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AKPUNONU, UJU EVANS (corresponding author)


The importance of stock market in any economy cannot be over-emphasized because it
promotes economic development in all sectors (Nwachukwu, 2009; Kalu, 2009). The
emergence of stock markets in most nations of the world became a source of long-term
investment to individuals, groups and government at all level. This sector in recent time has
experienced monumental challenges which is as a result of Global financial crisis popularly
called Global Financial Meltdown that took stage between August and November 2008 has
compelled many financial institutions and money market to experience some level of
bankruptcy (Abdullan and Obie-china, 2009; Jenrola and Daisi, 2012).
Global Financial Crisis according to CBN, (2013) is a global situation where financial
institutions or assets suddenly lose a large part of their value. In another vein, Sanusi (2010)
saw it as a sharp change in asset prices that leads to distress among financial market
participants. This distress according to him came in form of banking crisis, speculative
bubble, international financial crisis and economic crisis.
The global financial crisis rooted to the mortgage loan crisis became heightened in the United
States in the early 2004 until mid-2007 when it escalated. The mortgage industry in the
United States enjoyed an unprecedented boom whereby mortgage brokers enticed prospective
buyers with inadequate income or poor credit history into taking mortgage loans with little or
no down payment (Ojuola, 2011). However, this unethical action of mortgage brokers puts
the global credit market to a standstill in 2007, because the mortgage beneficiaries were
unable to service their loans which were then due for refinancing (Sanusi, 2011). The
resultant effect of this crisis is that it spread to other sectors thus causing credit and liquidity
crunch, weakness in consumer demand, job losses, collapse of the stock market, declining
output and host of other macroeconomic instability indicators (Jenrola and Daisi, 2012).
In Nigerian perspective, Nigerian Stock Market (NSM) before the recent Global Financial
Crisis (GFC) happened to be one of the most profitable Financial investment in the economy
of its kind as cited by Jenrola and Daisi (2012) due to banks consolidation exercise of 2004,
of which almost All Share Index (ASI) and Market Capitalization (MC) grew over the year
from a value of 12,137 in 2002 to 66,371 in 2008 with about N12.640 trillion market
capitalization (George, 2008) and significant fall by 24.3 percent in 2012 (CBN, 2012). This
was as a result of the global financial crisis. Furthermore, investors Patronage also have been
seriously hit by this financial crisis in the sense that investors never buy or invest their
resources on stocks and securities because of the consistent and sharp fall in the value of
stocks in the floor of Nigerian Stock Exchange. And even the existing investors have during
this harsh period re-sold their stocks mainly because of the fear that they may eventually loss
the money invested.

It has also been argued that global financial crisis has resulted in the value of the national
currency (naira), reduction in Nigerias foreign direct investment, inflow, decline in export;
decline in government revenue and expenditure due to a fall in commodity prices particularly
oil (Igbataya 2011; Agaba and Tenuche 2010). These arguments have been cited by Yabubu
and Akerele (2012) who argued that the global financial crisis has no significant effect of the
Nigerian stock market. These disagreements among the researchers have created a lull in the
knowledge gap, thus warranting further examination of the phenomenon. Hypothesizing the
study is;
Ho: Global financial crisis does not have significant effect on the foreign direct investment
in the Nigerian Stock Market.
The theoretical framework of this study anchored on the financial instability theory
propounded by Hyman Minsky 1992 and reviewed in kindlebergers empirical work of 2000.
Minsky was a traditional economist within the Keynesian mold. The financial instability
theory and the expanded Kindleberger model contain crucial political dimensions in their
The theory identifies three different types of income-debt relationships namely; hedge,
speculative and Ponzi finance. Hedge financing units can fulfill the entire contracted payment
obligation by the cash flows. Speculative finance units can meet the payment commitments,
although the cash flows will not allow them to repay the principle, requiring them to roll over
the liabilities. Lastly, Ponzi financing units cannot fulfill either repayment of principle or the
interest due on outstanding debts from cash flows thus requiring them to borrow more to pay
commitments, or sell assets to fulfill commitments. Minsky application of the term Ponzi
does not refer to the more common usage denoting an illegal scheme, but Ponzi financing
units are entirely legal in modern capitalist economies.
The theory further stressed that over periods of prolonged prosperity, the economy transits
from financial relations that make for a stable system may have effect on financial relation
that make for an unstable system. On the other hand, Kindleberger (2000) expanded the
Minsky model into financial crisis model. The financial crisis model is broken into five
phases which helps to explain the model. The five phases are,
1. Displacement: Some change in political economic circumstances creates new and
profitable opportunities for certain companies.
2. Euphonia: Investment and production pick up and the boom is felt by expansion of
bank credit that enlarges the total money supply. There is an urge to speculate and it is
translated into effective demand for goods or financial assets.
3. Mania: The prospect of easy capital gains attracts new comers and swindlers. There
may be pure speculation for price rises, an overestimation of prospective returns, or
excessive gearing. Speculation for profits leads a way from normal rational
behaviour to a Mania or a bubble.
4. Distress: As the speculative boom continues, interest rates, velocity of circulation, and
prices, all continue to increase. A few insiders realized that the future expected profits
cannot possibly justify the exorbitant prices, and they take their current profits by
selling out. The top of the market is now being balanced with insiders withdrawing
and new speculators entering. There is awareness on the part of a considerable
segment of the speculative community that a rush to liquidity might ensue.
5. Revulsion: This phase is characterized by bankruptcies and liquidations. Banks
discontinue lending on the collateral of certain commodities and securities. The
revulsion may go so far as to lead to panic. The panic will feed on itself until one of

