1.1 BACKGROUND OF THE SUDY
One of the cardinal economic objectives of the developing countries is to achieve high economic growth that will lead to rapid economic development and reduce poverty. Economic growth means a sustained increase in per capita national output or Net national product over a long period of time. This implies the ability of an economy to increase the production of goods and services with the stock of capital and other factors of production available within the economy. It is therefore assumed that a high level of capital accumulation, with the right combination of other factors of production will bring about higher out-put growth. Economic growth has been theoretically and empirically established to be dependent on capital accumulation or investment.
For government to achieve its desired objective of high economic growth and rapid development, it must pursue policies that will increase both the public and private investments. Such investments lead to industrialization. Industrialization is described as the methods used to increase productivity. It is a system by which a society (a nation) gets its wealth through industries and machinery. If a country industrializes, it develops a lot of industries, and this will promote economic growth and development.
The early stages of industrialization require systematic policy measures to steer resources into the productive process. It is a known fact that the investments that promote economic growth and development requires long term funding, far longer than the duration which most savers are willing to commit their funds. Hence, there is need for long term supply of fund for industrialization. This vacuum is filled by the activities in the capital market.
Capital market is a collection of financial institutions that are set up for granting medium and long-term loans. It is a market for government securities; for corporate bonds; for the mobilization and utilization of long-term funds for development. It is the long-term end of the financial system. In this market, investors provide long term funds in exchange for long-term financial assets offered by borrowers. The market has both the new issues securities market (i.e. Primary Market) and already existing securities market (the Secondary Market). Such securities might be raised in an organized market such as the Stock Exchange. In this sense, it may involve consortium underwriting, syndicated loans and project financing. Thus, it is a mechanism whereby economic units that are desirous to invest their surplus funds, interact directly or through financial intermediaries with those who want to procure funds for their businesses.
More so, the capital market synchronize the divergent preferences for portfolio managers and financial institutions while providing avenues for savers to invest when the need arises through the secondary market, without affecting the operations of the firms which their savings had earlier financed. In other words, through the secondary market, the capital market converts short term investment to long term or perpetual investments are enlarged and economic growth accelerated.
The capital market is therefore very important to any economy because, it encourages savings and real investment in any healthy economic environment. Through the market, aggregate savings are channeled into real investment that increases the capital stock and therefore the economic growth of the country.
1.2 STATEMENT OF PROBLEM