IMPACT OF THE NIGERIA CAPITAL MARKET ON THE GROWTH OF INSURANCE SECTOR IN NIGERIA
The recent firming up of the finance of Nigeria insurers through a policy of across the board re-capitalization in the sector will charge the way underwriters ply their trade in the market and give them a much needed lever age to enlarge their coast certainty, insurers will find that it is not enough any more to stress just their financial muscles as the brand promise because by the reason of the insurance. Act 2003, everyone is back at the starting block as far as share capital is concerned.
This chapter makes a broad review of other literature materials published by tune tasted authorities in the related fields of accounting, marketing and management. The chapter also basically establishment the theoretical framework, which act as a catalyst to the successful completion of the study.
2.1 TYPES OF INSURANCE BUSINESS
Insurance is payment of premium or premium to obtain a financial recompense if or when a particular event occur, whether the event is certain or not (Henderson 1988). Under 2(1) of appendix II, insurance Decree 1997 insurance business and general insurance business. Under life insurance belong the individual life insurance business and group life insurance business.
General insurance business are accident, motor vehicle, workman’s compensation, goods-in-transit marine and aviation, contractors and engineering risks, credit insurance, bonds and surety ship, railway rolling stock are miscellaneous insurance business.
National Insurance commission is the regulatory and supervisory institution responsible for licensing all insurance companies, which have satisfied the conditions for registration. It supervises that operations to ensure that they operate in accordance with the laws regulations governing their operations to enable them to discharge to discharge their obligations to their customers (Owoh 2002). The National Insurance Commission reserve the right to revote the licenses of insurance companies of brokers, who fall short of the expected standard of 1992, has made it mandatory for all registered insurance companies operating in Nigeria to contribute not less than a total of 2090 and 40% respectively in real property development. Half of this sum should be paid into the housing fund through the FMBN. The other half can be applied by the insurance company directly in real property development or through a subsidiary company specifically set up for real estate development.
In the course of reform of the Nigeria capital market in the 905, a number of legislations improving on the development of the capital market were abrogated. One of them was the trustees investment act of 1962 and some aspect of the insurance decree No 58 of 1991. With the repeal of the obnoxious laws or aspects of their pension funds, insurance companies and saving like institution were given greater freedom to venture into investment activities, which were considered very unsafe for their operations in the past. Because of their obligations to their clients, which they were expected to satisfy on demand, their investments were until recently restricted risk less assets.
Insurance companies issue performance bond to guarantee that a complete work being undertaken by a contractor will be complete accordingly and credit bond to guarantee that a loan taken by the person or company, on behalf whom the credit bond is issues will be repaid accordingly should the credit bond holder fail to repay the insurance company refunds the creditor bank.
2.2 THE ROLE OF THE INSURANCE SECTOR IN THE ECONOMY
The contributions of the specialization insurance institution are inter-related and one is dependent upon the other. They all contribute their quota to the insurance industry as a whole. Insurance policy plays a vital role in the development of the economy of nations and I will use Nigeria, as an illustration to show the role economy. In recent years in Nigeria, especially since the establishment of Nigeria reinsurance co-operation and African Re-insurance co-operation in 1978, Nigeria has become a very important insurance and reinsurance center for Africa and to some extent the entire insurance world. Inikoru (1988).
In addition to it’s traditional role of giving insurance protection or cover to individuals and co-operate bodies against the damage or losses arising from insured events, the insurance industry in Nigeria has played and continue to play other subsidiary roles which help in development of the Nigerian economy and in the improvement of the Nigeria economic and social welfare of the people of Nigeria. As a financial institution, the insurance industry plays a major role in the granting of loans for industrial development in the country and most of the insurance companies in Nigeria have substantial shares and stock-holders in the banks, especially the merchant banks are insurance companies.
Nigeria, also give loans to individuals for building of houses thereby promoting the general welfare of the people. These are some of the subsidiary roles which insurance plays in the development of Nigeria. It is expected that the insurance industry’s involvement in the social and economic development of Nigeria will continue to grow and improve as Nigerians become more conscious of the value and importance of insurance of insurance. Inkwu (1988). What I have mentioned above is only a summary of the basic role that the insurance industry plays in the economic development of the nation. A more detailed examination of the subject will clearly indicate that no modern economic system can survive without an organized insurance industry and the same remark would apply to the Nigeria economy.
