Money Market and the Economic Growth of Nigeria

Money Market and the Economic Growth of Nigeria

The money market is a market for short term funds and as the name suggest, it is a market in which money is bought and sold, the market is used by business enterprise to raise fund for the purchase of inventories, by banks to finance temporary reserve loss, by companies to finance consumer credit and by government to bridge gap between its recipient and expenditure.

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Unlike the market for textiles, for example, there is no place that one can call a money market. Although activities in the money market can be concentrated in a particular street for example, all street in New York, Lombard Street in London and Broad Street in Lagos. Transactions are impersonal taking place mostly by telephone Ajayi and Ojo (1981).

The money market also refers to a collection of group of financial institution up for the granting of short term loans and dealings in short term securities, gold and foreign exchange Anyanwu (1993).

Furthermore, the money market is a key component of the financial system as it is the fulcrum of monetary operations conducted by the Central Bank in the pursuit of monetary policy objectives. It is a market for short term funds with maturity from overnight to one year and includes financial instruments that are deemed to be close substitutes of money. The money market performs three braod functions. One, it provides an equilibrating mechanism for demand and supply of short term funds. Two, it enables borrowing and investment requirements at an efficient market clearing price. Three, it provides an avenue for Central Bank intervention in influencing both quantum and cost of liquidity in the financial system, thereby transmitting monetary policy impulses to the real economy.

In order to meet these basic functions efficiently, money market have evolved over time spawning new instruments and participants with varying risk profiles in line with the changes in the operating procedures of monetary policy changes in financial market structures, macroeconomic objectives and economic environment have called for shift in monetary regimes which in turn have necessitated refinements and procedures and institutional arrangement of Central Banks.

The money market is also a subsection of the fixed income market. We generally think of the term fixed income as being synonymous to bonds. In reality, a bond is just one type of fixed income security. The differenced between the money market and the bond market is that the money market specialized in very short term debt securities (debt that mature in less than one year) money market investments are also called cash investments because of their short maturities period.

Money market securities are essentially IOUs issued by government, financial institutions and large corporations. These instruments are very liquid and considered extra ordinarily safe because they are conservative, money market securities offer significantly lower returns that most other securities. One main difference between money market and the stock market is that most money market securities trade in very high denominations. This limits access for the individuals investor.

The money market is a dealer market which means that firms buy and sell securities in their own account at their own risk. Another characteristic of a dealer market is the lack of a central trading floor or exchange. Deals are transacted over the phone or through electronic media.

The easiest way for us to gain access into the money market is with a money market mutual funds or sometimes through a money market bank account. These accounts and funds pool together the asset of thousands of investors in order to buy the money market securities on their behalf. However, some money market instruments can be purchased directly like treasury bills failing that, they can be acquired through other large financial institution with direct access to these markets.

2.1.1      AN OVERVIEW OF THE NIGERIAN MONEY MARKET

No money market existed in Nigeria before the establishment of the central Bank of Nigeria (CBN). This is however not to say that a market for short term funds did not exist before then; before the advent of commercial banking, there existed some elements of short term lending and borrowing based on commercial papers. The market was an integral part of the London money market. It worked by moving funds London money market. It worked by moving funds from London to Nigeria during the season in order to finance the export of produce. At the end of the season, the funds were moved back to London when there was all-season money market activities. The establishment of the Nigerian money market involved on the part of the Central Bank of Nigeria. Repatriating these “roving” funds to Nigeria for the countries economic development.

Reasons for the Establishment of the Nigerian Money Market

  1. To provide the machinery need for government short-term financing requirement.
  2. It is a part of modern financial and monetary system which enables the nation to establish the monetary autonomy which is part of the workings of an independent state.
  3. To domesticate the credit base by providing local investment outlets for the retention of funds in Nigeria and for the investment of funds repatriated from abroad as a result government persuasions to that effect.
  4. It provides a good barometer to Central Bank of Nigeria which can use it to judge the shortage or surplus of funds in the economy.
  5. The existence of the money market enables the Central Bank to undertake vigorous money policy.

2.2  MONEY MARKET INSTRUMENTS

Money links investors who want to earn competitive rates on their investment with government and companies that need short-term financing. Money market instruments are shorts term promissory notes much like “IOUs” which mature from one to 18 months.

Money market instruments are considered to be cash equivalents. They are highly liquid and have very low risk because of their short term to maturity. The face value of money market instruments is guaranteed by the issues compared with stocks and bonds of the same issuer, money market instruments carry the lowest risk. However, in exchange for this high degree of safety, these instruments usually have lower potential rate of return, money market instruments are ideal for ideal for investors who are seeking safety of principal and a predictable rate of return. They add stability and liquidity and help to reduce the overall risk of a portfolio invested in stocks and bonds for these reasons, market instrument should be included as a part of a well-balanced investment portfolio. The major instruments currently use to evidence debt are treasury bills, treasury certificates, certificates of deposits, money at call; commercial papers, and stabilization securities.

