





































Australian Finance & Banking Review; Vol. 2, No. 1; 2018 

ISSN 2576-1196   E-ISSN 2576-120X 

Published by Centre for Research on Islamic Banking & Finance and Business 

 

 

11 

 

Foreign Portfolio Investment and Performance of the Nigerian 

Capital Market 
 

Nwonodi Daniel Ikezam1 

 

1Department of Banking and Finance, Rivers State University, Port Harcourt, Nigeria, Nigeria. 

Correspondence: Department of Banking and Finance, Rivers State University, Port Harcourt, Nigeria, Nigeria 

 

 

Received: January 20, 2018        Accepted: January 26, 2018          Online Published: February 7, 2018   

 

 

Abstract 

This study examined the effect of foreign portfolio investment on the performance of Nigerian capital market. 

The specific objectives are to investigate the impact of Net Foreign Portfolio Investment, Foreign Portfolio 

Investment in Equity, Foreign Portfolio Investment in Bonds, Foreign Portfolio in Government Securities and 

Nigerian Exchange Rate per US Dollar on the performance of Nigerian Capital Market. The required data were 

sourced from Central Bank of Nigeria (CBN) Statistical Bulletin and Stock Exchange Annual Report. The study 

has All Share Price Index and Market Capitalization as proxy for Capital market performance while Net Foreign 

Portfolio Investment (NFPI), Equity Investment (PIE), Bond Investment (PIB), Portfolio Investment in 

Government Securities (PIGS) and Exchange Rate as predictors variables. The Ordinary Least Square multiple 

regressions with econometric view were used as data analysis techniques. Cointegration test, Granger Causality 

Test, Augmented Dickey Fuller Test and Error Correction Model were used to examine the variables and its 

relationship to the dependent variables. Model one  revealed that foreign portfolio investment in bonds and 

foreign portfolio investment in government securities have negative relationship with All Share Price Index 

while Net Foreign Portfolio investment, foreign portfolio investment in equities and exchange rate have positive 

relationship with All Share Price Index. Model two revealed that Net Foreign Portfolio Investment, Portfolio 

Investments in Bonds and Government securities has negative relationship with market capitalization while 

equity investment and exchange rate have positive relationship with market capitalization. The study concludes 

that foreign portfolio investment have significant relationship with Nigerian capital market performance. It 

therefore recommends that policies should be devised to enhance the operational efficiency of the Nigerian 

capital market, to attract foreign investors. 

 

Keywords: Foreign Portfolio Investment, Nigerian Capital Market, Equity Investment, Net Foreign Portfolio 

Investment, Exchange Rate. 

 

1. Introduction 

One of the aims of economic integration, partnership and multi-lateral investment treaties is the inflow and 

outflow of capital across national borders. The aim is to bridge the financial disequilibrium and savings 

investment gap that exist among countries. Nigerian capital market was established in 1960 to meet investors’ 

needs through the creation and distribution of long-term financial instruments such as bonds and equities within 

Nigeria and the flow of foreign portfolio investors. Portfolio investment is the commitment of resources in 

foreign securities by foreign nationals, with view to profitable returns (Ezirim, 2005). Foreign portfolio 

investment is a component of foreign private capital; it is an aspect of international capital flows, comprising 

transfer of financial assets, such as cash, stocks or bonds across international border in want of profit 

(Chukwuemeka, 2008). The inflow of foreign portfolio investment is determined by the development of the 

capital market, the market rate of return and the monetary policy of the country. Unlike Foreign Direct 

Investment, inflow of portfolio investment is sensitive to exchange rate risk and political risk of the country 

(Anayochukwu, 2012). 

The relationship between foreign portfolio investment and the capital market of the emerging financial market 

has results in two schools of thought. First Yartey (2008) argues that economic activities in a country constitute 

the key drivers of the growth and development of the stock market. They opined that financing a country’s 



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growth through foreign portfolio investment can expose the country to international monetary shocks, for 

instance the global financial crises, findings in support of this are Dellas and Martin (2002), Chanda (2000), and 

Carlson and Hernandez (2002). The second schools of thought argued that greater openness will lead to inflow 

of foreign portfolio investment that will enable the country to benefit from research and development which can 

result in positive spillover effect to other sectors of the economy and the development of capital market (Chee 

and Stulz, 1999;  Moreso, 1993; and Gould et al., 1993). This view is supported by the Nigerian capital market 

reforms with the objective of attracting foreign investors.           

The theories dominating the flow of foreign portfolio investment and capital market growth have been the 

standard Neo-classical theory of foreign portfolio inflows which predicts that capital should flow from the 

capital rich countries to capital scarce countries and the Lucas paradox or why capital does not seem to flow 

from rich to poor countries (Francis, 2013).Theoretically, numerous body of knowledge, known as portfolio 

theory, has been propounded to evaluate the behavior of portfolio investment. Harry Markowitz (1951) noted 

that portfolio investment is a function of market rate of return. This means that inflow of portfolio investment to 

Nigerian capital will increase if the market rate of return exceeds the cost of the investment.  

The challenges facing the inflow of foreign portfolio investment determines the value of inflow to Nigeria in the 

past and present. The emerging and underdeveloped status of the Nigeria financial market compared with 

financial markets of the developed nations, Nigeria financial market lack some credibility to attract foreign 

portfolio investment. For instance, prior to the consolidation reform in the banking system, Nigerian banks were 

not considered very healthy to attract Foreign Portfolio Investment as a result of the poor rating. The capital 

market and other institutional policies also have a negative effect on the inflow of Foreign Portfolio Investment 

in Nigeria (Onoh, 2002). Other factors may either have a negative or positive effect on Net inflow of Foreign 

Portfolio Investment (FPI).  

However, despite the growing literature on the performance of the Nigerian capital market, none has examined 

the relationship or effect of the various reforms on the inflow of foreign portfolio investment. Similar study by 

Chi-chi and Eze, (2013) examined the determinants of foreign portfolio investment in Nigeria. This study seeks 

to examine the effect of the various policy reforms on the inflow of foreign portfolio investment on the growth 

of the Nigerian capital market 

2. Review of Related Literature 

Theories of Stock Market Price  

▪ Efficient Market Hypothesis 

Efficient Market Hypothesis (EMH) asserts that in an efficient market, prices at all times fully reflect all 

available information that is relevant to their valuation (Fama, 1970). The efficiency of stock markets has been 

a major area of research in financial economics, particularly as it pertains to stock markets of developing 

economies (Rapuluchukwu, 2010). This is because of the implication of market efficiency to the functioning of 

the capital market; especially as it concerns investors’ returns and thus stimulation of investor’s interest in 

market activities. It is believed that the behaviour of stock prices is explained by the behaviour of investors 

(Inegbedion (2009). EMH argues that competition between investors seeking abnormal profits drives prices to 

their ‘fair’ value. This implies that prices should incorporate information in the market. The ability of a stock 

market to incorporate information into prices determines its level of efficiency.  