No product investor would consider investing large sums of money in a project without the kind of safe guards offered by insurance. The industrialist who invested two million naira in a paint factory is encouraged to do so because they knows that the factory is protected by a fire insurance policy which would ensure that he is not financially crippled by a five disaster in the factory insurance has the effect of promoting economic development by encouraging the release of funds for investment in these circumstances where investors would not have invested in the absence adequate insurance protection.
2.3 WHAT IS THE CAPITAL MARKET
In most of the economy of the world, there is a segment of the financial system that is responsible for regulating, facilitating and operating the long term financial environment ie. Determine the types and amounts of funds to be issued. Their cost and sector of the economy to which these funds are to be put. This segment of the financial system is referred to as capital market. The market facilitate mobilization of medium and long term funds for the investments needs of the government and business “An efficient capital market therefore mobilizes the nation’s (as well as foreign) capital resource and allocates them among the productive sectors of the economy for optimal output (Onyiuke 1996).
Capital market is a complex of institutions and mechanism through which medium and long term funds are pooled and made available to business and government and instruments already outstanding are transferred (Osaze 1991).
2.4 ROLE OF CAPITAL MARKET IN ECONOMIC DEVELOPMENT
A well organized capital market “plays a key role in fostering a country’s economic development” (Hakin 1985). It helps in the development of the economy through the following ways:
- Broaden ownership base of firms: Capital market broaden ownership base of companies by distributing ownership of equities more widely among the public “it ensure ownership of business of business is not confined to small number of wealth, families or big industrial financial conglomerates “Hankim 1956).
- Protection of investors: The stock exchange, through it’s listing requirements, rules and regulations on well as code of contract governing conau, members, staff of exchange stock brokers and directors of quoted companies ensure that the investing public is adequately protected by properly supervising new issues and requiring rull disclosure of relevant financial information, the system protects investors against insider dealing and other unfair practices.
- Allocating of capital: According to Osaze (1991), capital market facilitates the allocates of capital resources among different industries and sectors of the economy. The market also helps allocate capital efficiently by establishing raw prices for securities and minimized the cost of buying and selling such securities.
- Continuity of companies: According to Onyiuke (1996) the survival and containing of firms quoted on the stock exchange is guaranteed even after the death of its founder. This the market engenders the existence of the companies in perpetuity, contributing to the growth of the gross domestic product.
- Promotion of employment: Capital market promotes employment resources in the economy. It enlarges the range or financial instruments, offering investors different combinations of risk and reward which in turn raised the total volume of domestic savings. The savings are the channels into investments in different sectors of the economy during which process the “investment multiplier” effect leads to increase in the national income (N.I), provided the marginal propensity to consume (MPC) is less than unity.
- Provision of liquidity and risk diversification: The market provides liquidity for investment funds through it’s secondary market. The available of several securities allowed investors to diversity their investment and adjust their portfolios quickly without having to hold large cash balance.
2.5 FACTORS IN THE GROWTH OF THE CAPITAL MARKET
A survey of the markets all over the world would indicate that certain ingredients are essential to it’s development. The under listed factors are necessary for capital market growth.
- The establishment of certain capital market’s institutions would have a catalytic effect on the growth of the market. (Akamokhor 1995). These institutions include the rating agencies over the counter (OTC) market and second. Tier securities market (SSM). The first particularly stimulates the growth of the corporate debt sector, the second would attract more companies into the market and the last would encourage the lasting of small and medium scale companies, thus enlarging the volume of securities and invariably the growth of the market.
- The opening of the market to foreign investments through the removal of restrictive regulations such as limitations on dividends and capital gains repatriation on foreign investment encourage foreign participation in the market thereby enhancing it’s growth.
- Institutional framework with adequate infrastructure for efficient communication, pricing of issues, marketing securities, effective deliveries and settlements system without doubt enhance the growth of securities market.
- The array of financial instruments available for trading in the market would definitely stimulate both supply of and demand for securities in the market.
- Another important measure of promoting capital market development is availability of secondary market, since it would create liquidity in the system and encourage investors to enter the market because they can exist when and if they so desire.