  1. Commercial Papers or Commercial Bills

This is a short term unsecured promissory note issued by cooperators and foreign governments. It is a low cost alternative to bank loans for many large credit worthy issuers. Issuers are able to efficiently raise large amounts of funds quickly and without expensive Securities and Exchange Commission registration (SEC). When commercial papers are sold by big companies (blue chips, large old, safe, well known companies and national companies. Such notes are backed by any collateral rather they rely on high auditing rating of the issuing companies. In the Nigerian context there are two forms of commercial bills;

  1. The Ordinary Trade Bill

This is drawn by ordinary reputable commercial firms and accepted by a bank or acceptance house and are secured on stocks of manufactured goods or other stock in trade. These bills were not eligible for rediscount at the Central Bank of Nigeria and hence not popular with banks except when secured on exports produce.

  1. The Marketing Boards Bill

It is originated with inception of the bill market scheme in 1962 Anyanwu, (1993). Under the scheme, the marketing board met its requirements forecast by drawing a 90 day commercial bill of exchange supported by scales of contract on the Nigerian produce marketing company limited, then the sole exporter for all the marketing boards upon acceptance by the company the board then rediscounted the bills with the participating commercial banks and accepting houses which if they choose could rediscount the bills with Central Bank of Nigeria (CBN).

  1. Certificate of Deposit

They are another form of money market investments. This is a document evidencing a time depository institution e.g. commercial banks at a discount or face value. It is an inter-bank debt instrument which is used to provide outlet for the commercial banks surpluses. It was introduced in Nigeria by the Central Bank of 1975 which was meant to upon up new funds for the Merchant Banks who was its major issuer. There are two main types of certificates of deposit.

  1. The Nigerian Certificate of Deposit

They are rediscounted at the CBN and have a maturity date of between 3 and 6 months and a wholesale issue of not less than fifty thousand naira (N50,000).

  1. Non Negotiable Certificate of Deposit

This certificate was issued in denomination ranging between (N1,000) one thousand naira and fifty thousand naira (N50,000) and are normally held till maturity. Those maturing within 18 months are classified as liquid asset and are eligible for the purpose of satisfying the liquidity ratio requirements. This non-negotiable certificate of deposit complies with rates of interest on deposit as stipulated from time to time by the Central Bank.

The center of money market is banks lending money to banks using commercial paper or repurchase agreements in such a case banks borrow money without putting up collateral CBN (1989).

  1. Treasury Bills

They are short term securities issued by the Federal Government of Nigeria, the Treasury bill at regularly schedule actions to refinance its trading issues. It also helps to finance deposits. They further sell bills on regular basis to smooth the uneven floe of revenue from cooperate and individual tax receipts. They are sold at discount mature within 91 days from day of issues. It provides government with a highly flexible and relatively cheap means of borrowing cash and securities for dealing in the money market CBN (1989). Treasury bills are used by the Federal Government to borrow for a short period of about three months depending on the collection of its revenues. They are issued for varying periods of less than a year. The treasury bills rates were fixed prior tot eh deregulation of interest rates in Nigeria but since 1989 they have been offered on auction basis and hence market determined. The main investor in the treasury bill is the commercial banking system and this is partly related to the fact that these bills from part of the assets statutorily specified for liquidity ratio purposes.

  1. Treasury Certificate

They are similar tot eh treasury bills but are issued at par or face value with fixed interest rates. These fixed interest rates are called coupon rates. Thus each issue promises to pay a coupon rate of interest and the investors’ collects this interest rates income by tearing coupons off the edge of the certificate and cashing the coupons at a bank, post office or other specified federal office. Reach coupon in imprinted with its naira value and date it is eligible to be cashed, treasury certificates are medium term government securities which mature after one or two years and are intended to bridge the gap between the treasury bill and the long term government securities unlike the treasury bills they can be rediscounted at a Central Bank (CBN) and commercial banks.

  1. Stabilization Securities

These are special purposes which the law authorizes the Central Bank of Nigeria to issue and sell compulsorily to banks at any interest rate and such conditions as the Central Bank may deem it for the purpose of mopping up the excess liquidity of banks. This instrument is not an instrument of the government but that of the Central Bank of Nigeria. The use of stabilization security was introduced in 1976 but was later phased out. It re-introduced again in 1993 but by 1998 further issue was stopped. The issue of this type of security is usually made banks in the system are perceived to hold excess liquidity. Bank that hold such securities can discount it if they have immediate liquidity need.

  1. Call Money

This article was extracted from a Project Research Work Topic

IMPACT OF THE MONEY MARKET IN THE GROWTH OF NIGERIA IN ECONOMY

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  1. How safe is investment in the money market?

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