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Determinants of Bond Market Development in Nigeria
Abstract:
The various financial crises all over the globe underscore the need for economies to have vibrant bond markets to augment their financial portfolios. Among other benefits, this will enable them to support rapid and sustained infrastructural development, which in turn will lead to swift economic growth. The small size of the Nigerian bond market, the accompanying huge infrastructural challenges, the overdependence on external debt and Deposit Money Banks (DMBs), the lopsided empirical evidence, which is concentrated on western and Asian economies coupled with mixed findings in related studies call for the need to examine the factors that promote the country‘s bond market development. This study therefore examines the influence of bond market determinants on the development of the bond market in Nigeria. To this end, the study disaggregates bond market into corporate and government debt markets. The research utilizes secondary data sourced from Central Bank of Nigeria (CBN) Statistical Bulletin, World Bank, and Securities and Exchange Commission (SEC) covering 32 years (from 1980 to 2011). The Vector Error Correction Model (VECM) is employed as technique of data analysis. The Augmented Dickey-Fuller (ADF) stationarity test, the Johansen Co-integration test and other tests are carried out to ensure the robustness of the results. The findings of the study reveal that bank size, external debt, money supply and size of the economy are significant determinants of corporate bond market development in Nigeria. Also, level of economic development, budget deficit and bank size are significant determinants of government bond market size in Nigeria. However, bank size, money supply and external debt are seen to be the most important and significant drivers of total bond market size in Nigeria. Some of the key recommendations of the study include: developing the capacity of the banking sector to provide more qualitative and productive credit, channelling a substantial part of the existing pension funds towards investing in bonds, balancing bank finance and bond markets, and restricting finance raised through external borrowing to infrastructural projects
Determinants of Bond Market Development in Nigeria
