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BOND MARKET AND ECONOMIC DEVELOPMENT IN NIGERIA

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 INTERNATIONAL JOURNAL OF MARITIME AND INTERDISCIPLINARY RESEARCH (IJMIR) - Maiden Edition

BOND MARKET AND ECONOMIC DEVELOPMENT IN NIGERIA

CHIDI-OKEKE, Chioma Nnenna (Ph.D)1

OGBONNA, Kelechukwu Stanley (Ph.D)2
OKEKE, Ijeoma Chinwe (Ph.D)3
Department of Banking and Finance Nnamdi Azikiwe University, Awka.
CHRIS-EJIOGU, Uzoamaka Gloria (Ph.D)4
Department of Banking and Finance, Federal University of Technology, Owerri

ABSTRACT
The study on bond market and economic development in Nigeria was carried out as a result of the scanty
empirical evidence on the topic, which is mainly on developed and Asian economies coupled with mixed
findings in related studies. The main objective examines effect of bond market development on economic
development in Nigeria. The study employed a time series of 33-as sample period sourced from CBN
statistical bulletin and the Debt Management Office (DMO)and online version of World Bank economic
development indicators. The ARDL regression model was carried out for both Long Run and Short-Run
Dynamics. The finding of the study revealed that bond market could not facilitate significant economic
development in Nigeria. Hence, the study recommended increased government budgetary allocation on
education, health and youth empowerment schemes so as to improve the level of Human Capital
Development.

Keywords: Economic growth, Bond market capitalization, Human Development Index.

1.0 INTRODUCTION
The bond market is a financial market where participants buy and sell debt securities
usually in the form of bonds. It is a channel through which government and corporate fund seekers
come into contact with long term investors with surplus funds to lend. It is also known as debt,
credit, or fixed income market. The bond market mainly covers corporate debt securities and
government-issued securities. A well-functioning bond market efficiently mobilizes savings to
fuel the private sector and finance valuable projects, diversify credit and funding risk from the
banking system. Citing the significant role of bond market in Asian economic crisis of 1997, Mu,
Phelps and Stotsky (2013) opined that bond market aids sustainable economic stability through
intermediating between capital savers and capital user. Ifionu and Omojefe (2013) stated that the
most important function of the capital market is in its capacity to provide long-term debt in the
form of bonds issued by the government and corporations and as well as equities. It is also
important to note that stable access to long-term capital from diversified sources is important to
the sustained growth of the real economy and stability of the financial system. There are other
benefits of having a sound bond market which include achieving the monetary targets, because it
can strengthen and enhance the implementation and transmission of the monetary policy, and can
also enable the use of market-based indirect monetary policy instruments (World Bank, 2000).
The absence of a viable bond markets has made several developing economies more
vulnerable to financial crisis, (Herring & Chatusripitak, 2000, Sonakul, 2000). Although the bond
markets have been developing in recent years in a number of emerging markets, particularly in
Asia, bond markets remain at the nascent stage in sub-Saharan Africa (SSA), apart from South
Africa, where bond market development has more recently included the significant expansion of
the corporate bond market. This has led to increasing study on the development of bond market
especially for emerging markets.

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 INTERNATIONAL JOURNAL OF MARITIME AND INTERDISCIPLINARY RESEARCH (IJMIR) - Maiden Edition

