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Nigeria in the last few years had clamored for foreign portfolio investment in the country. This is believed to be a facilitator of economic growth and development, which leads to industrialization of the economy in the long run (Adeleke, Olowe & Fasesin, 2014). Foreign portfolio investment means the purchase of shares in a foreign country where the investing party does not seek control over the investment. A portfolio investment typically takes the form of the purchase of equity (preference share) or government debt in a foreign stock market, or loans made to a foreign company. Obviously the purchase of bonds issued by a company, which gives no voting rights, or of government debt, and making loans to foreign company do not give control (Bosodersten and Reed, 1996).

Portfolio investment is a recent phenomenon in Nigeria. Up to the mid 1980’s, Nigeria did not record any figure on portfolio investment (inflow or outflow) in her balance of payment account. The nil return on the inflow column of the account is attributable to the absence of foreign portfolio investors in the Nigerian economy. This is largely because of the non-internalization of the country’s money and capital markets as well as the non-disclosure of information on the portfolio investments in foreign capital/money markets (Obadan, 2004). Following a careful review of the consequences of the Exchange Control Act of 1962 on the economy, after some thirty three years of its operation, Nigerian authorities came to the conclusion that the Act had not brought the economy any substantial benefits. The Act was judged inimical to a market driven economy, new policy government had pursued since 1986, with the deregulation of the economy. While equity investment trickled into Nigeria as a result of the Exchange Control Act of 1962, Portfolio Investments dried up, because portfolio investments required an investment climate, which guarantees speedy “free entry” and “free exit” of investment funds into and out of a country in a flash.

The investment climate in Nigeria engineered by the Exchange Control Act of 1962 did not guarantee the speedy mobility of funds across international borders. It took the authorities more than three decades to realize that protection of the economy in a world striving to dismantle economic frontiers had not paid off, and that the capital market being a major player in the mobilization of funds for investment has to be liberalized and modernized to enable it capture enough resources for the economy from within and from outside. The Exchange Control Act of 1962 was identified as a major constraint on the growth of the Nigerian capital market. Accordingly the Act was blown away with gale force in 1995, by the strong wind of deregulation, which swept across the Nigerian Macro-economic policy arena, from the beginning of the last quarter of 1986 (Onoh, 2002).

The deregulation of securities pricing by SEC in 1993; the abolition in 1995 of both the Exchange Control Act of 1962 and the Nigerian Enterprises Promotion Decree (NEPD) of 1989, demanded the reorganization of the Nigerian Stock Exchange to make it more dynamic and mobile in the provision of adequate liquidity of investment bring up the operation of the exchange to international standard and attract foreign portfolio investors. Accordingly, Federal Government of Nigeria in March 1996 set up a panel on the Nigerian Stock Exchange and , the panel’s term of reference include the reorganization of the Nigeria Stock Exchange to make it more dynamic, to recommend ways for modernizing the exchange to bring it up to international standard and to make other recommendations, which in the view of the panel, would strengthen the operation of the exchange, and position it to deal with the domestic and international capital market challenges to the coming millennium (Onoh, 2002).


Nigeria’s stock market index is the Nigerian stock exchange’s All-share Index (NSE-ASI, or simply ASI), and currently provides a composite picture of the financial health of 233 listed equities. Starting with an index value of 100 in 1984, with increased listings and financial activity, the index value saw changes from 12,137; 20,129; 23,845; 24,086; to 33,358 at the end of the years 2002-2006 respectively; with respective end-of-year market capitalizations of N0.748 trillion, N1.32 trillion, N1.93 trillion, N2.90 trillion and N5.12 trillion. The ASI attained a value of 57,990 (and N10.180 trillion capitalization) at the end of year 2007, started the year 2008 at 58,580 (with a market capitalization of N10.284 trillion), and then went on to achieve its highest value ever of 66,371 on March 5, 2008 with a market capitalization of about N12.640 trillion.

