BACKGROUND OF THE STUDY
The importance and centrality of the financial system to the growth of any economy is obvious and indisputable. It has been postulated that a well developed financial system performs several critical functions that enhanced the efficiency of their financial intermediation roles with highly reduced costs of information, transaction and monitoring.
Also, it promotes investment by identifying and locating viable business opportunities; helps in mobilizing savings; monitors the performance of managers thereby enabling trading, hedging and diversification of risk in order to facilitate the exchange of goods and services. These functions result in efficient allocation of resources and rapid accumulation of physical and human capital with faster technological process which in turn feed economic growth. The financial market is a sub-set of the financial system where funds from surplus economic units are pooled and made available to deficit units at a cost. The financial market consists of themoneyand the capital markets.
The money market is the market for short term funds with a maturity period of not more than a year. The Capital Market consists of institutions and procedures that provide for transactions in long term financial instruments with a maturity of more than one year. The major instruments that are used in raising funds in the Nigeria Capital Market include Debts – Government bonds (Federal, State and Local Governments), Industrial loan stocks or Debentures, Preference Stocks, and Equities – ordinary shares. Instruments classified as Debt securities are generally referred to as bonds because of their fixed income characteristics except for preference stock which is a hybrid instrument.
Therefore investors in bonds are essentially lending money to the issuer. Some of the common bond issuers are governments (Federal, State and Local Government), government agencies and corporate institutions. There are different types of bonds with its unique features relating to the way it pays interest, the market in which the bond is issued, the currency it is payable in, protective features and the legal framework under which it operates. The bond market is the channel through which government and corporations that need to borrow money are matched with investors who have funds to lend. There are really two markets for bonds – THE PRIMARY AND THE SECONDARY MARKET.
The underdeveloped nature of the Nigerian Bond market is reflected through the depth of the market, lack of investors’ confidence, inflationary pressure coupled with continuous depreciation of the Naira, absence of major international rating organization, absence of secondary trading market, macro-economic instability and closed nature of the market to external actors. All these indices indicate the faulty fundamentals of the market and hence its inability to contribute significantly to the growth and development of the Nigerian economy as it obtains in other developed countries of the world like Europe and United States of America. The effect of reviving the
Nigerian Bond market on the Nigerian economy cannot be overemphasized as it will enhance the achievement of a transformed economy through provision of long term funding to government and corporate borrowers, foreign investment, participation in the global bond market and international capital flow. However, how fast the Nigeria government and financial authorities move to combat the faulty fundamentals of the market will determine its efficiency and effectiveness as a major provider of the long termfinanceneeded for Nigeria’s economic growth. In Nigeria, one major defect for the slow pace of development of the real sector which is necessary to bring about a sustained economic growth and development is inadequate finance.
It is therefore pertinent to examine theoretically and comparatively the roles the Nigerian Bond market can play in the growth of the Nigerian economy with a view of assessing the effect of bond market development in an imperative way to achieve a transformed economy.
STATEMENT OF THE PROBLEM
The major problem that brought about slow movement of developing the real sector of Nigeria which is necessary to bring about a sustained economic growth and development is inadequate finance. This can be traced largely to the underdeveloped state of the Debt segment of the Nigerian Capital Market which is supposed to serve as the vehicle for the mobilization and provision of long-term funds needed by both government and corporate organizations to embark on developmental projects needed for economic growth and development.
The underdeveloped state of the bond segment of the Nigeria capital market has in time past led to distortions in the economy as most corporate organizations sourced their long term funds from commercial banks. This in effect is a financial mismatch funding strategy where long term projects are funded with short term finance. The commercial banks are set-up to provide only short term funding due to the nature of their sources of funds; whereas the kind of finance needed for sustainable development are long term funds. Also, because there is no developed outlet for the sourcing of long term funds by corporate organizations, there is overdependence on government to dictate and direct the pace of economic development.
Thus, business activities are predicated on public expenditure projections and when these projections and budgets are delayed or not forthcoming, economic activities in the whole economy is directly adversely affected.
OBJECTIVE OF THE STUDY
The major objective of this study is to assess the effective development of the Nigerian bond market and it essential effect on the growth of the economy is however the task of this study. Other objective is to, (i) Find out whether there exist an optimal economy whereas bond market can be developed.
RESEARCH QUESTION AND HYPOTHESIS
In line with the research problem, some specific questions must receive answers in the course of the study.
These questions are as follow:
- How does development of Nigerian bond market affect economic growth?