- Another important factor in the growth of capital market is high degree of transparency whereby prices and other terms on which transactions are carried out can easily be understood and checked by the investing (Edun 1997).
This capital market deals with long term financial investments. It provides facilities for interaction between long term suppliers and users of funds. Capital market instrument have long term maturities and ranging from three years to twenty-five years, while other could be held perpetually. Capital market has both securities based segment (the stock market ie., the stock exchange) and non-securities based segment (market for long term loans) Olowe R.A 1998.
The capital market is made up of a number of institution and intermediaries through which surplus funds of the community are channeled to the deficit units in need of additional funds for medium or long term investment or for the modernization of the production line or to broaden the capital base to enhance the enterprises leverage.
Two distinct segments of the capital market and therefore identifiable. They are
- Primary market
- Secondary market
The capital market consists of two main segments the securities and the non-securities market.
The security market segments deals with financed assets (securities). This financial asset represents the promising notes of various bodies and are suppose to be impacted liquidity by the market. The market is an organized set-up with definite pattern of trading definite rules, identifiable markets participating and a broad regulatory frame work.
2.6 NON SECURITIES MARKET
The non-securities market consist of market for various long term loans and funds for various productive purpose. It is also called the market for negotiated capital funds that are not covered by negotiated instruments. The market is characterized by direct deals consists of negotiate loan transaction arranged or negotiated between two parties and does not necessarily involve the sale of securities. The direct deals market is usually not very structural and no infirmity exists in the market. There is also definite structure of rates. To a large extent, the market influences the pattern of market consist of two markets the informed market for capital funds and the market for institutionalized capital funds. The operational mechanism in each of these markets differs. The institutionalized capital funds consist of all the sources of long-term capital provided by various institutions. This institution principally consists of developments. This institution principally consists of development finance companies long-term loans are needed for various productive purposes. In the view of the long-term maturities associated with these types of loans, conventional commercial banks deemphasized them in their credit operations, except under syndicated loans arrangements. Principally, the development finance institution seek to bridge the market gaps at long-term end of the market and thus propel growth in the productivity sectors of the economy.
The major types of funds provides include long term loans, cease, financing, syndicated loans etc. two types of development finance institution are easily distinguishable. The development finance intermediaries.
- a) Development Banks:
These are specialized banks that provide financial support with form of loan capital, equity, participation, technical assistance etc to various industries. The emergence of industrial development banks in Nigeria followed the recognition that economic development demands the employment of long term capital as limited the grow of the industrial sector.
The main development banks in Nigeria include:
a The Nigeria industrial development bank which fosters industrial development through loans and technical services.
b Agriculture and co-operative Bank (ACB) responsible for providing long-term loans and technical services for agricultural productivity.
c The urban development bank provides financing support for urban development, urban transport and housing.
d Development financial intermediaries:
These institution facilitate development in Nigeria by providing industrial finance and other development activities such as investments and finance companies, state development and include investment companies. These institutions provides technical services and industrial finance for small and medium sale enterprises, industrial promotion services.
2.7 BACKGROUND TO THE DEVELOPMENT OF THE NIGERIA CAPITAL MARKET
The origin and early growth of the Nigeria capital market could be traced to 1946 when the first development stock was issued with establishment of the central bank of Nigeria, more government securities were issued to stimulate and accommodate government long term financial requirement. Initially the bank provide a secondary market in these development stocks with the establishment of the Lagos stock exchange in 1961 which became the Nigeria stock exchange in 12977, secondary market transaction were transferred to the Nigeria stock exchange. The Nigeria stock exchange is private institution with government backing. The exchange grew from a few securities and only one stock broke in 1961 to 153 securities in 1987 and more than 200 securities in 1992. moreover, the number of broker increase to 10, 20 and 10 in 1980, 1985 and 1992 respectively. The market capitalization grew steady from #4.5 billion in 1980 to N6.6.7 billion in 1985, N12.8 billion in 1989 to about N25 billion in 1992 (Ahmed 1992).
- NIGERIA’S CAPITAL MARKET PROBLEMS
The Nigeria capital market is confronted by various problems that militate against it’s growth and the level of it’s efficient. These problems that generally affect the branch and depth of the market.