Despite the vibrant nature of the Nigerian capital market, the size of the equity market is
still larger than that of the bond market. For instance, the govt bond increase from $74.1Million in
2001 to $23.656Billion in 2007 but fell to $21.589Billion in 2008. The sharp fall between 2015
and 2016 from $35.333Billion to $2.624Billion respectively. However, the corporate bond
fluctuated between $51.832Million in 2001 to $135.135Million in 2007 when it peaked, fell in
2009 to $67.830Million before increasing continuously till end of the study period to
$2.174Billion.The equity of Nigeria has also fluctuated by increasing and decreasing over the years
since 2001 from 21% increase to -35.4% decrease in 2009 and worst position of 42.2 decrease in
2016 before ending as -17.9% decrease in 2018 regardless of the enormous market compared to
the bond market in Nigeria. However, a gradual shift from the equity market to the bond market
was experienced in the market capitalization of listed bonds on the Nigerian Stock Exchange
(NSE) which surpassed that of the equity market by N195.94billion in 2019 (NSE, 2019).The
fluctuation in the bond market should further the development of an economy. Hence, the question
does bond market activities improve economic development? Empirical literature on bond market
development has not attracted the deserved attention and is still scanty therefore the potentials of
the bond market in bridging the financing gap and serving as a cushioning effect to other sources
of finance does not seem to be sufficiently explored. Harris, (1997); Beck, (2003) noted that most
studies in this area have focused on either the impact of the banking sector or the stock market on
economic growth and less attention has been paid to the impact of the bond market on economic
growth and the studies on bond market focused on developed and Asian economies.
The limited research on the bond market fails to address either the effect of bond market
development on the economy or how the bond market could be further developed to a world class
standard. The lack of a developed bond market not only has implications for the issue of currency
mismatch, but also for the efficacy of fiscal policy. It is against this backdrop that this study aimed
at achieving its main objective which is to ascertaining the effect of bond market development on
the Nigerian economic development.

2.0 Literature Review

2.1 The Concept and theory of Bond
A bond is a debt instrument issued by a government or a corporate entity to raise fund to
finance budget or projects Ajayi (2013). It is usually issued for a period of time more than a year.
It is an 'IOU' with a preset interest rate, redeemable at the expiration of the specified tenor. Ajayi
(2013) noted that the Bond Market in Nigeria can be classified to different categories. Usually,
bonds market always consist the government bond and corporate securities.
Government securities is made up of the federal government development stock, the
treasury bonds (TBs) Treasury Certificates (TCs) and the development bond issued by states and
local governments, while corporate securities are mainly in the form of debentures or loan stock.
It may also be classified based on time, such as medium or long-term bond to indicate the time
dimension. There are also State and Local Governments/Municipal Bonds which are debt security
issued by a state and local government to finance their capital expenditures. It is also called
Municipal bonds, and are exempted from federal government, state and local taxes.

2.2 Bond Market Development in Nigeria

The bond market in Nigeria is generally under-developed, in both breadth and depth,
compared to the banking system and the equity market (Onalapo& Adebayo, 2010). Nevertheless,
the rapid growth of the Nigerian bond market after the year 2000 following the establishment of
the Debt Management Office (DMO), and the accompanying reforms by both the latter and the

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Security and Exchange Commission (SEC) has accelerated the growth of the bond market,
especially the government bonds. The market is dominated by government bonds. For instance,
the Federal Government of Nigeria (FGN) is the main issuer of government bonds, which is
implemented under a monthly programme for bond issuance. In the same vein the sub-nationals
(States and Local Governments) and corporate organizations issue state government bonds, local
government bonds, and corporate bonds occasionally. The Nigerian bond market as at 2012 was
dominated by FGN bonds to the tune of 86.0%, states 10.6% and corporate 3.4% (George, 2013).
Nigeria’s Bond Market Instruments includes The Federal Government of Nigeria (FGN)
Development Stocks, the Federal Government of Nigeria (FGN) Treasury Bonds, the State and
Local Governments Bonds, the Industrial Loan Stocks, the Unsecured Zero Coupon Redeemable
Convertible Stock and the AMCON Bonds.
Main Institutions in the Bond Market are the Debt Management Office (DMO), The
Central Bank of Nigeria (CBN), The Nigerian Stock Exchange (NSE), The Central Securities
Clearing Systems Ltd (CSCS), The Security and Exchange Commission (SEC).
Although the size of the Nigerian bond market has been increasing in recent years, it is still
facing some challenges. Mailafia (2014) pointed that Critical challenges of bond market
development are centered on how to accelerate development in the bond market through financial
innovation, determination of the direction of innovation in the bond market, and maintaining a
balance between risk minimization and market innovation. Some of the constraints as documented
by most writers include illiquidity, budget delays, lack of a bond auction trading platform, high
inter-bank rate, lack of a strong policy to facilitate the speedy growth of corporate bonds, amongst
others.
Ajayi (2013), also noted the following challenges faced by the Nigerian bond market: lack
of education and awareness, poor transparency of markets, lack of depth in issue size, ease of
raising money from equity market, high implied cost of borrowing, regulatory bottlenecks,
liquidity, legal and supervisory framework.This pose a great threat to the foundation of the market
segmentation theory that holds that market is made up of different characteristics and motivation
for either long term or short-term maturing securities. The study is anchored on the q-theory of
investment by Tobin James (1969) which holds that the rate of investment (i.e. the speed at which
investors wish to increase the capital stock) should be related at least to q (Tobin, 1969). The q
depends on expectations, estimate of risk and a host of other factors. Other theories like the
Neoclassical investment theory (Jorgensen, 1963), dynamic model of investment with convex
adjustment costs (Lucas & Prescott, 1971) and Hayashi (1982) all added to the theoretical
foundation of q-theory of investment. Thus, the proposition of the theory therefore asset that bond
market development or impact on economic development is subject to the anticipated expectations
of investors, risks and financial developments which determine the motivation for investment in
the bond market.

