 2012 relative to 13.9 per cent in 2000, with an addition of 1.8 million to the labour pool, according to the Central Bank of Nigeria (CBN). The correlation between GDP growth and employment is dismal.
The anomalous growth pattern is counter inclusive growth and has exacerbated the ‘tragedies of the common’ with a high misery index estimated at 48 per cent. It is distressful to the economy , stunts inter-generational mobility and poses a threat to national security. Inclusive growth is a concept that advances ‘’equitable opportunities for economic participation during economic growth with benefits incurred by every segment of society. It implies direct link between the macroeconomic and microeconomic determinants of the economy and economic growth’’.
The anomaly could be linked to five major factors, 1. Infrastructure deficit, 2. Deficient Foreign Direct Investment, 3. Unharnessed Potential of SMEs, 4. Systemic corruption and, 5. Predominance of a bank-based financial system which is the major focus of this article. Banks contribute to economic development but their traditional predominance in financing economic activities in Nigeria has severe shortcomings. One, they rarely lend to the real sector. Two, they tend to extract more from future profit of firms. Three, their conservative disposition and strategies hinder entrepreneurial and industrial risk-taking necessary for in- novations, crucial to economic growth.
But this could be corrected through a discriminative promotion of a marketbased financial structure typified in the instrumentality of the capital market. The capital market is a web of institutions and mechanisms ( stock exchange, merchant banks, development finance institutions, venture capital firms and other such institutions) through which medium and long-term funds are channelled from surplus to deficit ends for entrepreneurship, innovation, job creation and transfer of outstanding instruments among investors. It is one of the most important factors of economic development suitable for driving growth in developing nations.
In India, the expansion of the capital market has been a major factor for consistent growth in the economy. And to underscore its importance, the Association of Chambers of Commerce in India (ASSOCHAM) had had to collaborate with Price Water Coopers (PwC) to come out with a study paper entitled ‘’Capital Markets-Key to Double Digit Growth’’. Also, the US government in the 18th century, largely financed its development by selling bonds to nations across the world. And till date, the capital market remain the lifeblood of capitalism in the US as companies still turn to the market to finance building of factories, airplanes, trains, ships, and to conduct research and development and such other capital intensive projects.
Research show that industries grow faster in a market-based structure than in bank-based systems . And in countries with developed financial markets, market-based systems yield higher real economic performance. The Nigerian financial system may not be as developed as those of advanced nations but it has undergone critical reforms even as the economy is sophisticated to support a vibrant capital market for a more rapid and inclusive growth. Stock exchanges play a critical role in the growth of capital markets by enabling trades with efficiency, adopting adequate risk management measures and establishing transparent communication channels to benefit stakeholders.
In a report, ‘’ Creating Securities Market in Developing Nations: A New Approach for the Age of Automated Trading’’, Benn Steil noted that ‘’countries with more liquid stock markets enjoy faster growth rates of real per capita GDP over subsequent decades as they increase economy wide mobility of productive resources’’. Also, Mehmet Uzunkuya, in a research report, posit that ‘’market-based financial system optimally allocate capital and enhance economic performance and is superior to the bank-based in processing information in new and uncertain situations involving innovative products and services’’. And Levine (2004) indicate that market-based systems are able to provide tailor made risk management tools as the economy matures and the method to raise capital increases’’.
The incoming government of President-Elect, General Muhammadu Buhari (retd) is expected to provide inspirational and catalytic leadership. We need a new growth model to exit our present growth but no-growth status. It should promote an investment-oriented economy and shift from consumptionled to investment-led growth, with the public sector taking the lead. The incoming government should promote discriminative policies in favour of a market-based financial system and introduce incentives to stimulate investment in securities. As the former Director-General, SEC, Ms Arunmah rightly noted, ‘’the capital market is the one big idea that one needs to focus on today to help move us to the next level. You can create wealth through the capital market because companies are listed and business environment is much easier because infrastructure is funded with medium to long-term finance’’.
The capital market has tremendous potential to drive the agenda of financial inclusion by providing investors with the opportunity for wealth creation. It provides a window for the growth of SMEs through venture capitalism. If companies are incentivized to list on the Exchange and more individuals invest in stocks, wealth of the nation will be more broadly distributed when stocks or other financial assets rise in value. But the caveat is that there be market stability, product and service innovation and creative methods of channelizing small investible funds to the market.
Companies listed on the stock exchange tend to add more value to the economy than the unlisted and they should be recognized as such and be made to enjoy preferential tax treatment and such other creative concessions. There are presently more than 600,000 companies that are registered with the Corporate Affairs Commission (CAC), but the 214 companies listed on the Nigerian Stock Exchange are estimated to pay above 60 per cent of all corporate taxes in Nigeria. To be listed is to be in the public spotlight which connotes transparency, accountability and integrity all of which are key elements of corporate governance , integral in attracting both foreign portfolio investment (FPI) and foreign direct investment (FDI).
Investors prefer companies with sound corporate governance, the reason the Nigerian Stock Exchange (NSE) introduced a Corporate Governance index. The CEO, NSE, Oscar Onyema, had noted, ‘’we would like investors to view companies that are part of the index as the largest companies on the exchange and those willing to take a stance as upholding the highest standards. This will resonate with both local and foreign investors looking for well managed companies.”
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