However, ever since that high, the ASI has severally declined, exhibiting a secular bear posture since July 17, 2008 when, at ASI of 52,910, the Index fell below 20% of its all time high. It fell further, crossing below the 50,000 mark on August 8, 2008 and closing on October 22 at 42,207 (a 36.4% loss from the high within just seven months, and a year to date decline of 27.9%) (Mobolaji, 2008). Meanwhile CBN annual report on Foreign portfolio investment from 2000-2006 are $51,0791.1; $26,317.1; $24,789.2; $23,555.5; $23,541.0; $375, $858.9; $117,218.9 US dollars ranging from $1-$1000 respectively, imply fluctuation on Foreign portfolio investment in Nigeria (CBN Annual Report, 2006). The figures and dates above suggest an overlap of distress periods. Bearing in mind that there is virtually no cross-ownership of banks (investment or otherwise) between Nigeria and foreign countries, and there is hardly any vibrant domestic mortgage market for there to be sub-prime problems as found particularly in the UK and the USA. It is difficult to pronounce any direct impact. Nevertheless a factor on which this situation may have direct or indirect effect is Foreign portfolio investment withdrawals and withholding in order to service financial problems at home, as well as prospects of reduced foreign direct investment (FDI), are bound to affect investors’ confidence and the economic health of Nigeria. (Mobolaji, 2008).


There has also been competition among emerging markets to attract foreign portfolio investments, which has led to a situation in which in order to sustain inflows of portfolio investments, it has become increasingly important for developing countries to ensure attractive returns for portfolio investors. Often this means offering increasing operational flexibility (Parthapratim, 2006).


On the other hand, several related studies on Nigerian emerging market had neglected the fact that foreign portfolio investment may exert positive influence on stock market returns. Among these papers are the case of Temitope (2002), Tokunbo (2004), Rose and Sara (1998), examined the trend towards promoting stock market and economic growth but fail to consider the fact that foreign portfolio investment according to Adeleke (2004) is believed to facilitate economic growth and development which leads to industrialization of the economy. Ologunde et al (2006) showed that interest rate exert positive influence on stock market returns, this is in line with the empirical result of Temitope (2002). Robert (2008) and Shehu (2009) investigated the relationship that exists between stock market returns and the exchange rate. Meanwhile, Adabag (2005) had opined that foreign investors are blamed for financial instability through sudden flows in emerging markets. To this end, it needs to be investigated whether the inflow and outflow of foreign portfolio investments on the stock market is significant enough to lead to an increase or fall in stock market returns.



Trade flow involves short-term positions in financial assets of international market and is similar to investing in domestic securities.FPI allows investors to take part in the profitability of firms operating abroad without having to directing manage their operations. This is a similar concept to trading domestically. Most investors do not have the capital or expertise required to personally run the firm that they invest in.  One of such capital flows is the foreign portfolio investment. FPI has been noted to flow mostly to developed nations from developing nations. However, there has been dramatic increase in the magnitude of international flows of portfolio investment from developed countries to emerging markets especially before the global economic crisis. Even though, FPI can be unproductive to developing economies, the massive flow of international capital can play a useful role in economic development by adding to the savings of developing countries in order to increase their pace of investment.


Over the past years, Nigerian economy has been subjected to series of social, political and economic policies and reforms. Before a decade after independence, the country was basically agrarian and the various regional governments then largely achieved food security. In 1961, the establishment of the Nigerian Stock Exchange (formally called Lagos Stock Exchange) promoted private capital investment for growth and development in order to develop the capital market. Past and present scholars believed that investment that promotes economic growth and development requires long term funding, far longer than the duration for which most savers are willing to commit their funds. In the capital market, both local and foreign investors provide long-term funds in exchange for long-term financial assets offered by fund users.