Stock market forecasting is marked more by its failure than by its successes since stock prices reflect the 

judgments and expectations of investors based on information available (Aguebor, Adewole and Maduegbuna, 

2010). Remarkably, efforts have been made to apply econometric techniques of model building in the prediction 

of stock prices in a bid to demonstrate that the market fluctuations are essentially unpredictable Brummelhuis, 

2005). Have argued that there are long-term pattern in stock prices with several years of upswing followed by 

more sluggish periods, according to Fama (1965), a stock market where successive price changes in individual 

securities are independent is by their definition, a random walk market Gupta and Basu (2007). Specifically, 

stock prices following a random walk imply that the price changes are as independent of one another as the 

gains and losses. The independence assumption of the random walk hypothesis is valid as long as knowledge of 

the past behaviour of the series of price changes cannot be used to increase expected gains (Aguebor, etal2010). 

More specifically, if successive price changes for a given security are independent, then there is no problem in 

timing purchases and sales of the security. A simple policy of buying and holding the security will be as good as 

any more complicated mechanical procedure for timing purchase and sales (Fama, 1965; 1995). Fama (1970) 

stated that the sufficient but not necessary conditions for efficiency are:  

• There are no transaction costs in trading securities;  

• All information is costless, and available to all market participants. And  



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• All agree on the implication of current information for the current price and distribution of future 

prices of each security. The EMH can be more specifically defined with respect to the information item 

available to market participants. Fama (1970) classified the information items into three levels 

depending on how quickly the information is impounded into prices:  

▪ Weak- Form EMH,  

▪ Semi-Strong Form EMH, and  

▪ Strong-Form EMH  

Weak-form efficiency 

In weak-form efficiency, future prices cannot be predicted by analyzing prices from the past. Excess returns 

cannot be earned in the long run by using investment strategies based on historical share prices or other 

historical data Lulia (2009). Technical analysis techniques will not be able to consistently produce excess 

returns, though some forms of fundamental analysis may still provide excess returns. Share prices exhibit no 

serial dependencies, meaning that there are no patterns to asset prices. This implies that future price movements 

are determined entirely by information not contained in the price series. Hence, prices must follow a random 

walk. This 'soft' EMH does not require that prices remain at or near equilibrium, but only that market 

participants not be able to systematically profit from market inefficiencies'. However, while EMH predicts that 

all price movement is random, many studies have shown a marked tendency for the stock markets to trend over 

time periods of weeks or longer and that, moreover, there is a positive correlation between degree of trending 

and length of time period studied. Various explanations for such large and apparently non-random price 

movements have been promulgated. The problem of algorithmically constructing prices which reflect all 

available information has been studied extensively in the field of computer science.  

Semi Strong Form Efficiency 

In semi-strong-form efficiency, it is implied that share prices adjust to publicly available new information very 

rapidly and in an unbiased fashion, such that no excess returns can be earned by trading on that information. 

Semi-strong-form efficiency implies that neither fundamental analysis nor technical analysis techniques will be 

able to reliably produce excess returns. To test for semi-strong-form efficiency, the adjustments to previously 

unknown news must be of a reasonable size and must be instantaneous. To test for this, consistent upward or 

downward adjustments after the initial change must be looked for. If there are any such adjustments it would 

suggest that investors had interpreted the information in a biased fashion and hence in an inefficient manner 

(Olowe, 2009). 

Strong Form Efficiency 

In strong-form efficiency, share prices reflect all information, public and private, and no one can earn excess 

returns. If there are legal barriers to private information becoming public, as with insider trading laws, strong-

form efficiency is impossible, except in the case where the laws are universally ignored. To test for strong-form 

efficiency, a market needs to exist where investors cannot consistently earn excess returns over a long period of 

time. Even if some money managers are consistently observed to beat the market, no refutation even of strong-

form efficiency follows: with hundreds of thousands of fund managers worldwide, even a normal distribution of 

returns should be expected to produce a few dozen "star" performers Mishra (2009). 

▪ Testing the Efficiency Market Hypothesis   

Though no stock market is generally believed to be strong-form efficient, most early tests of stock markets in 

industrialized countries have typically been unable to reject null hypotheses of semi-strong and weak-form 

efficiency (Fama, 1970). Some recent studies, however, have tested for the semi-strong and weak-form 

efficiency in developing countries, focusing primarily on the emerging Asian economies, the Latin American 

markets, African and the Middle East. Chan, Gup, and Pan (1992), for example, use unit root tests that show 

weak-form stock market efficiency in Hong Kong, South Korea, Singapore, and Taiwan. Liu, Song and Romilly 

(2007) find that both the Shanghai and Shenzhen Chinese stock market indices are characterized by a random 

walk and are thus weak-form efficient, although cointegration tests indicate joint inefficiency between the two 

markets, i.e. past returns from one market can be used to predict returns in another.  

▪ Concept of Foreign Portfolio Investment 

A portfolio investment is a transaction in which securities are held purely as a financial investment, which can 

be liquidated depending on the investment horizon of the holder. This has been on the increase of recent due to 

the internationalization of the capital market, but is seen as the major cause of hot flows that in itself causes 

capital flight and is currently been blamed for the downturn of the Nigerian Stock Exchange. The recent market 

bubbles aided the inflow of portfolio funds, which many overseas hedge funds took advantage of to make quick 

returns. Beaker, Harvey and Lundblad (2005) find that capital inflows benefits equity markets with above 

average financial development, better legal systems and better quality institutions, which mostly are still 



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fledgling and nascent in most of the emerging markets of Africa. According to Anyanwale (2007) and Ezirim 

(2005) foreign portfolio investment is one of the components of foreign investment (FI). FPI involves the 

commitment of funds to domestic securities by a foreign nation or the purchase of foreign securities by a 

resident. Foreign portfolio investment may not involve positive transfers, just being a change in ownership.  

