1.0 macroeconomic policy incentives. The initiatives aimed at

1.0 Background to the Study

Significant attention has over the years been
given to the manufacturing sector in most developing economies because of the belief
in the sectors capability to accelerate economic  growth and provide employment opportunities.
In Nigeria, this sector has received considerable attention from the government
and other stakeholders by way of financial and other macroeconomic policy incentives.
The initiatives aimed at enhancing the performance of this sector have included
targeted credit, concessionary lending, special foreign exchange allocation and
intervention funds amongst others. All these efforts notwithstanding, the
performance of the sector has remained below optimal.

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Before exiting recession in the
second quarter of 2017, the Nigeria economy formally fell into recession in the
first half of 2016, having recorded year-on-year contractions of 0.4 per cent
2.06 per cent in the first and second quarters of the year respectively. The
manufacturing sector contributed significantly in this contraction. From a peak
level of 7.8 per cent in 1982, the contribution of the sector to GDP fell to -0.36
per cent and -2.1per cent in the first two quarters of 2016. Similarly,
capacity utilization in the sector has fallen from 51 .2 per cent in 2010 to 48.9
per cent in 2015. The declining performance of this sector has been
attributable to many factors including poor infrastructure, high lending rates,
shortage of raw materials, scarcity of foreign exchange and long term
investible funds.    

            The
Stock market has emerged as a significant source of long term investment funds
in Nigeria. The emergence of this source of long term financing reflects the
shortcomings in the other segments of the financial markets in providing the
type of funds required for investment and growth. The maturity profile of
funds, the high lending rates and the instability in the supply of funds in the
other segments of the financial market have not been conducive to investment
and growth in the Nigerian economy particularly the manufacturing segment.
However, the bulk of the policy initiatives targeted at the sector have adopted
the bank or debt mode of financing. This is evidenced in the setting up of specialized
or development banks and intervention funds to finance the industrial or
manufacturing sectors. Recently, a government directive was given for
commercial banks interest rates to manufacturing enterprises in the country to
be kept at single digit. Not much effort have been directed at exploiting the
potentials of the equities market in financing the manufacturing sector of the
country. The Small and Medium Enterprises Equity Investment Scheme (SMEEIS)
established in 2002 to facilitate the flow of long term funds into the sector
has been abandoned.   After the crash of
the stock market in Nigeria in 2009, doubts have been entertained concerning
the efficacy of the market to raise and allocate long term funds to the real
sector of the economy. Particular concerns have been raised concerning the the
depth and liquidity of the market.  This
is the background from which this study seeks to investigate the relationship
between stock market liquidity and manufacturing sector performance in Nigeria.

 

1.2 The Research Problem

Poor access to
long term investible finance has been identified as one of the factors
responsible for the dismal performance of the manufacturing sector in Nigeria.
Consequently, several policies and programmes have been initiated to address
the issue. The Bank of Industry is specialised development bank set up
primarily to channel funds into that sector at concessionary rates. Also, a
N200 billion Refinancing/Restructuring of SME/Manufacturing Fund was established
in April 2010 to enable banks refinance and restructure their existing loan
portfolio to manufacturing firms in the country. The 15 year facility has a
3year moratorium, with loan amounts ranging from N5million to N1billion to a
single obligor at an interest rate of 7.0 per cent. Similarly in August 2016, a
N250billion fund was established to support the policy of single digit rate on
loans granted by the banks to manufacturing enterprises. These initiatives have
focusses mainly on loans or credit mode of financing. It has however been
observed that over the years of executing this strategy, this method has not
been able to substantially improve the performance of the sector. Consequently,
the contribution of the manufacturing sector to GDP dropped from 8.1 per cent
in 1990 to 3.4 per cent in2001. Between 2001 and 2015 it has fluctuated between
3.4 per cent and 9.2 per cent but remained below 10 per cent. This scenario is
a cause for concern especially when compared to other emerging economies like
Brazil and Malaysia where average manufacturing sector contribution to GDP is
20 per cent and 35 per cent respectively. New initiatives are required to
significantly improve Manufacturing sector performance in Nigeria. However, the
stock market channel of funding the manufacturing sector does not seem to be
yielding the required results. Some commentators have attributed this
suboptimum performance to the low liquidity of the Nigerian stock market.  

1.3 Objectives of the Study 

The broad
objectives of this study are to explore alternative or complimentary sources of
finance that could enhance the performance of the manufacturing sector in
Nigeria. The specific objectives include

(i)                
To assess the impact of stock market liquidity on
manufacturing sector performance in Nigeria

(ii)              
To investigate the impact of stock market development
on manufacturing sector performance in Nigeria

(iii)            
To find out possible policy measures that could enhance
manufacturing sector performance in Nigeria.

1.4 Research Questions

This study seeks
to address the following questions

            (i) To what extent has the liquidity
in the stock market impacted

                   on manufacturing sector
performance in Nigeria

(ii)
To what extent has developments in the stock market impacted on

                 the manufacturing sector performance in
Nigeria

 

 

1.5 Research Hypothesis

            Ho: That Liquidity  in the stock market has a no significant
relationship

                    with manufacturing sector performance

            H1:
That liquidity in the stock market has a significant relationship with

                    Manufacturing sector performance  

1.6 Significance of the Study

The research
into the relationship between liquidity of the stock market and manufacturing
sector performance in Nigeria is significant in many ways.

(i)                
The study will reveal the extent to which that segment
of the stock market has provided the long term funds needed for the improved
performance of the manufacturing sector.

(ii)              
The study will assist in identifying an alternative or
complimentary source of investible funds for the sector

(iii)            
The study will assist in the current policy focus of
diversifying the base of the economy away from crude oil

1.7 Scope of the Study

This study
investigates the relationship between liquidity of the equities market and
manufacturing sector performance in Nigeria. The analysis in the study is
limited to the period 1980 – 2016. The indicators of the relationship used in
the study include market capitalization, value of shares traded, index of
manufacturing production.

 

1.8 Plan of the Study

This work is presented in five chapters. The
background to the study is presented in Chapter One to justify the need for the
study and the value of the study. Chapter two explores the theoretical and
empirical literature related to the subject matter. The structure of the
Nigerian Financial System, developments in the equities market and an overview
of the manufacturing sector in Nigeria will also be discussed. The research
methodology is presented in Chapter three while the data analysis, regression
results and discussion of the results is in Chapter four. Chapter five g