Below are some of the problems
a High level of ignorance:
Inspite of various attempts to enlighten to a average investor, there is an all pervending ignorance of investors in stock market activities. This ignorance induces the “buy and hold” attitude of the investor and their investment decision. There is very limited speculation at the market and thus limiting the vibrancy or the market. Here potential market capitalization is larger than the real capitalization since the level of the development of the stock market is associated with the number and velocity of change in ownership of the securities and liquidity, the buy and hold attitude constrains stock market development.
b The inefficient infrastructural facilities:
Generally, infrastructural facilities in the Nigeria macro-economy are inefficient, poorly developed and generally available in limited quantities. These also affect the activities of the capital market and it’s efficiency. These also affect the activities of the capital market and it’s efficiency. In the development countries, computer technology and the introduction of the internet have elevated the capacity of these market in capturing all present and future information on the stock and translating these into the stock price.
c Limited level of professionalism:
Inpite of the attempts by the market operators to elevated the level of professionalism, available evidence show the most of the operators manifest very limited and low level or sophistication, imagination, dynamism and lack of competitiveness in various aspects of the stock trading, including investment advice.
d Lack of timely easy access to information:
Time and easily accessible information on the market operation are very essential for the efficient working of the market. In the Nigeria capital market, information on the companies quoted on the exchange are often late in coming and this constrains the decision making process. Most times, the information may not even be available.
e Poor investment climate:
The investment climate in Nigeria is generally very poor. This increases the risk of holding domestic financial assets in capital market and sustain capital alight. This could be cause by the high level of political instability in the country. The lack of participatory government, various social threat and unstable macro economic factors. As a result, direct foreign protocol investments have not impressive. Various investors also shy away form the Nigeria factors in the capital market.
The Nigeria capital market also manifests a high of liquidity. Conceptually, the level of liquidity of a stock market is measured by the total value of shares traded on a country’s stock exchanges as share of GDP. This rating varies with the case of trading ie how easy is it to buy and sell securities in the market. The measure of liquidity is the value of traded shares are a percentage of total market capitalization (valued of stock listed on the exchange). The third measured is the valued-traded divided by stock price volatility. Using the three measures of liquidity, evidence show at the Nigeria capital market is highly illiquid, up to 1998. for instance, the trading value of the Nigeria capital market averaged vs & 28.9 million in the ten years period ended 1997. This contracts with Malaysia (vs & 13,013,4 million) Thailand Cuss & 43,569.9 million), braxil (vs & 63.567.8 million and chile (us & 4122.5 million). Furthermore, Nigeria in 1997 recorded a turnover ratio of 3.7 percent, while Malaysia and Thailand in the same year recorded 734 percent and 37.5 percent respectively Brazil (86 percent) chile (10.8 percent) etc.
2.9 COMPOSITION OF NIGERIA’S CAPITAL MARKET
As was discussed previously in this chapter two, capital market provides the necessary facilities for users and suppliers of capital (long term) funds to interact for their mutual benefit. Traditional, it’s operations tend to be cooked into within the framework of activities connected with the issue and distribution of long-term securities and those concerned in these activities (Okafor 1983).
Two distinct segment of the capital market are therefore primary market and secondary market.
- i) The primary market (New issues market).
The primary market or new issues market as it is often called, provides structure for the placement of new issues of securities in the market. New issues are new securities in the first time by the government and corporate concern to the general public or only to existing share holders. To a large extent, new issues contributes, directly towards increasing invisible funds for productive activities in the market. The new issue market consists of the amalgam of fur draisers and funds issuers and the participants could be classified into three.
- a) The primary operations.
- b) The intermediaries
- c) The regulators
- a) Primary operations:
These are the fundraisers and fund issuers. The fundraisers are those units or bodies that seek for funds at the market and they include corporate concerns and the government. The issuers are the surplus units that provide funds to the market through holding the financial assets of the fundraisers.
- b) Intermediaries:
They are those that help investors to channel their saving into portfolio of securities designed to satisfy specific investment objectives.
- c) The regulators:
These are the body that regulate the pricing, timing and issue of new securities in the market. The major regulatory body in the new issue market is the securities and exchange commission.