- Does inadequate finance result from underdevelopment state of debt segment in the Nigerian capital market?
Ho: There is no significant relationship between effective development of the Nigerian Bond market and economic growth. H1: There is a significant relationship between effective development of the Nigerian Bond market and economic growth.
SCOPE OF THE STUDY
This research is carried out mainly on Nigerian capital market to assess the development on fund to the Nigerian economy it covers data sourced from Nigerian stock exchange, Annual report, Security and exchange commission and National News paper.
It covers the period of eight years (2000- 2008)
SIGNIFICANCE OF THE STUDY
The important of this study cannot be overemphasized owing to the value of a research on this nature. To the end, this research is carried out to bring to the attention of financial managers of the firms especially financial institutions, relevant information regarding to Bond market and economy development in order to assist in making financial decision.
DEFINITION OF TERMS
(i) Bond: A bond is simply a certificate of indebtedness issued by a borrower to a lender. (ii) Capital Market: This is the market for intermediate and long term securities that have more than one year of maturity say three years. iii) Debt: This is referred to as an obligation owed by one party (the debtor) to a second party the creditor. (iv) Debenture: This is referred to as type of bond that is not secured by physical asset or collateral, it is credit worthiness and reputation of the issuer. (v) Equity: this referred to as the residual claim or interest of the junior class of investors in asset after all liabilities have been paid. (vi) Financial Market: The financial market is a sub-set of the financial system where funds from surplus economic units are pooled and made available to deficit units at a cost. (vii) Money Market: This market is the market for short term funds with a maturity period of not more than a year. (viii) Preference Stock: ix) Primary Market: This is referred to as the market where securities are newly issued. (x) Secondary Market: This is referred to as the market where existing securities are traded.
PLAN OF THE STUDY
This research project is divided into five (5) chapters for better and easy understanding, chapter two (2) is the review of related literatures; the literature is reviewed with a view to lay a foundation for the building of new research that we are currently undergoing. It gives directions and light to research work. Chapter three (3) tell us about the method(s) of research used in this project. It shows the research design, source of data, method of data collection, and techniques of data analysis among others.
Chapter four (4) is mainly the presentation of data and the analysis. Here our research hypothesis will be tested in order to enable us draw a conclusion on the topic under consideration. The final chapter which is chapter five (5) will highlight on the conclusion, summary and recommendation.
A bond is a debt security in which the issuer owes the holder a debt and is obliged to repay the principal and interest (coupon) at a later date, termed maturity. Other stipulations may also be attached to the bond issued, such as the obligation of the issuer to provide certain information to the bondholder or limitations on the behaviour of the issuer.
Bonds are generally issued for a fixed term (the maturity) longer than one year (Olashore, 2006). Umoren (2000) also defines a bond as basically IOU’S of longer duration than the average money market instrument present in a given market. According to Fahm (2006), a bond is a long term debt instrument issued by an entity, company or government as evidence of a promise to pay. The claim protects the holder in circumstances in which the issuer is unable to pay the amount due. According to Oni (2006. ), the entity borrowing money by the way of a bond is called the issuer and the person investing is the buyer. The issuer of a bond promises to pay the buyer’s interest which is called a coupon for the privilege of using the buyer’s money.
The issuer also promises to return the money which is the principal to the buyer on a specified date called the maturity date. The coupon which is a predetermined interest account is paid to the buyer at periodic intervals throughout the life of the bond. It is the nature of known periodic interest amount (coupon) and known principal amount that gave rise to the nomenclature “ fixed income securities” given to bonds. Corporate bonds are often called debentures, but the term debenture is usually used to refer to borrowings without specified collateral. Such borrowings are based on the general credit standing of the borrower. In Nigeria, however, some debentures are said to be mortgage debentures.
In such cases, the security provided goes beyond the credit worthiness of the borrowers to include a mortgage of some specific assets and also all future assets (Odife, 1999). 2. 2 Review of the Nigerian capital market 2. 3 Bond financing: Prospect, Benefit, And Associated Risk 2. 4 The impediment and problem of Bond development in Nigeria 2. 5 Recent developments in the Nigerian Bond market 2. 6 Theoretical framework 2. 7 summary of the chapter
CHAPTER THREE: RESEARCH METHODOLOGY
3. 1 Introduction 3. 2 Research Design 3. 3 Sources and Methods of Data Collection 3. 4 Method of Data Analysis 3. 5 Justification for the Method Used 3. 6 Summary of the Chapter