The Impact of Bank Capitalization on Stock Market Growth: a Nigerian Case Study

This study uses data from Nigeria to examine the impact of bank capitalization on stock market growth. A review of available literature has shown a lack of empirical studies on how the capitalization of the banks affects stock market growth. This study is explanatory and quantitative, using secondary data to contribute to a unique research by developing a theoretical model and testing it empirically to demonstrate that bank capitalization leads to stock market growth. Time series data from 1981 to 2016 have been sourced from the World Bank World Development Indicators and the Central Bank of Nigeria data bases. The benchmark used to assess stock market growth were market capitalization and stock market turnover, while the index for bank capitalization was the ratio of commercial banks' equity to their total assets. The data was processed for validity using the unit root and ordinary least squares (OLS) tests. The data analysis technique used is the Nonlinear Autoregressive Distributed Lag (NARDL). The results of the analysis find empirical evidence to confirm the research theory that bank capitalization is important for stock market growth, channelled through risk absorption to increase in lending. The analysis shows that decrease in bank capital ratio has more impact on stock market growth than recapitalization of banks. The implication of this finding is that policy measures that prevents banking sector distress will achieve more results than measures that target growth in the banking sector. This thesis further contributes to literature as it is the first to relate bank capitalization to stock market growth using three different indicators which provides more insight on the relationships. This concept was developed from theoretical literature, forming a model of the detailed transmission channels through which bank capitalization impacts on stock market growth. The implications of the findings, of use to policy makers and finance experts, are that bank capitalization can be used to stimulate growth in the stock market and that shocks and deflections of banks' equity capital can be used to exert pressure on the stock market. This study recommends that policy makers and finance managers should guard against erosion of bank capital as they use adjustments in bank capital requirements to effect growth in the stock market.