2.3 Empirical Review

The development of the economy is expected to improve bond market development. The
Financial Sector Development index, FSDI (2010) reveals that countries, which have less
developed or non-existent domestic bond markets are generally small countries. Evidence provides
that for most countries there is a direct correlation between bond market size and level of economic
development.Diamond and Dybvig (1993) studied the impact of financial development on the rates
of investment in physical and human capital. Financial development in their study leads to the
accumulation of physical capital positively and significantly. The authors however, noted a weak
relationship between the financial development and human capital. This could be due to the choice

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of particular variables (the authors also mention that different results may be possible if enrolment
ratios instead of average years of schooling is considered and the rigors of the cross-country
exercise. Other available studies include Fink, Haiss and Hristoforova (2003) examined the
causality between the bond market and economic growth in thirteen highly developed countries
and obtained mixed results. Granger causality test and co-integration approach are employed. They
found evidence of uni-directional causality in seven of the ten countries, in which the causality
was strong in 5 of the 10 countries (Switzerland, Austria, UK, Germany and the USA). There was
evidence of bi-directional causality in three of the ten countries suggesting that there is
interdependence between the two variables. However, the link from bond market to economic
growth was found to be more robust. The estimated models support the supply-leading hypothesis
implying that real economic activity is significantly influenced by the development of the bonds
market.
Manna, Owino, and Mutai (2008) who analyzed the development of public domestic debt
and its impact on the Kenyan economy between the period 1996 and 2007. Using the modified
Barro growth including a domestic debt variable the results revealed that domestic debt expansion
had a positive but insignificant effect on economic growth during period.
Onaolapo and Oluwafemi (2010) examine the development of the bond market in relation
to the Nigeria economy using OLS regression analysis. The study reveals a considerable link
between bond market and economic growth, with bond market size, liquidity being significant
determinants of economic growth in Nigeria.
Said (2012) examined the relationship between East Asian debt markets and economic
growth for the period 2002 to 2009. The author considered three types of debts, domestic public
debt, foreign debt and private debt. Their empirical results revealed that at regional level both
private and public debt contributes to economic growth. However, at country level the results were
not the same. In South Korea there was evidence of both public and foreign debt contributing to
economic growth, whilst in countries such as China and Hong Kong only public debt was found
to be significantly influencing economic growth.
Ndida (2012) explores the relationship between issuance of Treasury/ Government bonds
and economic growth in Kenya using data that spans from the year 2003 to the year 2011 and
establishing through causal study if changes in one variable cause changes in the other. The time
series data is on gross domestic product, market capitalization of bonds, value of bonds traded and
total new issues of bonds. Regression analysis is used to analyze the data used in this study. The
results show that the issuance of Government bonds has a positive effect on the level of economic
growth in Kenya.
Thumrongvit, Kim and Pyun (2013) in their paper added bond markets as a third key
component of the financial system. Using a panel data set of 38 countries, and applying the
generalized method of moments techniques for dynamic panels, they find that stock market
development is positively related to economic growth; the contributing role of bank credit to
economic growth diminishes as domestic bond markets develop and government bonds are
positively related to economic growth, while the effects of corporate bonds change from negative
to positive, as domestic financial structures expand in size and diversity.
Matei (2013) empirically investigated the dynamic causal relationships between the
government bond market and growth rates for 14 European non-EMU countries. Using a dynamic
panel ECM model over the period of 2002-2012, and finds that the slope of the yield curve is
negatively related to the growth in real GDP, and to a lesser extent that growth rates negatively
influence term spreads.

