FINANCIAL INTERMEDIATION IN THE NIGERIAN PRIMARY CAPITAL MARKET
CHAPTER ONE
INTRODUCTION
1.1    Background Of The Study
In the financial system, funds flow from those who have surplus funds to those who have a shortage of funds, either by direct, market-based financing or by indirect, bank-based finance. According to William Gladstone (1858):”finance is, as it were, the stomach of the country, from which all the other organ take their tone”. The financial system consists of the financial markets, intermediaries, instruments and institutions. According to cross-country comparisons, individual country studies as well as industry and firm level analyses, a positive link between the sophistication of the capital market and economic growth. The financial system is virtually linked to economic performance. Nevertheless, economists still hold conflicting views regarding the underlying mechanisms that explain the positive relation between the degree of development of the financial system and economic growth. (William F. D. 2001).
Banks play an important role in the financial system and the economy. As a key component of the financial system, banks allocate funds from savers to borrowers in an efficient manner. They also provide specialized financial services, which reduce the cost of obtaining information about both savings and borrowing opportunities. These financial services help to make the overall economy more efficient. Banks are not the only financial intermediary, today in addition to banks, there are several other types of financial intermediaries. These include savings institutions, credit unions, insurance companies, mutual funds, pension funds, finance companies, and real estate investment trusts (REITS). (Econ, 2001).
Financial intermediation involves banks and other institutional investors playing pivotal roles in transforming savings into investment, thereby facilitating liquidity, information, and consumption smoothing. Financial intermediaries also serve as a commitment mechanism and provide delegated monitoring to the organization to which they provide capital. Traditionally, transaction costs and asymmetric information have provided the foundation for understanding intermediaries. Financial intermediaries have also played a pivotal role in the growth of the real sector in the development experience of the developed and newly industrialized countries (Goldsmith 1969, Patrick 1966).
According to Ogenekaro. O. A (2013), the Nigerian financial market broadly comprises the capital market for trading corporate shares/stock and long term government debt, the money market for dealings in short-term finance, the foreign exchange market for currency trades and a selection of specialized markets that trade in financial derivatives. Capital market instruments are typically long term, running in excess of a year, while money market instruments are typically of a shorter duration of less than one year. The capital market typically offer high returns on higher-risk portfolios, while access to the money market is for purchase of less risky securities.  Money market returns often tend to be low but stable, while capital markets offer higher but less frequent returns. (Ogenekaro, 2013).
We can therefore conclude that the money market deals with short term loans. It creates opportunities for raising and investing short term funds. It also refers to the group of financial institution set up for dealing with short-term credit instruments. The various financial instruments traded in the money market includes treasury bills, treasury certificates, commercial paper etc. While the capital market deals with medium to long term funds and channel same into industries and government for project financing. Unlike the money market which function principally to meet the short term financial requirement of household, corporate bodies and government, the capital market is a connection of instrument, institutions, and individuals. It facilitates the savings and investment process which fosters economic growth.
The capital market can be divided into two: The primary market and the secondary market.The market is usually organized into primary where new securities are bought and sold and secondary market where outstanding securities are bought and sold. However, the capital markets not really a market in the traditional African sense. It is rather a network of institutions that arranged for long-term financial instruments, like debentures stocks, mortgages, and shares (Okafor, 1983).7
The key function of the primary market is to facilitate capital growth by enabling individuals to convert savings into investments. It facilitates companies to issue new stocks to raise money directly from household for business expansion or to meet financial obligations. It provides a channel for the government to raise funds from the public to finance public sector projects. (Sujata, 2017).
The regulatory bodies of the Nigerian stock market consist of securities and Exchange Commission, Nigeria Stock Exchange, Central bank of Nigeria, federal Ministry of Finance
(Nnanna, Englanna and Odoko, 2004).  
The operators of the market includes Brokers/Dealers, issuing houses, Registrars, underwriters, Trustees and portfolio/fund managers, that provide various services for the investors and borrowers in that capital market (op.cit). nwude (2004) included the above listed participants in the market but added government and quoted companies.     
1.2    Statement Of The Research Problem
Financial intermediation will not be necessary if lenders and borrowers of funds can come into direct contact and also, of there is no surplus and deficit units. However, because of the complexity of modern time and also because of the requirement of the fact that financial requirement are too large, an effective and efficient financial intermediate system will not develop.
The link between the providers of funds and the fund users is very important. If the link does not exist, both the deficit and surplus sector of the economy will be losing. Economic development will also be hindered due to low level of investment arising from poor capital formation.
Some economists just do not believe that the finance-growth relationship is important. For instance, Robert Lucas asserted in 1988 that economists badly over-stress the role of financial factors in economic growth. Moreover, Joan Robertson declared in 1952 that “where enterprise leads, finance follows”. According to this view, economic development creates demands for particular types of financial arrangements, and the financial system responds automatically to these demands. Other economists strongly believe in the importance of the financial system for economic growth. This study will therefore address the problem of direct finance and also the issue as to whether the financial system is important for economic growth.
1.3    Research questions
The following questions will be asked:
i.    Does any link exist between financial sector development and economic growth?
ii.    Is there any link between interest rate and economic growth?
iii.    Is there any link between money supply and economic growth
1.4    Objectives of the study
The main objective of the study is to examine the impact of financial intermediation on the capital market and economic growth of Nigeria. The specific objectives are:
i.    To examine the extent to which financial sector has stimulated economic growth in Nigeria.
ii.    To establish the link between interest rate and economic growth.
iii.    To establish the link between money supply and economic growth.
1.5Research Hypotheses
The following are the formulated hypothesis to be tested:
H0: There is no significant relationship between financial depth and economic growth in Nigeria.
H1: There is a significant relationship between financial depth and economic growth in Nigeria.
H0: There is no significant relationship between money supply and economic growth in Nigeria.
H1: There is a significant relationship between money supply and economic growth in Nigeria.
H0: There is no significant relationship between interest rate and economic growth in Nigeria.
H1: There is a significant relationship between interest rate and economic growth in Nigeria.
1.6Significance of the Study
The study is to provide researchers with basic knowledge of what a capital market is, the intermediaries, regulators and participants in the capital market, as well as the role they play in the capital market. Also the role of intermediation played by these intermediaries and how efficient it is to the nation’s economy. Most importantly is to let the readers know that a primary market or “new issues market” leads to the development of the Nigerian capital market and the economy.    
1.7 Scope, Limitations and Methodology.    The research work will cover the role of financial intermediation in the Nigerian primary capital market. The study will cover the activities of the financial intermediaries in the Nigerian capital market. It may also involve the activities of the regulatory bodies in the Nigerian capital market. But however, it will cover the capital market and the role of the financial intermediation in Nigeria.
The limitations of the study include the inability of the researcher to collect adequate secondary data, especially due to poor record keeping. Other limitations include time and finance constraint.
This research work is also designed to study the relevance of financial intermediation, so emphasis will be laid on the “New issues” in the capital market.
The researcher uses a sample size of three (3) institutions. These are:The Central Bank of Nigeria, the Nigerian stock exchange, The Securities and Exchange Commission.
The sample techniques employed in this research work is the non-probability sample techniques. This is a technique in which all units in a population do not have equal chance of being represented as a sample. Under these techniques, the convenience sample is used. In this case, the researcher selects whatever sampling units which are conveniently available. During the course of this study, data were collected from one major source, which is secondary source. Basically, the method that is being employed is linear regression analysis which will be used to examine the relationship between the dependent variable and the independent variables.