▪ Foreign Portfolio Inflow in Nigerian Capital Market  

Foreign portfolio inflow was not observed in the Nigerian capital market in the early 1980s up to 1985. The first 

report made by the Central Bank of Nigeria (CBN), recorded foreign portfolio inflow of N151.6 million in 

1986. Beginning from 1985 when the second-tier securities market was established coupled with the 

promulgation of the NigerianEnterprise Promotion Decree in 1987, the Nigerian capital market continued to 

register the inflow of foreign portfolio investment. Thus, directives that the Nigerian capital market must be 

internationalized to make it more responsive and attractive to both local and foreign investors buttressed 

government’s appreciation of the importance of the capital market in national development. Ideally, 

internationalization should enhance the market’s competitiveness and attractiveness in the global market place 

(SEC, 1995).  

The later part of the 1980s particularly between 1987 and 1988 received foreign portfolio inflow of N4,353 

million and N2,611.8 million respectively, representing a drastic rise when compared to the 1986’s figure, 

though it fluctuated downward from 1987 to 1988.  

According to Ekineh (2003) the investment climate in Nigeria for the period 1987 to 1998 was unconducive, 

leading to a spate of divestment even by the nation’s traditional and long standing investors, who perhaps 

moved to more favourable environments. Although the Nigerian capital market was completely deregulated in 

1993, foreign portfolio inflow continued to be negative up to 1998 and reversed in 1999 with a record of 

N1,815.7 million (SEC, 2008). In 2000, the FPI inflow into the market stood at N51.1 billion compared to 

N1.82 billion in 1999. Since then the market has witnessed a tremendous increase in the inflow of fund from 

oversea, high records of N311.1 billion in 2006 and N703.6 billion in 2007 respectively. The N391.1 billion 

increase in FPI inflows in 2007 over 2006 whichrepresents 125% increase. Also, there was a sharp increase in 

FPI inflow between 2005 and 2006, rising from a low inflow of N23.5 billion in 2004 to stand at N116.0 billion 

in 2005 and N311.7 billion in 2006. The inflow of FPI dropped after the 2000’s figure to N26.0 billion in 2001, 

slightly dropped again in 2002 to N24.8 billion and stagnated between 2003 and 2004 recording N23.5 billion 

for the two years. Between 2007 and 2008 there was a drastic fall in FPI inflow from a high of N703.6 billion in 

2007 to N350.9 billion in 2008 (Oluba, 2008). Despite this fluctuation or sharp fall in the inflow of FPI, the 

inflow of foreign portfolio investment rose significantly in 2009 to the tune of N2.15 trillion approximately and 

further rose in 2010 toN2.73 trillion approximately.  

According to SEC (2008) the high foreign portfolio inflow to the market between 2005 and 2007 could be 

attributed to high returns, liquidity level and safety of investment in the Nigerian stock market. However, the 

trend of FPI to the capital market over the period under study (1980-2010) represents an unstable and 

fluctuating inflow between 2011 and 2013, Nigeria’s net foreign portfolio investment was positive with 

N2,789.69, N60,289, and N1,045,628 respectively. 

▪ Performance Trend of the Nigerian Capital Market  

According to Central Bank of Nigeria (2007), analysis of the major indicators of activity in the capital market 

shows that the market has experienced remarkable growth since 1980. Transactions in equities were hitherto 

weak due largely to the low level of information dissemination and awareness which resulted sluggish market 

behavior. However, with the computerization of trading and increased transparency in delivery of corporate 

information, the market has become relatively more efficient. Since the 1980’s, the market indicators including 

the number of listed companies and securities, market capitalization, new issues, value index and market 

turnover have recorded significant increases. The relative improvement in the performance of the major key 

indicators can be attributed to the establishment of second-tier securities market (SSM) in 1985; the 

deregulation of interest rates in 1987, the continuous privatization of government owned companies, 

improvement in market infrastructure/innovation; as well as the reform in the Nigerian banking industry. These 

developments have enhanced market liquidity; offered opportunities for price discovery; improved market 

efficiency in service delivery; and above all resulted in unprecedented growth of both the primary and 

secondary markets (Onyiuke, 2009).  

The deregulation of interest rates, as well as the massive bank failure in the late 1990’s made many private 

enterprises/investors to patronize the equity market to source funds, as bank lending became relatively 

expensive. From 91 in 1980, the number of companies listed on exchange (equities) rose by 114% to 214 in 

2005, but declined to 202 in 2006 as some quoted banks were involved in mergers, acquisitions in the 



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2005/2006 recapitalization exercise in the banking sector, while those that were unsuccessful were di-listed 

from the stock exchange. 

The growth of listed companies coupled with greater awareness on the part of investors resulted in increase in 

the number of securities issued and traded in the market. This also contributed in the increase in market 

capitalization, which grew from N5.0 billion in 1981 to N13.3 trillion in 2007, over twenty-fold increase. The 

phenomenal growth notwithstanding, the market capitalization represents about 56.0 percent of GDP, compared 

to 167.1 percent for South Africa, and 130.0 percent for Malaysia. This indicates that the potentials for growth 

in the Nigerian capital market is still very enormous (Central Bank of Nigeria, 2008).  

The trend in the new issues market was one of fluctuations between 1980 and 2000, and general improvement 

thereafter. Indeed, the entry of some corporate entities into the Nigerian capital market after deregulation of the 

market contributed to the upsurge witnessed in the market between 1986 and 2006. Following the banks’ 

recapitalization exercise in 2004, the tempo of activities in the new issues market was very high in 2005 and 

2006, as many banks and insurance companies approached the stock, market to raise additional funds.  

Consequently, the exchange considered and approved 62 applications for new issues, valued at N1.4trillion in 

2006, compared with 52 applications for new issues, valued at N703.5 billion in 2005. The non-bank corporate 

issues accounted for 41 percent with 21 applications valued at N577 billion. The Federal Government Bonds 

issue amounted to N155.0 billion and accounted for 11.0 percent of the total; while N39.28 billion, N6.94 

billion and N140.0 billion were from private placements, debt stocks and Federal Government bond (in 7 

series), respectively. In 2008, the exchange considered and approved 70 applications for new issues and mergers 

to acquisition in excess of N2.2 million or 9.53% of GDP, as against 65 applications for new issues valued at 

N779.8 billion. Government Bond issue accounted for N272 billion or 12.62% of total amount approved during 

the year. Of the non-bank application, foreign listing and insurance subsectors accounted for N295 billion and 

N150.45 billion or 13.54% and 6.9% respectively of total applications considered (NSE, 2009).  