Ologunde, Elumilade & Asaolu (2006) said that the market embrace both the new issues (primary) market and secondary market. Generally, capital markets are the heart beat of every economy since their ability to respond instantaneously to fundamental problems change in all countries. Also, it encourages savings and real investment in any healthy economic environment. Aggregate savings are channeled into real investment which increases capital stock and therefore economic growth of the country. These attributes of capital market make it possible for the discerning minds to feed the impulse of such an economy. Nigeria Stock Exchange is not an exemption as it is expected to be influenced by external shocks, which are outside the realm of capital market. The external shocks are the macroeconomic indicators that are expected to cause variation in the stock prices movement. Maku and Atanda (2009) argued that these changes are often reflected by the magnitude and movement in stock prices, market index and liquidity of the market. Hence, it is line with this that the study seek to investigate the impact of foreign portfolio investment on stock market return in Nigeria



The broad objective of this study is to investigate the impact of foreign portfolio investment on stock market returns. Specifically, the study shall:

  1. Examine the impact of foreign portfolio investment on stock market returns in Nigeria.
  2. Examine the direction of causality between foreign portfolio investment and stock market returns.
  3. Examine the impact of inflation on stock market returns in Nigeria.



In line with the above objectives, the research questions shall be:

  1. What is the impact of foreign portfolio investment on stock market returns in Nigeria?
  2. What is the direction of causality between foreign portfolio investment and stock market returns?
  3. How does inflation affect stock market returns in Nigeria?



Following the objectives and  research questions of the study, the research hypotheses are stated as:

  1. Foreign portfolio investment has no positive and significant impact on stock market returns in Nigeria.
  2. There is no causality between foreign portfolio investment and stock market returns.
  3. Inflation has no positive significant impact on stock market returns in Nigeria.




This study covers a period of twenty years, ranging from 1990-2009. The data are sourced from Central Bank of Nigeria (CBN). It is limited to Market capitalization, Volume of shares traded, Number of listed dealers and all shares Index amongst others. Several related studies on Nigerian emerging market had neglected the fact that foreign portfolio investment may exert positive influence on stock market returns, and also examine the trend towards promoting stock market and economic growth. To consider the fact that foreign portfolio investment is believed to facilitate economic growth and development which leads to industrialization of the economy. This research work is an attempt to re-examine the issue as it concerns the growth of the Nigerian capital market via foreign portfolio investment. It needs to be investigated whether the inflow and outflow of foreign portfolio investments on the stock market is significant enough to lead to an increase or fall in stock market returns.



The study will be beneficial to the following:

  1. Prospective investors: This work will provide the stock of knowledge needed by prospective investors to control the extraneous variables, which must be considered prior to investment, under the operating conditions prevalent in the Nigeria economy.
  2. Investment Decision-makers and Financial Analysts: To investment decision-makers and financial analysts alike, this work will set new track knowledge of responsibility, challenging them to the strategies simple enough and available in carrying out investment decisions. It will provide such understanding needed to establish a fulfilled investment goals by creating a portfolio containing a variety of investment vehicles that will produce an acceptable return for a level of risk at comparative advantage.
  • Students, professionals, corporate practitioners, public and Board of companies: The work is recommended to students seeking familiarity with the market, entry level professionals, corporate practitioners as a reference and training material, for other studies channeled towards portfolio investment decision, and for the general public as a guide to the market and for members of Board of companies, who are not capital market professionals as a defense against jargons thrown at them by their finance Directors.



CAPITAL MARKET: the part of a financial system concerned with raising capital by dealing in shares, bonds, and other long-term investments.

ECONOMIC GROWTH: the increase in the market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.

INFLATION: a general increase in prices and fall in the purchasing value of money.

INTEREST RATE: the proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.

ALL SHARE INDEX: originally known as the FTSE Actuaries All Share Index is a capitalization-weighted index, comprising around 1000 of more than 2,000 companies traded on the Nigerian Stock Exchange.

MARKET CAPITALIZATION: the total value of the issued shares of a publicly traded company; it is equal to the share price times the number of shares outstanding.

EQUITY: the value of the shares issued by a company.

NIGERIAN STOCK EXCHANGE (NSE): The NSE is regulated by the Securities and Exchange Commission, which has the mandate of Surveillance over the exchange to forestall breaches of market rules and to deter and detect unfair manipulations and trading practices.




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Adeleke, K. M; Olowe, S.O. & Fasesin, O. O. (2014). Impact of Foreign Direct Investment on Nigeria Economic Growth, International Journal of Academic Research in Business and          Social Sciences, Vol. 4, No. 8, pp. 234-242.

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