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The study explores the effects of financial sector liberalization and capital market development in Nigeria. The objective of the study was to determine the extent to which financial sector liberalization led to the development of the capital market in Nigeria. Data used were sourced from the CBN statistical bulletin 2018. Two research questions guided the study. Data collected were analyzed using Ordinary Least Square method. The result revealed that the financial sector liberalization had impact on capital market development in Nigeria which in turn leads to economic growth. Following the findings, it was recommended that there is need to boost the value of transactions in the Nigerian capital market, there is also need to restore confidence to the market by regulatory authorities.

Keyword: capital market, government stock, bond, equity.





Title page     –           –           –           –           –           –           –         –          i

Declaration           –           –           –           –           –          –           –          ii

Certification           –           –           –           –           –           –         –           iii

Dedication           –           –           –           –           –           –          –        iv

Acknowledgement            –           –           –           –           –           –        v

Abstract        –           –           –           –           –           –           –           –          vi

Table of content    –           –           –           –           –           –          –          vii



1.1.  Background to the study  –        –        –        –       –       1

1.2.  Statement of problem   –   –        –        –        –       –       6

1.3.  Research questions –        –        –        –        –         –       7

1.4.  Objectives of the study     –        –        –        –        –       7

1.5.  Research hypotheses           –           –           –           –           –          8

1.6.  Significance of the study  –        –        –        –        –       9

1.6.  Scope and limitations of the study       –        –        –        10

1.7.  Organization of the study –           –           –           –           –          10




2.1.        Conceptual Literature –        –        –        –        –        12

2.1.1.     Financial Liberalization        –        –        –        –        12

2.1.2.     Capital Market  –        –        –        –        –        –        14

2.1.3.     Capital Market and Economic Growth    –        –        24

2.2.        Theoretical Literature- –        –        –        –        –        29

2.2.1.     The McKinnon_Shaw hypothesis (1973)         –        –        29

2.2.2.     Economic growth theories    –           –           –           –           32 The neoclassical growth model (Solos_Swan model of

economic growth)         –           –           –           –           –           32 Harrod_Domar model             –           –           –           –           –        34 Endogenous growth theory    –           –           –           –        35

2.3.        Empirical Literature     –           –           –           –           –           36

2.4.       Theoretical Framework         –        –        –           –           40

2.5.        Gaps in Literature       –         –        –        –        –        41




3.1.  Types and sources of data –        –        –        –        –        42

3.2.   Method of estimation      –        –        –        –        –        42

3.3.   Model specification-        –        –        –        –        –        42

3.4.   Evaluation criteria.        –          –         –        –        –        –        44




4.1. Presentation of results        –        –        –        –        –        47

4.2. Analysis of results    –        –        –        –        –        –        47

4.2. Summary of major findings        –        –        –        –        –        50

4.3. Policy implication of findings-     –           –           –           –           51



5.1. Summary of the finding    –        –        –        –        –        52

5.2. Conclusion    –        –        –        –        –        –        –        53

5.3. Recommendations   –        –        –        –        –        –        54


REFERENCES            –        –        –        –        –        –        56


APPENDICES –  –        –        –        –        –        –        –        58






1.1   Background to the Study

Liberalization, literally, means the “removal of controls. Financial liberalization refers to measures directed at diluting or dismantling regulatory control over the institutional structures, instruments and activities of agents in different segments of the financial sector. These measures can relate to internal or external regulations (Chandrasekhar, 2004).

Financial Liberalization is when restrictions on financial markets and financial institutions are eliminated, or when financial innovations such as subprime mortgage loans are introduced to the financial markets. Financial liberalization has become an important economic policy package in both advanced and advancing countries. Financial liberations and innovations are beneficial to the economy in the long-run because they lead to more efficient financial markets. Financial liberalization serves as a panacea to financial constraints in a financially repressed economy

Financial liberalization gained  attention  in  the  early  1970s  due  to  the  seminal  work  of  McKinnon (1973)   and  Shaw  (1973)  in  which  they  argued  that  liberalization  of  the  financial  sector  will  lead  to  increase  in  savings, encourage  investment  and  induce  economic  growth. Hence, many countries especially  developing  countries  have  embraced  financial   liberalization  as  the  way  forward  for  their  economies.