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Nwaiodo and Deekor (2013) examined how the growth of domestic bond market and
foreign participation in the same market function to impact the development and growth of the
Nigeria capital market and enhance financial stability and they discovered that foreign
participation in the domestic bond market contributes very little or nothing to the liquidity in the
Nigeria domestic bond market, and does not affect national yield curve.
Kapingura and Makhetha-Kosi (2014) empirically examines the causal relationship
between bond market development and economic growth in Africa with South Africa as a case
study over a period from 1995 to 2012. Quarterly data applying the Engle Granger cointegration
method and the pairwise granger causality test was used. Empirical results reveal that there is a
relationship between economic activity and bond market capitalization.
Ogboi, Njogo, and Nwankwo (2016) studied the impact of Bond market development on
the economic growth of Nigeria and employed both Generalized Method of Moment (GMM-IV)
Instrumental variables estimator and Granger Causality Test to examine relationship between bond
market development and economic growth in Nigeria. Result from the study revealed that bond
market bond market has positive but statistically insignificant effect on economic growth in
Nigeria.
The findings from the literature are mixed given that most reviews were sensitive to the
choice of countries with most of them not including the country under study. It is also important
to note that most of these studies made use of GDP as a measure economic growth. This study
therefore presents an up to date research by considering a more robust measure for economic
development which is the Human Development Index (HDI)as its key components include data
on life expectancy, education and per capita GDP.

3 Methodology
This study employed ex post-facto research design aimed at ascertaining the effect of bond
market development on the Nigerian economy. To achieve the stated objective of the study, annual
time series data were collected from secondary sources which include the DMO and CBN
statistical bulletin, the data covered 33years between 1986 -2018.

The dependent variable of the study is:

Economic Development: Proxied by HDI and the independent variables of the study include
Government Bond Market Size: Proxied by the government securities capitalization comprising
FGN bonds, Nigerian treasury bonds (NTBs), and development stocks. Market capitalization is
the total value of all listed government stock and debt/bond securities on the Nigerian stock
exchange.
Corporate Bond Market Size: proxied by corporate bond capitalization represented by industrial
loans.

Model Specification
In analyzing the effect of bond market on Nigeria economic growth between 1986 and
2016 using econometric method, this study adopts and modified the model used by Kapingura &
Makhetha-Kosi (2014). The model was used to examine the causal relationship between the bond
market and economic growth in Africa and it is specified as:
Yt= β1 + β2Bt+μt -------------------------------------------------------------- (1)
Where ytis the measure of economic activity Btis the measure of the bond market capitalization
and utis the error term which is assumed to be white noise.

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For the purpose of this study, the bond market was disaggregated into the government bond market
and the corporate bond market. The variables of interest include bond market (Govt. securities and
corporate bond). This implies that economic growth is a function of the above variables. From eqn.
(1), the equation was remodeled according to specific objectives of the study.

HDI = f (GOVT, CORP, INF, INT)…………………………………….. (ii)

Where GOVTB. = Government bond market capitalization i.e. the total value of all bonds listed
on the stock exchange comprising FGN Bonds, NTB Treasury Bond, and Development Stocks.
CORPB = corporate bond market capitalization represented by industrial loans.
HDI = Human Development Index.
INT = Interest Rate
INF = Inflation Rate
The functional relation is:
HDI = β0 + β1 GOVT + β2 CORP+ β2 INF +β2 INT +μ ------------------------------- (iii)
8

7
Series:
Sample
Residuals
1989
Observations
2018
30

Where;
6

5
Mean 9.94e-17
Median -7.93e- 05
4 Maximum 0.028303
Minimum -0.021753
3 Std. Dev. 0.012819
Skew ness 0.392538
2 Kur tosis 2.810523
1
Jarque- Ber a 0.815309
0 Pr obability 0.665209
-0 .0 2 -0 .0 1 0 .0 0 0 .0 1 0 .0 2 0 .0 3

= coefficients of the regressors or parameter estimates.