According to SEC (2008) transactions in the secondary segment of the market have been vibrant in recent years 

as the market has witnessed substantial growth in turnover. This development followed the automation of 

processes, increased local awareness of opportunities on the Nigerian Stock Market as well as the continued 

effort at internalization of the market. For instance, the volume of transaction rose by 40.0 percent to 26.7 

billion shares in 2005 from 19.2 billion shares in 2004, while the value stood at N262.9 billion, up by 16.4 

percent from N225.8 billion in 2004. In 2006 the total turnover was 36.7 billion shares, indicating an increase of 

37.5 percent over the preceding year’s level. The year closed with a market turnover value of N470.3 billion.  

Foreign Portfolio Investment  

The phenomenon of Foreign Portfolio Investment in emerging market economies has always attracted the 

attention of writers from the theoretical and empirical perspective. The benefits of foreign portfolio investment 

(FPI) include transfer of technology, higher productivity, higher incomes, more revenues for government 

through taxes, enhancement of balance of payment ability, employment generation, diversification of the 

industrial base and expansion, modernization and development of related industries. According to Feldstein 

(2000), first, international flows of capital reduce the risk faced by owners of capital by allowing them to 

diversify their lending and investment. Second, the global integration of capital market can contribute to the 

spread of best practices in corporate governance, accounting rules and legal traditions. Proponents of foreign 

portfolio investment picture it as adding new resources/capital to the host economy in a way that improves 

efficiency and stimulates economic growth. It is thus viewed as a panacea for economic development by 

providing the capital underdeveloped countries desperately need to fill their savings-investment gap. From the 

neoclassical theory, growth is achieved by increasing the quantity of factors of production optimally. In a 

simple world of two factors, Labour and capital, it is often presumed that low- income countries have abundant 

Labour but scarce capital. This situation arises owing to shortage of domestic International Journal of Economic 

Development Research and Investment savings in these countries (especially the developing countries), which 

places constraint on capital formation and hence growth. Even where domestic inputs in addition to Labour, are 

readily available, increased production may be limited by scarcity of imported inputs upon which production 

processes in low- income countries are based. Based on this fact, international capital flows readily as 

popularized by O'Connor and Iscariot (2010) become an important means of helping developing countries to 

overcome their problem of capital shortage. As Lebragacio (2010) suggests that capital will move from 

countries where it is abundant to countries where it is scarce. The resultant capital relocation will boost 

investment in the recipient country. 

▪ Macro-Economic Indicators and Foreign Portfolio Investment in Nigeria 

Lee (2007) argued that wide range of factors has been adduced to be responsible for the causal effect on the 

international flows of foreign investment. Nuntila Derusia (2012) opined that relative low yields in industrial 



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countries together with impressive economic growth and attractive returns in developing countries motivated 

investors to relocate their funds to direct investments. He posits that the increase in international flow of foreign 

investment correspondent well with the trend towards trade globalization, international financial linkages and 

expansion of production bases overseas. Macroeconomic variables are indicators or main signposts signaling 

the current trends in the economy. Thus Keynes identified some main macroeconomics variables that study the 

FPI of the economy as a whole: Gross Domestic Product (GDP), Exchange rate (EXR), Interest Rate, Inflation 

and Money Supply. GDP is a measure of the annual improvement in the standard of living of the average 

citizen/resident of a country and it takes into account all the production inside a country, independent of whose 

,domestic or foreign, owns the production site. What is important is that the production takes place inside the 

territories of the country. Exchange rate is the rate in which one nation’s currency is compared with the value of 

another country’s currency. If one nation’s exchange rate is higher than another one, it affects the purchasing 

power of the lower exchange rate of a particular country. Example, Nigeria naira rate is lower as to compare to 

dollar of America therefore an American will have a higher purchasing power than Nigerian. Interest rate is the 

cost of borrowing money, cash, credit, bonds, stocks, mortgage government borrowing. Interest rate reaches a 

peak just before recession and fall through the recession. Rising interest rate signal an expanding economy and 

when already high interest rate begins to rises even further and faster, that is a sure sign of the onset of inflation. 

Inflation is an economy can be the result of an increase in aggregate demand that is accompanied by an increase 

in aggregate supply. 

▪ Policy Reforms and Foreign Capital Flows in Nigeria  

The federal government indigenization policy of the 1970s contributed in scuttling the growth of foreign capital 

flows in Nigeria. Prior to the promulgation of the Nigerian Enterprises Promotion (NEP) Act of 1972, there 

were some laws (Exchange Control Act of 1962, Section 7 of the Act, stipulates that “nobody within Nigeria 

could make any payment to anybody outside Nigeria or make such payment on behalf of anybody resident 

outside Nigeria without the permission of the Minister of Finance, Companies Act of 1968, Banking Act of 

1969, Petroleum Act of 1969, Patents and Design Act of 1970 and Copy Rights Act of 1970) laid the relevant 

legal framework for the eventual take-off of the indigenization policy. 

However, different policy reforms led to the change in the investment climate in Nigeria for both domestic and 

foreign investors. The abrogation of the Nigerian Enterprises Promotion Decree 1989 and the Exchange Control 

Act of 1962 as well as their subsequent replacements with Nigerian Investment Promotion Council Decree No 

16 of 1995 and Foreign Exchange (Monitoring and Miscellaneous Provisions) Decree 17 of 1995, publication of 

Industrial Policy for Nigeria in January, 1989 provided foreign investors with enormous opportunity to 

participate in the economy. The Company and Allied Matters Act 1990 and Nigerian Investment Promotion 

Commission (NIPC) decree No. 16 of 1995 represented an institutional framework for the formation, 

management and winding-up of companies as well as registration of business names and incorporated 

trusteeship in Nigeria, while NIPC is to encourage, promote and co-ordinate investment in the country. The 

Foreign Exchange (Monitoring and Miscellaneous Provision Provisions) Decree 17 of 1995 was enacted to 

liberalize transactions involving foreign exchange, thereby; allowing for free flow of foreign capital. In 

addition, there was the establishment of Investment and Securities Act (ISA) of 1999 to further deregulate and 

enhance the development of the Nigerian capital market for greater inflow of foreign capitals. Apart from the 

law reforms, there are also the economic and financial sector policy reforms designed to reduce barriers, 

increase banking capital base and attract investment as well as tax holidays, easing of import and customs 

controls, infrastructure investment, and Labour law reform.  