three things occur. Prices might fall low enough to attract investments back to less
liquid assets; trading could be curtailed or limited, or a lender of last resort steps in to
provide liquidity.
The Global Financial Crisis has been described as Wall Streets biggest crisis since the Great
Depression in October 1929. The financial crisis started to show effects in October 2008 in
United States and spread to Europe. Around the world, stock markets began to crash as
billions of mortgage related investments went bad. Bank of England reported that the worlds
financial firms had lost 1.8 billion ($2.8 trillion) as a result of the continuing credit crisis. If
developed countries like US, Europe and Asia have been the hardest hit by the crisis, the
effect would eventually affect our country Nigeria.
The effects of the global financial crisis on the Nigerian Economy cannot be over
emphasized. The crisis was multifaceted as it led to a dwindling of government revenues,
affected Nigerian currency, weakened the banking sector and fueled an unprecedented stock
market crash, undermining confidence in the financial sector.
Adamu (2008) opined that Foreign Direct Investment and equity investment to Nigeria and
other developing countries will be under pressure, while revenue from oil will also drop. Aids
enjoyed by the United Kingdom and other European countries including United States will
reduce because of their weak fiscal positions. Investors of stock market inclusive, other
developed nations will find it difficult to get facility from bank as commercial banks are
under pressure. All these will result in increased unemployment, increased poverty and
slowdown of economic growth.
The impact of the global financial crisis on Africas economy is still evolving. However, early
assessments indicate that the crisis could undermine decades of economic of progress marked
by economic growth and investment (World Bank, 2008). Devarajan (2009) opined that
Africas banking system is not threatened by the current global financial crisis, but the region
saw some decrease in private investment flows. Such a decrease would compromise the
financing of many infrastructure projects on the continent. Devarajan (2009) proposes
however that many developed nations now turn to Africa as an attractive place to invest.
Recent trends in global financial markets, particularly the rapidly diminishing availability of
capital experienced worldwide, are having an increasingly adverse impact on African
countries and on the Banks clients (Friedman, 2008). The African Development Bank (ADB)
Group has been at the forefront of efforts at analyzing the crisis impact an Africa. The
developed economies can help African exports. Indeed, recovery in the developed and
emerging markets will help Africa out of the crisis by increasing African exports and capital
inflows (Stanley, 2008). Iweala (2009) in her contribution opined that discouraging
protectionist practices in trade and capital flows, supporting increased provision of
confessional financing and grants to African countries through Bilateral and Multilateral
mechanisms, providing adequate funding for Africa and low income countries as well as
supporting funding for programs will aimed in enhancing response to vulnerability
considering and severity of the crisis.
According to (2009), the causes of the Crisis in Nigeria are numerous and they
are listed below.
i. Overdependence of the nation on petroleum as source of income, according to Sanusi
(2009), Nigeria gets over 95% of her revenue form oil.