Financial  liberalization  became  a   useful  and  important  monetary  policy  in  many  countries  following  the  directive  from  the  “Washington  Consensus” or  “Bretton  Woods”. Just like other African economies, Nigeria’s financial sector is underdeveloped and unorganized. It is characterized by dualism, market segmentation and spatial fragmentation [Iyoha and Oriakhi, 2002]. The financial sector of any economy in the world plays a vital role in the development and growth of the economy. The development of this sector determines how it will be able to effectively and efficiently discharge its major role of mobilizing fund from the surplus sector to the deficit sector of the economy.

Oshikoya and Osita [2002] financial liberalization in several African countries has been implemented largely through Structural Adjustment Programmes. In Nigeria, until the adoption of Structural Adjustment Program in 1986, financial repression and bureaucratic control of interest rates were the order of the day. Nigeria, prior to liberalization of the financial sector, had a repressed financial sector in which the government and the Central Bank of Nigeria (CBN), restricted and controlled the activities of the financial sector. However, following the adoption of SAP, Nigeria liberalized her economy in August 1987. This policy initiative commenced with the liberalization of interest rates. Apart from the liberalization of interest rates, the reform also involved promotion of market-based system of credit allocation, enhancing competition, and efficiency of the regulatory and supervisory framework (Jegede and Mokulolu, 2004; Agu et al., 2014). The adoption of this economic package was motivated by the need to proactively put the Nigerian banking industry and the economy at large on the path of global competitiveness.

It is a well acknowledged fact that there exist a positive and significant relationship between capital market development and economic growth and development. The Capital market is a complex institution and mechanism through which funds are pooled, and made available to Business, Governments and Individuals on long-term basis for Development purpose. That is, the surplus funds of the community are channelled to the deficit units in need of additional funds for medium or long-term investments, or for the modernization of the production line or to broaden the capital base to enhance the enterprise’s leverage (Onoh, 2002). Financial regulators like Nigerian stock exchange (NSE) regulate and protect investors against fraud, among other duties.

Capital market increases the proportion of long-term savings (pensions, funeral covers, etc.) that is channelled to long-term investment. Capital market enables contractual savings industry (pension and provident funds, insurance companies, medical aid schemes, collective investment schemes, etc.) to mobilize long-term savings from small individual household and channel them into long-term investments, also the transfer function of current purchasing power, in monetary form, from surplus sectors to deficit sectors in exchange for reimbursing a greater purchasing power in future.

From the foregoing, it is clear that the capital market and its operations are not new in Nigeria. Recently, the sector underwent series of reforms in order to strengthen its performance. Given the fact that the capital market is capable of mobilizing investment fund for the promotion of private enterprise, it must be the case that the inception of such market will help Nigerian economy to grow.  Even though the money and capital markets in Nigeria are not as deep as desirable, a start seems to have been made in the late 1980s and early 1990s to develop a more robust and balanced financial structure that would improve the ability of the domestic financial system to mobilize savings and contribute to self sustained Economic Growth [Iyoha and Oriakhi, 2002].

The Nigerian Capita market has been facing fluctuations, for the price of stocks. This has not proven favourable to investors, in the market. Capital market development translates to economic growth without hindrance. However, the challenge therein lies on how to attain a sustainable capital market development in an emerging economy like Nigeria that work as gate way to a sustainable economic growth and development.

A growing empirical literature demonstrates that the development of the financial system has positive effects on the long run rate of economic growth and the volume and efficiency of investment [Fry, 1995; Arestis, 2002].  Through the removal of the elements of financial repression, particularly controlled interest rates, financial sector liberalization is expected to lead to higher nominal and real interest rate [Emenuga, 1998].