μ is the error term.

4 Presentation of Results and Analysis

This section is divided into three subsections. The unit root test is presented first, followed by
cointegration tests. This leads to the presentation of the ARDL analysis for the study.

Fig 1: Normality Distribution Tests

8
Series: Residuals
7 Sample 1989 2018
Observations 30
6

5
Mean 9.94e-17
Median -7.93e-05
4 Maximum 0.028303
Minimum -0.021753
3 Std. Dev. 0.012819
Skewness 0.392538
2 Kurtosis 2.810523
1
Jarque-Bera 0.815309
0 Probability 0.665209
-0.02 -0.01 0.00 0.01 0.02 0.03
Hence, using the normality distribution test the result as shown in figure 1 revealed that there is
no absence of normality distribution therefore signifying that all the variables are normally
distributed in the study.

Table1: Stationarity test Using Augmented Dickey Fuller

Variables T-statistics Critical value (Prob.) Decision Remarks
INT -4.605448 -2.960411 (0.0004) I(1) Stationary @ 5%
INF -4.955177 -2.957110 (0.0009) I(0) Stationary @ 5%
CorpBond -2.187623 -1.951687 (0.0296) I(0) Stationary @ 5%
GovtBond -5.197222 -2.960411 (0.0002) I(1) Stationary @ 5%
HDI -8.591888 -2.960411 (0.0000) I(1) Stationary @ 5%
Source: Computation by author using E-view10.0

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The Augmented Dickey-Fuller Unit root test was done for the study thus; the result revealed that
all the variables were found to be stationery at order one (1) except CorpBond and inflation which were
stationary at level. At both level and First difference as reported, the test statistics is more negative than the
critical value at the set level of significance.The reported P-values were all less than 0.05 chosen level of
significance for which cause, the Null Hypothesis of the presence of unit root in all the variables are
convincingly rejected. Since the variables were integrated of mixed order, then the next step is to check if
the variables have long-run relationship. Thus, ARDL bounds test for co-integration was used for long-run
study.

Table 2: ARDL Regression

Dependent Variable: HDI
Variable Coefficient Std. Error t-Statistic Prob.*
HDI(-1) 0.777509 0.092795 8.378750 0.0000
CORPBOND -1.48E-13 1.50E-12 -0.098331 0.9226
GOVTBOND 1.32E-13 4.16E-13 0.317642 0.7539
INF -0.000181 0.000275 -0.657174 0.5182
INF(-1) 0.000345 0.000334 1.032266 0.3137
INF(-2) -0.000796 0.000305 -2.612911 0.0162
INT -0.003099 0.001254 -2.471937 0.0221
INT(-1) -0.003309 0.001106 -2.992505 0.0069
INT(-2) 0.003010 0.001015 2.966065 0.0074
C 0.179167 0.067665 2.647851 0.0150
R-squared 0.951049 F-statistic 45.33298
Adjusted R-squared 0.930069 Prob(F-statistic) 0.000000
Durbin-Watson stat 2.171421
Source: Computation by author using E-view10.0

The result in the t-statistics for variables in corporate bond, government bond and inflation
rate with their probability values of -0.098331 (0.9226),0.317642 (0.7539) and -0.657174 (0.5182)
reveals the absence of significant relationship between the bond market variables with inflation
rate and economic development indicator in Nigeria respectively. Only interest rate indicated
significant relationship with t-statistics of -2.471937 and probability value of 0.0221. The result
however showed that an increase in corporate bond decreased the human development index by
1.48% while an increase in government bond increase human development index by 1.32%. Thus,
there is both negative and positive relationship between bond market indicators of CORP Bond
and GOVT Bond respectively and economic development indicator in Nigeria. The Durbin Watson
statistics of 2.171421 showed that there is absence of auto-correlation in the study and the findings
of our study showed goodness of fits for policy implementation.