ii. Resource Mismanagement (not just Petroleum, but natural gas as well), countries like
Malaysia and Singapore in the1970s had the same revenue with Nigeria but it is not so
today (Baajide, 2008).
iii. Niger-Delta militant activities, this factors has worsened the situation, as barrels of
crude oil produced per day, has dropped due to militant activities in kidnapping,
stopping operations and damage to oil wells.
iv. High rate of importation: this has always been a great menace to the Nigeria economy
as many commodities are imported and on the Longman, other economies benefit
from Nigeria.
v. The debt game (at all levels): Nigeria as a country is still heavily indebted to the
World Bank and International Monetary Fund (IMF).
vi. The changing dynamics of over-population has also affected the Nigerian economy
because adequate plan have not been put in place for the nations increasing
vii. Outright corporate greed exhibited by various companies and services provides also
have a major contribution to the economic situation in the country.
viii. The national relocation of employment and changing means of labour also have a part,
many people are migrating to major cities like Lagos, Abuja, Port-Harcourt causing
these cities to be over populated and few people are left to form other states.
ix. Growing gap between the elite and the impoverished also has its fair share on the
nations economic meltdown. Other factors are erosion of human dignity, the erosion
of dignity of life.
The effects of the financial crisis on the Nigerian economy according to Adamu (2008) are as
i. Foreign direct investment and equity investments these will come under intense
pressure while 2007 was record year for foreign investment to Nigeria and other
developing countries, equity finance is under pressure, corporate and project finance
is weak (Mtango, 2008).
ii. Downward trend in oil price: the deteriorating global economic outlook is likely to put
further downward pressure on crude oil prices, which are expected to remain high
volatile. The indirect effect of volatile and falling commodity prices cannot be over
emphasized. This is because Nigeria depends on revenue form oil. In a precautionary
move, the Nigerian government reduced the 2009 benchmark or revenue estimate to
$45 per barrel form over $60 per barrel (Nwokeoma, 2008).
iii. Remittances to Nigeria will be decline, there will be fewer migrants coming to the
developed countries during the recession, so few remittance and also probably lower
volumes or remittance per-migrant. This will affect calls by government on Nigerians
in Diaspora to come and invest in the economy, Pedro (2008).

iv. Aid: aid budgets are under pressure because of debt problems and weak fiscal
positions e.g. in the United Kingdom and other European countries and also the
United State of America.
v. Commercial lending: Banks under pressure in developing countries may not be able to
lend as much as they have done in the past. This would unit investment in the country
as investors will find it difficult to borrow from banks.

Slowdown of economic growth.

vii. Foreign currency income slump, Unemployment increase, reduced overseas

development aid, depreciation of local currency etc. will result in a setback in
achieving the millennium development goals.
The Nigerian government has adopted several strategies to curb the global effects of the
global financial crisis on the Nigerian economy. Nduwugwe (2009) noted that political office
holders have had to accept reduction on the huge payouts to help stem down the huge
spending of the government and the financial regulators have earmarked for the financial
crisis. Bobajide (2009) opined that the government can overcome the challenges posed by
this crisis through prudent policies; he also said that the government must rely on the bench
mark of oil fix its budgets.
The Central Bank of Nigeria (2009) expanded its discount windows to increase lending while
reducing the cash reserve ratio from 40 to 30 percent to ensure liquidity. This measure would
help to private sector initiatives if they are to be sustained. The International Monetary Fund
(2008) enumerated some economic recipes that must be implemented; educate the world on
the devastating effect of the global financial crisis including that the regulatory perimeter, or
scope regulation needs to be strengthened; pro-cyclicality in regulation and accounting
should be minimized, information gaps should be filled and Central Banks fill and strengthen
their frameworks for systemic liquidity.
Alege, Olapinwa and Bello (2012) examined the global financial crises impact on Nigeria
economy in Nigeria from 1970-2010. Augmented Dickey Fuller (ADF) and Philip-Perron
(PP) test were used. The result shows that the impact of financial crisis was negative. The
global shocks made unstable the Nigerian economy.
Yakubu and Akerele (2012) analyzed the impact of global financial crisis on the stock
exchange in Nigeria from 2008-2011.Ordinary least square method was used. Findings show
that the global financial crisis has no significant effect on Nigerian stock exchange. Sanusi
(2011) examined the impact of global financial crisis on the Nigerian capital market and the
reforms, using theoretical approach. Findings show that financial crisis has a positive effect
on economic growth of 10.03 percent between 2001 and 2009 through the provision of short
and long term funds to the productive sectors of the economy by the financial markets.
Jenrola and Daisi (2012) opined that the implications of global financial crisis the Nigerian
capital market performance using simple regression analysis for the period of 20002008.Result revealed that the Nigerian Stock Exchange downfall is not attributed to global
financial crisis but the instability of microeconomic variables in Nigeria.
However, Igbataya (2011) elaborated the challenges of the global economic crisis and its
effects on Nigerias financial markets for the period of 2006-2008 using theoretical analysis.
Result show that global crisis impacted negatively on the nations financial sector, triggering
instability in banks and capital market. Ajakaiye and Fakyesi (2009) studied the global

