CHAPTER ONE

INTRODUCTION

1.0 Introduction

This study aims to analyses the impact of the Capital Market Operations in the development of Sierra Leone Economy. Capital market is a broad term used to describe the in-person and digital spaces in which various entities trade different types of Financial Instruments. These venues may include the stock market, the bond market, and the currency and foreign exchange markets. Most markets are concentrated in major financial centers such as New York, London, Singapore, and Hong Kong.

1.1 General Background of the Study

The capital market is a highly specialized and organized financial market and indeed essential agent of economic growth and development because of its ability to facilitate and mobilize saving and investment. To a great extent, the positive relationship between capital accumulation and real economic growth has long been affirmed in economic theories (Anyanwu, 1996). Success in capital accumulation and mobilization for development varies among nations, but it is largely dependent on domestic savings and inflows of foreign capital. Therefore, to arrest the menace of the current economic downturn, effort must be geared towards effective resource mobilization. It is in realization of this that consideration is given to measure for the development of capital market as an institution for the mobilization of finance from the surplus sectors to the deficit sectors.
Capital market is a market where savings and investments are channeled between suppliers, people or institutions with capital to lend or invest and those in need. Suppliers typically include banks and investors while those who seek capital are businesses, governments, and individuals. Capital market is composed of primary and secondary markets. The most common capital markets are the stock market and the bond market. Capital markets seek to improve transactional efficiencies. These markets bring suppliers together with those seeking capital and provide a place where they can exchange securities.

1.2 Background to the Case Study

The development of capital market in Sierra Leone, as in other developing countries, has been induced and fostered by the government. Though, prior to the establishment of stock market in Sierra Leone, there existed some less formal market arrangements for the operation of capital market. As a follow-up to this, the bank of Sierra Leone and other Committee to study and make recommendations on the ways and means of establishing a stock market in Sierra Leone as a formal capital market. Acting on the recommendation of the bank of Sierra Leone, the Sierra Leone Stock Exchange (as it was called then) was set-up in 27 July 2007.
With the establishment of the Central Bank of Sierra Leone in March 27, 1963 and the coming into existence of the Sierra Leone Stock Exchange in 2007 and subsequently, the Sierra Leone Stock Exchange by the bank of Sierra Leone Act in 2011, a sound foundation was laid for the operation of the Sierra Leone Capital Market for trading in securities of long-term nature needed for the financing of the industrial sector and the economy at large. After the incorporation of the Sierra Leone Stock Exchange, it was granted further protection under the law and its activities was placed under some sort of control by the government, hence the passing of the bank of Sierra Leone Act. However, the Sierra Leone Stock Exchange was only operational in Sierra Leone. By the mid 2012 the need for an efficient financial system for the whole nation was emphasized, and a review by the government of the operations of the Sierra Leone Stock Exchange market was advocated. The review was carried out to take care of the low capital formation, the huge amount of currency in circulation which were held outside the banking system, the unsatisfactory demarcation between the operation of Commercial Banks and the emerging class of the Merchant Banks, and the extremely shallow depth of the capital market. In response to the problems mentioned above, the government accepted the principle of decentralization but opted for a National Stock Exchange, which will have branches in different parts of the country.

1.3 Statement of the Problem

There is abundant evidence that most Sierra Leonean businesses lack long-term capital. The business sector has depended mainly on short-term financing such as overdrafts to finance even long-term capital. Based on the maturity matching concept, such financing is risky. All such firms need to raise an appropriate mix of short- and long-term capital (Demirguc-Kunt and Levine 1996). Most recent literatures on the Sierra Leone capital market have recognized the tremendous performance the market has recorded in recent times. However, the vital role of the capital market in economic growth and development has not been empirically investigated thereby creating a research gap in this area. This study is undertaken to examine the contribution of the capital market in the Sierra Leone economic growth and development. Aside the social and institutional factors inhibiting the process of economic development in Sierra Leone, the bottleneck created by the dearth of finance to the economy constitutes a major setback to its development. As a result, it is necessary to evaluate the Sierra Leone capital market.