▪ Capital Flows 

Nigeria’s foreign private capital flows involve mostly the Foreign Direct Investment (FDI) and Foreign 

Portfolio Investment (FPI). The Foreign Portfolio Investment is a recent development in Nigeria and this was 

initially attributed to the non-internationalization of the country’s money and capital markets as well as the non-

disclosure of information on the portfolio investments of Nigerian investors in the foreign capital/money 

markets (CBN 1997). 

Onosode (1997) stated that between July 1995 and July 1996, about US$6.0 million FPI was made in the 

Nigerian capital market through the Nigerian Stock Exchange (NSE) for the first time since 1962, while for the 

whole of 1996, foreign investment through the Nigerian Stock Exchange totaled US$32.99 million; for 1995, it 

was US$1.14 million (Obadan, 2004). In terms of net investment, the NPI in Nigeria was N151.6 million in 

1986, and it rose to N 51, 079.13 million in 2000. By 2005, there was a tremendous increase in the NPI in 

Nigeria. It increased from N23,541.00 million in 2004 to N393,336.41 million in 2005, (indicating growth rate 

of 1,565 per cent). It, however, dropped to N294,956.59 million in 2006. In 2007, the NPI increased to 

N609,342.81 million before declining to N350,919.40 in 2008. The sudden drop in the NPI level in 2008 could 



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be attributed to the capital flight witnessed in the country at the heat of the GFC. Similarly, the NDI was N 

735.8 million in 1986 and rose to N115,952.16 million in 2000. Furthermore, it increased from N654,193.18 

million in 2005 to N1,779,594.79 million in 2006, indicating a growth rate of 172 per cent. In 2007, it dropped 

to N759,380.40 million but rose to N802,615.70 million in 2008. 

Within the same period, while the economy was experiencing huge inflows of FDI, it also witnessed some 

outflows. Between 1986-2008, the inflow of FDI was N4,024.00 million in 1986, while the outflow was 

N1,524.40 million, resulting in a net flow of N2,499.60 million. In 2000, N16,453.60 million was FDI inflow 

compared to N13,106.60 million outflow. In 2007, the FDI inflow and outflow were N54,254.20 million and 

N328.80 million, respectively, while the net flow was N53,924.80 million. However, the inflow and outflow 

dropped to N37,977.70 million and N4,362.50 million in 2008, resulting in a net flow of N33,615.20 million. 

Averagely, the annual FDI inflow and outflow in the economy for the period under review was N18,755.49 

million and N4,090.89 million, respectively, thereby, resulting in a net flow of N14,518.59 million. Achieving a 

positive net foreign investment is important in influencing the overall position of a country’s external sector.  

▪ Empirical Review 

Aggarwal, et al, (2003) examined the investment allocation choices of actively-managed U.S. mutual funds in 

emerging markets after the Asian financial crisis. They analyzed both country- and firm-level governance and 

disclosure policies that influence these investment allocation decisions. At the country-level, they find that U.S. 

funds invest more in open emerging markets with stronger shareholder rights, legal frameworks and accounting 

standards. After controlling for country characteristics, U.S. funds are found to invest more in firms that adopt 

policies resulting in greater transparency and accounting disclosures in addition to characteristics such as size, 

visibility, and high analyst following. The impact of stronger disclosure and transparency is most pronounced in 

countries with weaker investor protection 

Rai and Bhanumurthy (2007) tried to examine the determinants of Foreign Institutional Investments in India, 

which have crossed almost 12billionUS dollar by the end of 2002. Given the huge volume of these flows and its 

impact on other domestic financial markets, understanding the behavior of these flows becomes very important 

at the time of liberalizing capital account. In this study, by using monthly data, they found that FPI inflow 

depends on stock market returns, inflation rate (both domestic and foreign) and ex-ante risk. In terms of 

magnitude, the impact of stock market returns and the ex-ante risk turned out to be major determinants of FPI 

inflow. This study did not find any causation running from foreign portfolio investment inflow to stock returns 

as it was found by some studies.  

Baharumshah and Thanoon (2006) provided a quantitative assessment of the effect of various types of capital 

flows on the growth process of the East Asian countries, including China. The empirical analysis was based on 

dynamic panel data and they found; first, that domestic savings contribute positively to long-term economic 

growth. Second, they confirm that foreign direct investment (FDI) is growth enhancing and that its impact is felt 

both in the short and long run. Additionally, FDI influence on growth is much higher than domestic savings. 

Third, short-term capital inflow has adverse effect on the long-term as well as short-term growth prospects and 

it appears to be sensitive to long-term capital inflows. Fourth, long-term debt has positive effect on growth but 

its effect does somewhat disappear in the long-term. By and large, the observed positive contribution of FDI in 

the growth process of East Asian economies is a robust finding.  

Durham (2003) focused on the effects of foreign portfolio investment (FPI) and other foreign investment (OFI) 

on economic growth using data on 88 countries from 1977 through 2000. Most measures suggest that FPI has 

no effect and some results indicates that OFI has a negative impact on growth that is somewhat mitigated by 

initial financial and or legal development.  

Jenkins and Thomas (2002) examined the determinants of foreign portfolio investment (FPI) and its impact on 

the national economy in six developing Asian countries. Regression results show that inflation rate, index of 

economic activity and the share of domestic capital market in the world stock market capitalization are four 

statistically significant determinants of FPI. The first variable has a negative coefficient while the last three 

variables possess positive coefficients. Foreign direct investment, total foreign trade and current account deficit 

variables are found to be statistically insignificant.  

Lee (2007) posits that in the last several years there has been a substantial theoretical advancement in our 

understanding of the factors determining international portfolio capital movements. From the mechanic flow 

theory, progress has been made to the portfolio-adjustment theory which rests on a firmer microeconomic 

foundation. Chukwuemeka (2008) examined the determinant of foreign Portfolio Investment. Anayochukwu 

(2012) examined the impact of stock market returns on Foreign Portfolio Investment. Chi-Chi and Eze (2013) 

examined the impact of macroeconomic indicators on the performance of Foreign Portfolio Investment. There 



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are however, few empirical studies on the macroeconomic variables that determine the inflow of Foreign Portfolio 

Investments.  