financial crisis discussion series using analytical data. The result show that global financial
crisis which was triggered by the credit crunch within the US sub-prime mortgage market
impacted negatively on Nigeria economy is evident in the performance of the Nigeria Stock
Exchange and financial system as well as the real sector. To further buttress more on it,
Agaba and Tennche (2010) examined the implications of the global economic meltdown on
the Nigeria economy using theoretical analysis. Findings show that it has devastating effects
since globalization is not a friend to developing economics like ours.
Ashamu and Abiola (2012) examined the impact of global financial crisis on banking sector
in Nigeria using descriptive analysis. The study revealed that the financial crisis has caused
depression on the Nigerian Capital Market and drop in the quality of part of the credit
extended by banks for trading in the capital market etc. Ojuola (2011) in his own contribution
adopted multiple regression analysis to determine the effect of global financial crisis on
developing countries in the world using Nigeria as a case study. The result shows that global
financial crisis constitutes serious threat to millions of people around the world specially the
poor. In addition, Sere-Ejembi (2008) examined the Nigerian Stock Market reflection of the
global financial crisis: An evaluation using descriptive analysis in Nigeria. The result
revealed that the global financial crisis brought turmoil to the worlds financial sector, the
Nigeria stock exchange market inclusive.
The data for this study was collected from the Central bank of Nigeria through the Statistical
Bulletin, Nigeria Stock Exchange (NSE) and all available data. This study employs
econometric techniques for analysis using multiple regression models with the ordinary least
square approach.
Models are representation of realities. Akerele (1997) in Yakubu and Akerele (2012). The
specification of the model is based on the empirical work of Ajakaya & Fakiyesi (2009) and
Jenrola & Daisi (2012). This model specifies that Foreign Direct Investment and Foreign
exchange rate are explanatory variables for the countrys market capitalization of Nigerian
Stock Market. Therefore Market Capitalization (MC) is a function of Foreign Direct
Investment (FDI) and Foreign Exchange Rate (FX). For the purpose of analysis, data will be
on annual basis and after the global financial crisis. The regression equation is stated below:
MC = (FX, FDI). (1)
The model is further expanded as follows;
MC = a+1FX + 2FDI +eo. (2)
MC = Market capitalization
FX = Foreign exchange
FDI = Foreign direct investment
a = Autonomous MC when FDI and FX is held constant
1 = Coefficient of foreign direct investment
2 = Coefficient of foreign exchange rate
eo = Error term.

This paper presented and analyzed the data from CBN annual report and statement of account
as well as the data from CBN statistical bulletin. The analysis was conducted through a
computerized program (SPSS). Linear regression was adopted. Below are some regression
Table 1: Model regression results

E-view; R : 0.69965; Adjusted R : 0.61321; F-statistic: 11.453271;


Durbin-Watson stat: 1.04539

Table 2: t-statistics
Not significant
Regression output and t distribution table; t*: Empirical t; t0.50:

Not significant

Theoretical t
Table 3: Standard Error (S.E.) test
Half of (a,
1and 2)