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Table 3: ARDL Bound test and Long Run Result

Null Hypothesis: No levels
F-Bounds Test relationship
Test Statistic Value Signif. I(0) I(1)
Asymptotic:
n=1000
F-statistic 1.878232 10% 2.2 3.09
K 4 5% 2.56 3.49
2.5% 2.88 3.87
1% 3.29 4.37
Finite
Sample:
Actual Sample Size 31 n=35
10% 2.46 3.46
5% 2.947 4.088
1% 4.093 5.532
Finite
Sample:
n=30
10% 2.525 3.56
5% 3.058 4.223
1% 4.28 5.84
Source: Computation by author using E-view10.0

The results of the ARDL bounds testing approach as shown in table 3 indicates that the F-
statistic with a coefficient of 1.878232 is less than the lower bound value 2.56 and upper bound
value of 3.49 at 5% level of confidence. Thus, no level of long run relationship was established in
the study. Therefore, the empirical findings provide that there is no long run relationship between
bond market, interest rate, inflation rate and economic development of Nigeria.

5 Discussion of Findings, Conclusion and Recommendation

From table 1 to 3, the results present the conditions of our findings and the position of the
independent variables on the dependent variable. The normality results further present that all the
variables and findings of the study are normally distributed. Two hypotheses form the basis of the
study with interest rate and inflation rate being control components; the ADF unit root test showed
that all the variables are stationary and good for analytical procedures. The ARDL result which
was necessitated by the presence of different levels of stationarity showed that the four variables
facilitated both negative and positive insignificant impact on economic development and the result
also showed absence of significant long run relationship in the study. Signifying that all the bond
market variables and the control components except interest rate combined were unable to
facilitate significant change on the economic development of Nigeria. The study further showed
the long run bound test which further confirm the position of no long run relationship in the study.
The short run dynamics prove that only govt bond among the entire variables can facilitate positive
increase on human development index, however the relational impact is insignificant and showed
that government bond in the market development can improve economic development but this
improvement is insignificant for the period reviewed in the study. Other variables prove to have
negative implication affirming that CORP bond, interest rate and inflation necessitate decrease on

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the economic development of Nigeria. However, the overall adjusted r-squared prove that a large
proportion change manifest on economic development by virtue of an increase in the variables to
the tune of 93% approximately in Nigeria. The Durbin Watson statistics of 2.17further approved
the acceptability and reliability of the result of the study for policy decision on the Nigerian
economy. The results inclusively showed that bond market however have not facilitate necessary
change on economic development which is confirmed in the insignificant relationship of the study
both at the short run and long run thus hindering the achievement of the full potential of economic
development in Nigeria.
The findings thus imply that Bond market does not enhances economic development of
Nigeria within the period under review. This is contradicted by the findings of Onaolapo and
Oluwafemi (2010) whose study reveals a considerable link between bond market and economic
growth and a more robust support of our findings is Ewah et al (2009) views in their work that the
capital market in Nigeria has the potential to induce growth in line with observations of our study,
but it has not contributed meaningfully to the economic growth of Nigeria because of low market
capitalization, low absorptive capacity, illiquidity, misappropriation of funds among others.
For the corporate bond market, the result showed a negatively insignificant relationship
with economic development both in the long run and short run in Nigeria. This confirms the
inability of government bond and corporate bond to facilitate economic development in Nigeria.
Hence, the study conclude that bond market has not facilitate required improve economic
development of Nigeria.
The study therefore recommends improved presence of corporate bonds in the market to
achieve activities that enhance human development index in the economy. This is achievable via
reduced public quotation cost, less stringent requirement for listing, improved communication and
information cost. There is need for government to increase its budgetary allocation on education,
health and youth empowerment schemes which will improve human development and Human
Capital Development in Nigeria. Finally, the provision of dependency by state and local
governments on monthly allocation should be totally prohibited and eliminated to fasten capacity
to utilization of the bond market for developmental purposes.

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