3. Research Methodology 

The study uses quasi experimental research design approach for the data analysis. The approach combines theoretical 

consideration with the empirical observation and extract maximum information from the available data. The  study used   

time series data sourced fromthe publications of Central Bank of Nigeria Statistical Bulletins, annual report and economic 

reviews.  

3.1 Model Specification  

The model specified below is based on empirical studies and theories.  

Model 1 

ASPI = F(NFPI, PIE, PIB, PIGS, EXR)………………………..1 

ASPI = β0 + β1NFPI+ β2PIE+ β3PIB + β4PIGS+β5 EXR + µ ………….2 

Model 2 

MKCT = F(NFPI, PIE, PIB, PIGS, EXR)……………………......3 

MKCT = β0 + β1NFPI+ β2PIE+ β3PIB + β4 PIGS+β5 EXR + µ….4 

Where  

ASPI  = Nigerian Stock Market All Share Price Index  

MKCT = Nigerian Stock Market Capitalization  

NFPI  = Net Foreign Portfolio Investment in Nigeria 

PIE  = Portfolio Investment in Equity 

PIB  = Portfolio Investment in Bonds 

PIGS  = Portfolio Investment in Government Securities 

EXR  = Nigerian Naira Exchange Rate per US Dollar 

β0  = Intercept 

β1 – β5 = Coefficientof the explanatory variable  

µ  = Error term  

Theoretical functional relationship between the dependent and independent variables in the models are 

explained below: 

▪ Net Foreign Portfolio Investment: This refers to the difference between the inflow and outflow of 

foreign portfolio in the financial market. An increasing inflow signifies that the capital market is 

functioning well. The general assumption based on the portfolio investment theory, is that outflow of 

portfolio investment is a mechanism for risk diversification. Therefore an increase in net foreign 

portfolio investment is expected to add on the capital market of the recipient country, which can be 

measured in market capitalization or all share price index. 

▪ Portfolio Investment in Equity: The Nigerian capital market trades on equity of corporate 

organizations which are multinational firms. For instance equity of Nigerian bottling company is 

traded on the floor of Nigeria stock exchange. The inflow of foreign investors wills not only increase 

the equity value of the firm, but will also enhance market capitalization and all share price index of the 

Nigerian stock exchange.  

▪ Portfolio Investment in bonds: The diversification theory of portfolio investment spreads among the 

various capital market instruments is a mechanism for management risk. But also have the potentials of 

increasing the performance indicators of the recipient country. 

▪ Investment in government securities: Apart from corporate securities, government securities also 

attract foreign investors, because it is assumed to be risk-free. Increase in inflow can enhance the 

performance indices of the recipient country. 

▪ Portfolio Investment in Exchange Rate: This is a monetary policy instrument that regulates the 

external sector of the economy. The inflow and outflow of investment across national borders is 

determined by exchange rate of the foreign investors and recipient country, just as rate of return or 

interest rate determined domestic investment. The depreciating Nigerian naira exchange rate will 

attract foreign portfolio investors, which enhances the performance of the capital market.          
3.2 Data Analysis Method 

In analyzing the data, and results of this study, the multiple regressions with the Econometric view. This is used to test the 

hypotheses and the variables in the study.  

Estimation Procedure 

3.2.1 Unit Root  

Dickey and Fuller looked at the distribution of this kind of test statistic and found that OLS estimates are biased 

down (towards stationary) and OLS standard errors. Thus, it is possible that many series that would have 

thought were stationary based on OLS regression were infact generated by random walks (Cochrane, 2005) the 



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19 

 

study will therefore subject all the variables to unit root test, using the augmented Dickey Fuller (ADF) test 

specified in Gujarati (2004) as follows. 

3...........................................................................1
1

121 Etyiyy t

m

i
tt ++++= −

−
−   

Where:  

ty  = change time t 

1− ty  = the lagged value of the dependent variables  

t  = White noise error term  

If in the above  =0, then we conclude that there is a unit root. Otherwise there is no unit root, meaning that it 

is stationary. The choice of lag will be determined by Akaike information criteria. 

3.2.2 Coint egration Test  

In order to avoid spurious estimates, we intend to establish long-run relationship between the variable included 

in the model and Engle-Granger Approach to co integration will be adopted. This approach is based on 

conducting unit root test on residual obtained from the estimated regression equation. If the residual is found to 

be stationary at level, we conclude that the variables are cointegrated and as such as long-run relationship exists 

among them. 

tijt

j

i

iit

i

i

tOt TATAwTA 1

11

 +++= −

=

−

=

 ………………………………………………4 

In the equation above, ASPI/MKCTis thestrength of Nigerian Capital Market. The regression will determine 

whether or not Nigerian foreign portfolio inflow affects Nigerian capital market performance positively or 

negatively. 

3.2.3 Granger Causality Test 

The main objective of this study is to investigate the causality between the independent and the dependent 

variables. Granger (1996) proposed the concept of causality and erogeneity: a variable Yt is said to cause Xt, if 

the predicted value of Xtis ameliorated when information related to Ytis incorporated in the analysis. 

4. Data Presentation and Analysis of Results Presentation of Results 

Table 1: Results of Static OLS Regression of Model 
Model Variable Coefficient Standard Error T-Statistics Probability 

      

1. 

 
ASPI 

Intercept 143.4465 750.5467 0.191123 0.8503 

NFPI 0.190868 0.029193 6.538103 0.000 

PIE 0.086646 0.029193 1.548630 0.1364 

PIB -0.520684 0.468963 -1.110288 0.2794 

PIGS -0.371395 1.486963 -0.249862 0.8051 

EXR 0.007304 0.021552 0.338898 0.7381 

R2 0.803279    

ADJR2 0.756441    

2. 