Regression output

Not significant

Not significant

In respect to the model, Market Capitalization (MC) was regressed against the 2 independent
variables, namely Capital inflow (FDI) and Foreign Exchange Rate (FX). The Ordinary least
Square Technique was applied on the time series data of the aforementioned table to estimate
the model. Various tests were carried out. The co-efficient of determination (R 2) was used to
test for the test for the goodness of fit of the regression. The F-statistics was used to test the
statistical significance of the R2. The t-statistics and the standard error tests were both
employed to test the statistical significance of the parameter estimates (a, 1and 2) at 5%
level). Finally, the Durbin Waston statistics was used to test for the presence of auto
correlation in the variables of the variables of the model. The explanatory variables FDI and
FX come out with the expected sign. Results are shown in Table 1.
From the regression results, the estimated model is
MC = 2.67E+13+ 2.3585463FDI - 1.54E + 11FX

R2 = F
R2 = 0.69965 or 70%
The F-statistics was used to test the significance of R 2, the empirical F (i.e., F*) was
compared with the theoretical F0.05 with:
V1 = K-1 = 2
V2 = N-K = 12 degree of freedom
Empirical F (i.e., F*) = 11.453271
Theoretical F0.05 = 3.67
Decision: R2 is significant
T-statistics Table 2
MC = 2.67E+13+ 2.3585463FDI - 1.54E + 11FX
(5.834871) (1.463451) (-4.673429)
Standard Error (S.E) test Table 3:
MC = 2.67E+13+ 2.3585463FDI - 1.54E + 11FX
(4.10E+12) (1.731321) (3.02E+10)
Durbin- Watson (d*): DW = 1.04539
Since dL<DW<dU (0.95<1.04539<1.47) we therefore conclude that the presence of
autocorrelation in the model is indeterminate.
With respect to regression model results, when the capital inflow (FDI) and foreign exchange
rate (FX) are zero market capitalization is N2.67trillion. R2 indicates that 70% variation in
Market Capitalization could be explained largely by variation in the various capital inflows
for period 2008 to 2012 on the quarterly basis. The remaining 30% could be traced to
unexplained variables. The F-statistics shows that the overall regression is statistically
significant. Therefore, the 2 independent variables jointly account for the variation in the
dependent variable.
The t-statistics and the standard error test show that the parameter 1and 2 which is capital
inflow and foreign exchange rate estimate respectively are not significant at 5% level,
whereas, the constant term a is statistically significant at 5% level.
Thus, we accept the null hypothesis that the global financial crisis has no significant positive
effect on investors patronage in the Nigerian Stock Market. Based on economic theory, if the
foreign exchange rate is depreciated it will mobilize capital inflow and invariably increase
market capitalization. This explains that the motive behind regulating foreign exchange rate
to increase capital inflow is defeated in this model. Financial analyst and market insiders
have given various reasons for the persistence fall in the prices of stock ranging from budget
delay, exit by foreign investors to profit making, but this result and the continued bearish
trend have given a lie to the postulation. Now we can say that policies of regulators must

have played a negative role in deepening the recession, as many of the policies acted out of
line with the realities on ground in the stock exchange market. These include the withdrawal
of the margin facility by the apex bank, the uniform end of the year statement by bank, over
subscription, greed and ignorance, domestic monetary and financial policies, etc. only the
intercept has significant effect on the Nigerian Stock Exchange. This confirms that other
variables not capture in the model affected the market capitalization as the aftermath of the
global financial crisis.
In conclusion, the empirical result explained above can be explained that the instability of
macroeconomic variables are major causes of Nigerian Stock Exchange downfall in terms of
the investors patronage. By implication, the research reveals that global financial crisis had
adversely reduced the number of stock as well as market capitalization value because of
instability of macroeconomic factors like inadequate infrastructural facilities, problem of
security, ineffective monetary policy, unstable market prices, and unstable foreign exchange
but to mention few, all contributed to the downfall of the Nigerian capital market.
Therefore, the paper recommended the following suggestions for the development of
Nigerian Stock Market as follows:
i. Government should provide enabling business environment friendly atmosphere for
domestic investors like constant power supply, Good network and others
ii. Government should improve the standard of living of the citizens through increase in
their incomes which will leads to increase in investment in securities such as Bonds,
Shares and others.
iii. For NSE development, government should encourage domestic investment through
equity capital financing.
iv. For vibrant NSE, the Government should ensure that the financial institutions
agencies should be transparent in their dealings and devoid corruptions in the
practices and
v. CBN and other regulators should be effective in their supervisory and regulatory
functions for strict compliance of their monetary policy and change from loose
monetary policy to tight monetary policy as advocated by Mallam Sanusi to letters.

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