Financial Market Liberalization and Stock Market Liquidity: Time Data Analysis from Nigeria

, stemmed from the implicit credit rationing effect which results finance from the Feast and Famine consequences of excessive government intervention in money and credit markets in developing countries. Given that real interest rates are prevented from adjusting to clear the market other nonmarket forms of clearing have to take their place. These can include various forms of queuing arrangements to ration the available credit such as auctions, quantitative restrictions as well as different types of bidding systems which themselves may be open to nepotism or even outright corrupt practices. Nigeria Interest Rate Liberalization Interest rate also called monetary policy rate in Nigeria is one of the major instrument of monetary policy with regards to the role it plays in the determination of investment decisions by firms. Interest rate is the price paid for the use of money. It is the opportunity cost of borrowing money from a lender. It can also be seen as the return being paid to the provider of financial resources. It is an important economic price. This is because whether seen from the point of view of cost of capital or from the perspective of opportunity cost of funds, interest rate has fundamental implications for the economy either impacting on the cost of capital or influencing the availability of credit, by increasing savings (Acha & Acha 2011). On the other hand, investment in addition to the stock of physical capital such as plant, machines, trucks and new factories that creates income and employment. Therefore, by real investment, it means the addition to the stock of capital goods such as machines, buildings, equipment, tools etc. (Ahuja, 2013). This refers to real capital formation that will produce a stream of goods and services for present and future consumption. In common terms, investment is defined as the capital formation in production. Stiglitz (1993) defines investment as the acquisition of an asset with the aim of receiving a return.it could also mean the production of capital goods; goods which are not consumed but instead used in future production. An example includes building of rail ways, or factory. There are different motives for investment; the basic is profit/return. According to Keynes theory of interest rate on investment, the motive of profit/return depends on the expected marginal efficiency of capital in relation to the expected rate of interest. The economy of Nigeria at different times has witnessed various interest rate changes in different sectors of the economy since 1970s and mid 1980s under a regulated regime. The preferential interest rates were based on the premise that the market, if freely applied would exclude some priority sectors. Thus, interest rates were adjusted through the market forces in order to promote increased level of investment in the various preferred sectors of the economy. Prominent among the preferred sectors were the agricultural, manufacturing and solid mineral sectors which were accorded priority and deposit money banks were directed to charge preferential interest on all loans to encourage the upsurge of small-scale industries which is a catalyst for economic development (Udoka, 2000). According to Mckinnon (1973) and Shaw (1973), this situation can ignite financial repression which occurs mostly when a country imposes ceiling on deposit and lending nominal interest rate at a low level relative to inflation. The resulting low or negative interest rates discourage savings mobilization and the channeling of mobilized savings through the financial systems. This has a negative effect on the quantity and quality of investment and hence economic growth. The policy was put in place to achieve efficiency in the financial sector, thus, engendering financial deepening. With the introduction of the interest rate liberalization in the mid-1980s, many countries such as Angola, Burundi, Congo, Ivory Coast, Ghana, Malawi, Nigeria, China, India, etc. have made attempt at liberalizing their financial sectors by deregulating interest rate, eliminating or reducing credit controls, allowing free entry into the banking sector, giving autonomy to commercial banks permitting private ownership of banks. While liberalizing international capital flows and financial repression has retarded the development process as stated by Shaw (1973). Undoubtedly, government past efforts to promotes economic development by controlling interest rate and securing inexpensive funding for their activities have undermined financial development (Arturo, Fabio & Andrew, 2003). Consequently, there was a persistent pressure on the financial sector, which in turn necessitated a liberalization of the financial system (Soyibo and Olayiiwola, 2000). In response to these developments, the government deregulated interest rate in 1987 as part of the Structural Adjustment Program . The official position then was that interest rate liberalization would, among other things, enhance the provision of sufficient funds for investors, especially manufacturers (a priority sector), who are considered to be the prime agents of investment, and by implication, promotes economic growth (Odhiambo & Akinboade, 2009). However, in a dramatic policy reversal, the government in January, 1994 out-rightly introduces some measures of regulation into interest rate management. It was claimed that there were more wide variations and unnecessary high interest rate under the complete deregulation of interest rate immediately, deposit rate once again set at 12% - 15% per annum while a ceiling of 21% per annum was fixed for lending (CBN, 2012). Investment does not depend on interest rate alone but also on other factors, for instance investors may be prepared to borrow more and invest more, even if interest rate is high provided they expect a higher margin of profits. On the other hand, investors are not tempted to borrow even if interest rate are very low, or even zero if they are afraid that they may lose even their capital. In order words, investment depends upon risk and the prospects of profits in a particular industry or what Keynes (1936) calls the marginal efficiency of capital rather than upon interest rates. Secondly, interest rate is just one among many factors that have negative effects ion investment. For example, the deregulation of Nigerian economy went beyond interest rates reform policies, rather interest rate liberalization through deregulation become a major obstacle to investment expansion in Nigeria. Interest rate liberalization was aimed at enhancing the ability of banks to charge market-based loans rates and also guarantee the efficient allocation of scarce resources. In 1989, banks were encouraged to pay interest on current account deposits. The rate to be paid was to be negotiated between banks and their customers. There was a shift from direct to indirect system of monetary control in June 1993 with the introduction of open-market operations . Under the scheme, OMO was to be conducted exclusively through licensed discount houses, which were supposed to constitute the open market for government securities. The introduction of OMO was meant to replace the use of direct controls for managing liquidity in the economy. All these reform measures were aimed at removing distortions in efficient allocation of resources to productive investments especially in the private sector. For according to Khan and Reinhart (1990), economic growth can only be efficient and sustainable if it is coming primarily from the private sector. In spite of these measures however, theoretical evidence suggest that the impact of financial liberalization on private investment in Nigeria is at best marginal (Busari, 2007; Akinlo and Akinlo, 2007, Ayadi et al, 2009, Uchendu, 1993 and Ndebibo, 2004). Capital Account Liberalization Omoruyi (2006) is of the view that capital account liberalization is the process of removing restrictions from international transactions related to