 

 
MKCP 

Intercept 1614781. 1227974 1.314995 0.2015 

 NFPI -12.17253 25.45797 -0.478142 0.6371 

PIE 212.6990 85.79699 2.479096 0.0209 

PIB -1202.984 830.7092 -1.448141 0.1611 

PIGS -2786.872 2513.737 -1.108657 0.2790 

EXR 4.992292 42.06899 0.118669 0.9066 

R2 0.239032    

ADJR2 0.073604    

Source: Author’s computation 

 

From the table above, model oneshow an R2 and Adjusted R2 of 0.803 and 0.756 which means that 80.3% and 

75.6% variation in Nigerian Capital Market All Share Index can be explained by variation in the independent 

variables formulated in the model, model 2shows that 23.9% and 7.3% variation in Nigerian Capital Market 

Capitalization can be explained by the explanatory variables. Model 1 shows that PIB and PIGS have negative 



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20 

 

relationship with All Share Price Index, while model 2 shows that NFPI, PIB and PIGS have negative 

relationship with market capitalization. 

Table 2: Autocorrelation and overall significance of Regression Model 

Autocorrelation Model Durbin Watson Statistics Autocorrelation Presence Type 

Test 1 2.089151 Presence Positive 

2 2.054879 Presence Positive 

 Model F-Statistics Probability Remark 

Model Overall  

Significant  

F-Test 

1 17.15006 0.000001 Very high 

2 1.444934 0.246081 Very low 

Source: Author’s computation 

The result presented in the above table, shows the positive presence of serial auto correlation in the models, the 

overall significance shows that the model 1 is significant while model 2 is not significant.    

Table 3:Unit Root Test 

Variable Critical 1% 5% 10% Adf Statistics Lag Remark 

At Level       

ASPI -3.681914 -2.19183 -2.625121 0.44851 2 Non-stationary 

MKCP -3.681914 -2.19183 -2.625121 -5.085272 2 Non-stationary 

 NFPI -3.681914 -2.19183 -2.625121 -7.452394 2 Non-stationary 

PIE -3.681914 -2.19183 -2.625121 -6.28197 2 Non-stationary 

PIB -3.681914 -2.19183 -2.625121 -6.907999 2 Non-stationary 

PIGS -3.681914 -2.19183 -2.625121 -11.28601 2 Non-stationary 

EXR -3.681914 -2.19183 -2.625121 -8.660356 2 Non-stationary 

At Difference       

ASPI -3.681914 -2.19183 -2.625121 5.389412 2 Stationary 

MKCP -3.681914 -2.19183 -2.625121 -2.288303 2 Stationary 

 NFPI -3.681914 -2.19183 -2.625121 0.565253 2 Stationary 

PIE -3.681914 -2.19183 -2.625121 -6.285197 2 Stationary 

PIB -3.681914 -2.19183 -2.625121 -6.468982 2 Stationary 

PIGS -3.681914 -2.19183 -2.625121 -7.220513 2 Stationary 

EXR -3.681914 -2.19183 -2.625121 -10.95431 2 Stationary 

Source: Author’s computation as extracted 

The table above shows the analysis of the Augmented Dickey Fuller Test Statistics. It shows that all variables 

are not stationary at level but stationary at difference. 

Table 4: Johensen Cointegration Test (Trace Test) 

Model Hypothized Null Eigen Value Trace Statistics Critical  Value At 

5% 

Probability Remark 

1. 

 

ASPI 

r ≤ 0 0.954082 156.0382 95.75366 0.0000 Significant  

r ≤ 1 0.674119 79.01559 69.81889 0.0077 Significant 

r ≤ 2 0.644179 50.98502 47.85613 0.0247 Significant 

r ≤ 3 0.506230 25.15182 29.79707 0.1561 Not Significant 

r ≤ 4 0.241908 7.509662 15.49471 0.5192 Not Significant 

r ≤ 5 0.023164 0.585902 3.841466 0.4440 Not Significant 

2. 

 

MKCP 

r ≤ 0 0.945733 1666350 95.75366 103.18 Significant  

r ≤ 1 0.707007 87.96130 69.81889 0.0000 Significant 

r ≤ 2 0.588251 54.81592 47.85613 0.0009 Significant 

r ≤ 3 0.453504 30.85769 29.79707 0.0097  Significant 

r ≤ 4 0.292913 14.54355 15.49471 0.0376 Significant 

r ≤ 5 0.174734 5.185322 3.841466 0.0629 Not Significant 

Source: Author’s computation 

The results presented in the above table choose the stable and long run relationship between the independent 

and the dependent variables in the models.  

 

 

 



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Table 5: Johensen Cointegration Test (Maximum Eigen) 

Model Hypotheses 

Null 

Eigen value Maximum 

Eigen 

Critical  Value 

at 5% 

Probability Remark 

1. 

 

ASPI 

r ≤ 0 0.954082 77.02264 40.07757  0.0000 Significant  

r ≤ 1 0.674119 28.03057 33.87687 0.2121 Not Significant 

r ≤ 2 0.644179 25.83320 27.58434 0.0823 Not Significant 

r ≤ 3 0.506230 17.64215 21.13162 0.1438 Not Significant 

r ≤ 4 0.241908 6.923760 14.26460 0.4982 Not Significant 

r ≤ 5 0.023164 0.585902 3.841466 0.4440 Not Significant 

2. 

 

MKCP 

r ≤ 0 0.945733 78.67368 40.07057 0.000 Significant  

r ≤ 1 0.707007 33.14538 33.87687 0.069 Not Significant 

r ≤ 2 0.588251 23.95823 27.58434 0.1362 Not Significant 

r ≤ 3 0.453504 16.31414 21.13162 0.2070 Not Significant 

r ≤ 4 0.292913 9.358228 14.26460 0.2576 Not Significant 

r ≤ 5 0.174734 5.185322 3.841466 0.0228 Not Significant 

Source: Author’s computation 

The results presented in the above table choose the stable and long run relationship between the independent 

and the dependent variables in the models.  

Table 6: Normalized Co integration Results 

Source: Author’s computation 

The table above reveals the long run relationship between the dependent and the independent variables in the 

models.  

Table 7: Pair wise Granger Causality Test: Model I 

Pairwise Granger Causality Tests 

    
    
 Null Hypothesis: Obs F-Statistic Prob.  