- b) The secondary market:
The secondary market is the formal market for trading in stocks and share, bonds and debentures and other long-terms securities. The market generally referred to as the stock market and provides the fulcrum for the capital market. The market essential measures changes in general economic activities through a stock market index.
According to (Nzotta 1999). This market is accessible to all categories of investors and has various participants, like the case of the new issue market. It provides liquidity for all securities issued by various corporate concerns and government. In this market, investor can convert their security holding into cash or buy more securities for investment purchase for speculative reasons.
THE SECURITIES AND EXCHANGE COMMISSION
The securities and exchange commission (SFC) series the apex regulatory organ of the capital markets its major objective is the promotion of an orderly and active capital market (Olowu 1998).
Section 6 of SRC Decree of 1988 listed the function of SEC as:
- a) Determining the amount of the price and time at which securities are to be sold to the public either through offer for sale or subscription?
- b) Maintaining surveillance over the capital market to ensure orderly, fair and equitable dealing in securities.
- c) Protecting the integrity of the security market against any abuses arising from the practice of insider trading.
- d) Reviewing, approving and regulating mergers, acquisitions and all form of business combinations.
- e) Acting as a regulatory apex organization for the Nigerian capital market including the Nigeria stock exchange and its branches to which it would be at liberty to delegate powers.
- f) Creating the necessary atmosphere for the order growth and development of capital.
- g) Under taking such other activities as are necessary or expedient for giving full effects to the provision of this decree.
The role of EC was further enlarge by the companies and allied matter Decree of 1990 which empowers it ot approve all mergers acquisitions and authorize effective performance of its function, the SEC formulated the various rules and regulations to guide the operators activities of participants (ie. Stock brokers, issuing houses registrars, investment advisers, stock exchange, issuers of securities and investors) in the capital market.
Section 20 of the SEC Decree of 1988 vests the responsibility for the approval of allotment of securities of all public companies in the allotment committee of the commission the commission tends to give preference to small investors so as to encourage widespread share ownership, which will able several as aveitable base for an active future secondary trading.
According to (Olowe 1998) these roles of SEC are meant to protect investor and promote orderly development of the Nigerian stock market. Also that the SEC would continue to maintain surveillance over the market to enhance efficiency”.
2.10 THE STOCK EXCHANGE
According to Akingunola et al (1998). The stock exchange is an institution where quoted investment (stocks and shares) are bought and sold. It provides a market in a wide range of traded securities, generally of medium to long-term maturity issued by companies, government and public organization. They also said that the stock exchange serves as an allocator of funds from the surplus sector to the deficit sector (those who can best use the fund). Prices of securities are determined through the market forces of supply and demand.
Onoh (2002) refers the stock exchange market as a “secondary market is a market where old issues are traded. It is the heart of the capital market”.
THE NIGERIAN STOCK EXCHANGE
The Nigerian stock exchange has been able to accomplish more equitable distribution of shares of quoted companies. This way of Nigeria stock exchange is also helping in socio-economic integration of all areas of the country.
It is to be noted that the stock exchange is not a government institution but a profit making organization limited by guarantee, incorporated via the inspiration and support of business and government. It is owned by 293 numbers make up of financial institution stock brokers and individual Nigerians of the high integrity.
The council members (Board of Direct) of the stock exchange are elected atan annual general meeting of members of the exchange, the council members management and staff of the Nigeria stock exchange (NSE) as well as stock brokers are subject to a strength regime of integrity, discipline, sacrifice and patriotism. According to Akingunola et al (1998). The ordinary members are to be distinguished from the dealing member are those licenses to trade on the floor of the exchange. In most cases, however, one may need to be an ordinary member before becoming a dealing member.
Some of the insurance companies quoted in Nigeria stock
They are as follows:
1) Allco insurance Plc
2) Continental reinsurance Plc.
3) Custodian and allied Insurance Plc.
4) Great Nigerian Insurance Plc.
5) Linkage Assurance Plc.
6) Mansard Insurance Plc.
7) Mutual Benefits Assurance Plc.
8) N.E.M Insurance Co. (Nig) Plc.
9) Niger Insurance Co. Plc.