1.2 Statement of Problem

Economic growth in a modern economy hinges on an efficient and effective financial sector that encourages domestic savings and mobilizes capital for productive projects. Absence of effective capital market could leave most productive projects which carry developmental agenda unexploited. Capital market connects the monetary sector with the real sector and therefore facilitates growth in the real sector and economic development.

It is strongly argued that financial liberalization can have strong positive effects on economic performance. However, after the prescribed financial liberalization, the domestic economy has failed to experience impressive performance such as attraction of foreign investment or halt capital flight (Akpan, 2004). Financial liberalization generates tremendous financial booms and busts in the short-run, but these booms and busts have not intensified in the long-run. The debate over the macroeconomic effect of financial liberalization on developing economies remains a controversial issue.

The Nigerian financial sector, like those of many other less developed countries, was highly regulated leading to financial disintermediation which retarded the growth of the economy. Most third world countries (including Nigeria) had in the past used governmental interventions as a tool in allocation of resources. These interventions have been described as not only repressive but a major factor retarding the growth process of the economy. In addition to being harmful to the banking sector whose interest, the liberalization is aimed at protecting. Indeed, the Nigeria growth performance has become worrisome over the last two decades. During this period, growth was sluggish and dismal.

In the light of the above, this study sought to examine the extssent to which liberalization policy has resolve the problems existing in the financial sector of Nigeria.


  • Research Questions

This study will be based on the following Research Questions:

  1. What is the impact of financial sector liberalization on the development of the Nigerian capital market?
  2. What is the impact of financial sector liberalization on the performance of economic growth?

1.4. Objectives of the Study

The general objective of this study was to determine the extent to which financial sector liberalization has led to the development of the capital market in Nigeria. To achieve this general objective, the following specific objectives will be examined.

  1. To examine the impacts of financial sector liberalization on the development of the capital market in Nigeria.
  2. To examine the impact of financial sector liberalization on the performance of economic growth

1.5      Research Hypotheses

  1. H0: Financial sector liberalization has no significant impact on capital

market  development.

H1: Financial sector liberalization has significant impact on capital market    development.

  1. H0: Capital market development has no significant impact on Economic

H1: Capital market development has significant impact on Economic Growth.

1.6 Significance of the Study

This study will be of utmost importance to investors and government because it will provide policy recommendations to the various Nigeria stakeholders taking adequate measures in the economy for rapid growth and industrialization.  It is hoped that the exploration of the Capital market will provide a broad view of the operations of the capital market to investors and government. 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. This study will be of benefit to;

  1. The Academia: members of the academia will find the study relevant as it will also form basis for further research and a reference tool for academic works.
  2. Government: this study will reveal to the government happenings in the capital market. Formulation and implementation of policies based on this findings would ensure growth.
  3. Investors: this study shall also be valuable to the investors especially those who may have research interest as it shall guide their private investment decisions.


1.7 Scope of the Study

This research work is to examine the impact of financial sector liberalization on capital market development in Nigeria. However, the study covered the period of 1986-2017. The choice of the period under review was informed solely by data availability consideration on the variables required for the study. The choice of the period from 1986 up to 2017 is for the period when the Nigerian financial sector has been fully liberalized.

1.8 Organization of the Study

This study is divided into five chapters. Chapter one is introduction which consists of the background to the study, statement of problem, research questions, research  hypotheses,  objectives  of  the study, the  significance  of  the  study,   the scope  and  limitations  of  the  study  and  finally the  organization of the study.

Chapter two deals with the literature review which consists of the conceptual literature, theoretical literature, empirical literature, theoretical framework, gaps in literature.

Chapter three gives the research methodology including techniques of analysis of data, types and sources of data, method of estimation and model specification.

Chapter four is presentation and analysis of results which contains the presentation of results, interpretation of results and summary of major findings.

Chapter five gives the summary, conclusion and recommendations.


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