    
    
 EXR does not Granger Cause ASPI  27  0.03881 0.9620 

 ASPI does not Granger Cause EXR  0.29521 0.7473 

    
    
 NFPI does not Granger Cause ASPI  27  3.39259 0.0520 

 ASPI does not Granger Cause NFPI  6.40120 0.0064 

    
    
 PIB does not Granger Cause ASPI  26  0.90906 0.4182 

 ASPI does not Granger Cause PIB  0.04577 0.9554 

    
    
 PIE does not Granger Cause ASPI  27  6.64787 0.0055 

 ASPI does not Granger Cause PIE  8.87283 0.0015 
    
    
 PIGS does not Granger Cause ASPI  25  0.00071 0.9993 

 ASPI does not Granger Cause PIGS  0.48612 0.6221 

    

The objective of Granger Causality is to examine the casual relationship running from the dependent to the 

independent variables and from the dependent variables. From the above, the probability value shows a bi-

Variable Coefficient Standard error Type Remark 

ASPI 1.000000    

 NFPI 2.638675 0.16356 negative Expected 

PIE -7.008705 0.3966 negative Not expected 
PIB 4.752103 1.44059 negative Not expected 

PIGS 56.73859 4.88216 positive Expected 

EXR -0.209000 0.07347 negative Not expected 
LOG LIKELIHOOD  - - - 

MKCP 0.0000    

 NFPI 4.753615 1.25885   
PIE -8.178754 3.03862 Negative  Not expected 

PIB 43.23362 16.8056 Positive Expected 

PIGS 31.63909 58.4390 Positive Expected 

EXR 1.0000 0.000 Negative  Not expected 



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directional relationship running through NFPI to ASPIto NFPI,it also run from PIE to ASPI and ASPI to PIE 

while others are independent showing no causal relationship between the variables.  

Table 8: Pairwise Granger Causality Tests Model II: 

Pairwise Granger Causality Tests 

    
     Null Hypothesis: Obs F-Statistic Prob.  

    
     MKCP does not Granger Cause EXR  27  0.06025 0.9417 

 EXR does not Granger Cause MKCP  0.06183 0.9402 

    
        
 NFPI does not Granger Cause MKCP  27  2.47591 0.1072 

 MKCP does not Granger Cause NFPI  0.33641 0.7179 

    
     PIE does not Granger Cause MKCP  27  3.54421 0.0463 

 MKCP does not Granger Cause PIE  8.88733 0.0015 

    
     PIB does not Granger Cause MKCP  27  0.09087 0.9135 

 MKCP does not Granger Cause PIB  0.09359 0.9110 

    
     PIGS does not Granger Cause MKCP  27  0.57749 0.5696 

 MKCP does not Granger Cause PIGS  2.32293 0.1215 

    
    5. Discussion of Findings 

The Nigerian capital market over the three decades attracts attention of the government and the regulatory 

authorities that result in reforms, for instance, the internationalization of the Nigerian capital market have the 

objective of attracting of foreign portfolio investors. The deregulation of stock price in 1993 was also aimed at 

attracting foreign investors (Onoh, 2002). The objective of this study is to examine the extent to which foreign 

investment has affected the performance of Nigerian capital market.  

From model one; the result found that 80.3% variation in All Share Price Index can be traced to the independent 

variables examined in the study. This means that foreign portfolio have significant effect on the performance of 

Nigerian capital market measured by All Share Price Index. The finding confirms the objective of the capital 

market reform and the A-piriori expectation of the result. However, foreign bond investment and foreign 

government security investment have negative relationship with All Share Price Index which is contrary to the 

expectation of the result. The negative relationship can be traced to liquidity challenges in the international 

monetary system such as the global financial crises. The negative relationship of the variables invalidates the 

capital market reforms. Model two reveals that 23.9% variation in the market capitalization can be traced to the 

predictor variables in the model. It shows that Net Foreign Portfolio Investment, Portfolio Investment in bonds 

and Portfolio Investment in Government Securitieshave negative relationship with Market Capitalization which 

is contrary to the expectation of the results. However, foreign investment in equities and exchange rate 

haspositive relationship on Nigerian capital market capitalization. The overall findings of this study confirm 

that there is relationship between foreign Portfolio Investment and the performance of Nigerian capital market. 

6. Conclusion 

To recall that the objectives of this study is to examine the relationship between Nigerian capital market 

indicators and inflow of foreign portfolio investment in Nigeria capital market, the data was sourced from 

Central Bank of Nigeria Statistical Bulletin. The study adopts the multiple regression using econometric view 

and descriptive analysis to examine the relationship between the dependent and the independent variables. From 

the findings of the study, fromthe findings of the study, foreign portfolio has more significant effect on All 

Share Price Index than the market capitalization. From the above the study concludes that the independent 

variables examined in the study have significant relationship with the performance of Nigerian capital market. 

7. Recommendations 

• Monetary and macroeconomic policies should be reformed and re-structured to achieve the macroeconomic 

policy targets for better inflow of foreign portfolio investments and the monetary authorities should engage 

on drastic measures to overhaul the investment climate to attract foreign portfolio investors into Nigeria. 



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• The financial sector should further be reformed and re-structured to enhance the inflow of foreign portfolio 

investors and Interest rate should be deregulated fully to allow for the market force of demand and supply 

determines the market rate of return. 

• The Nigerian capital market should further be reformed and deepened to international standard to enhance 

the inflow of foreign investors and the exchange rate market should properly be managed, consistent 

exchange rate policies should be used and flexible exchange rate regime should be introduced for effective 

management of Nigerian External Sector. 

• The monetary policy should make policies that will avert financial sector crisis in Nigeria and Policies 

should properly be device to manage the negative effect of international monetary crisis on the inflow of 

foreign portfolio investment. 

• The international liquidity system and the international monetary policy should be well examined; the 

existing policies should be reviewed to avert the negative effect of global liquidity crisis that can negatively 

affect the inflow of foreign investors and capital market performance. 

• The Nigerian investment climate should be reviewed, an international investment treaties be revisited to 

enhance the inflow of foreign portfolio investors. 

8. Contribution to Knowledge 

This study examined foreign portfolio and the performance of Nigerian capital market using time series data. 

From the findings of the study, the following is contributed to the existing body of knowledge in finance. 

▪ The inflow of foreign portfolio investment to the Nigerian capital market can affect the growth 

development and enhance the performance of the capital market. 

▪ The period covered in the study captured the post Structural Adjustment Programme period and 

various reforms in the Nigeria financial system therefore it contribute by examining the relationship 

that exist between the period, foreign portfolio inflow and the performance of capital market. 

▪ The use of Exchange Rates as independent variable contribute to the knowledge on the effect of 

exchange Rate volatility such as the depreciating Naira exchange rate on the performance of the capital 

market    

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