1.4 Objectives of the Study

The broad objective of this study is to examine the activities and operations of Sierra Leone capital market. The specific objectives of the study are as follows:
• To evaluate the operations of the capital market in relation to the economic development in Sierra Leone;
• To examine the operations of the Sierra Leone capital market;
• To examine the rate at which new stocks are issued on the capita market.
• To make recommendations as to how the operations of the market could be improve to boost economic growth and development of Sierra Leone.

1.5 Research Questions

This research shall be guided by the following research questions:
• How does the capital market impact on the economic growth and development process in Sierra Leone?
• What is the trend of trading activities on the Capital Market?
• What is rate at which new stocks are issued on the Sierra Leone capital market?
• How could the capital market through its crucial role stimulate economic growth and development in Sierra Leone?

1.6 Delimitation and Scope of the Study
The economy is a large component with lot of diverse and sometimes complex parts; this research work will only look at a particular part of the Sierra Leone economy (the financial sector). This work will not cover all the facets that make up the financial sector, but shall focus only on the capital market and its activities as it impacts on the Sierra Leone economic growth and development. The empirical investigation of the impact of the capital market on the economic growth in Sierra Leone shall be restricted to the period between 2007 and 2015 due to the non-availability of some important data.

1.7 Significance of the Study

The study will explore the impact or effectiveness of capital market instruments on Sierra Leone economic growth. Though the scope of study will be limited to the capital market, it is hoped that the exploration of this market will provide a broad view of the operations of the capital market. It will contribute to existing literature on the subject matter by investigating empirically the role, which the capital market plays in the economic growth and development of the country. The main importance of this study is that it will provide policy recommendations to policy-makers on ways to improve operations and activities of the capital market.

1.8 Definition of Key Terms

 Capital Market: Capital market is a market where savings and investments are channeled between suppliers, people or institutions with capital to lend or invest and those in need. Suppliers typically include banks and investors while those who seek capital are businesses, governments, and individuals.
 The Primary Market: it is responsible for the issue of new shares through the stock exchange or by private placement. Their operations are conducted through the following methods: offer for subscription, offer for sale, right issue, private placing and listing by introduction.
 The Secondary Market: also referred to as the stock market, it provides the forum for capital market activities (trading in stock and shares, bonds, debentures and other long-term securities) and is usually accessible to all category of investors – small or big, government institution or individuals
 The Derivatives Market: This is the market that trades, not in the issued securities, but on the right to title on the underlying security or on the basis of the future title to the security. The derivatives market in Sierra Leone is still in its infancy and the only derivative presently being actively traded on the Sierra Leone Stock Exchange is right offer issue options.
 Economy: An economy is the large set of inter-related production, consumption, and exchange activities that aid in determining how scarce resources are allocated. The production, consumption, and distribution of goods and services are used to fulfill the needs of those living and operating within the economy, which is also referred to as an
 Time: The greatest employer of man, which is time will not be in our favour though we manage it considering the time allocated to our studies, fellowship and the project.
 Finance: The research work generally involves money but considering our stand as a student. We will be limited by finance in achieving our aim.
 Response Rate: The information to be analyzed in the study will be limited to those who would respond voluntarily to the questionnaire.
 Paucity of Industry: At the course of our research, we came to release that many banks do not have any form inter-relationships which make things difficult for us in using one set of information generated as touching planning and control Limited to generalize issues. That leads us into more research, which will continue even after this project. Economic system.

1.8 Organization of the Study

For this purpose, the structure of this study will be organized into five chapters:
• will focus on, the background of the study which will give a brief explanation on the research, statement of the research problems, aims and objectives to be achieved, research questions which will be answered in subsequent chapters, significance of the research and the delimitations of the research.
• Will bring out the review of related literature, view relevant literature on the subject matter.
• Will be the research methodology. This highlights the methods used in obtaining data for analysis (Methodology).
• Will analyses and present result based on the research design. As aforementioned, a presentation will be made using ratios, graphs, and tables, especially when dealing with both primary and secondary data.
• Will be the Conclusion, Recommendations, Suggestions and conclusion of findings.

1.11 Summary of Chapter

This chapter gives a brief description about the Impact of the Capital Market Operations in the development of the Sierra Leone Economy and the period as well as the background of the case study which serve as the subject matter to be investigated, it also entails the problem statement that the researchers want to solved, the aim and objectives of the study, the various research questions, the significance of the study, the delimitation of the study which includes the scope, and as well as the organization of the study.