The Role Of The Nigeria Money Market In Indigenizing The Credit Base Of The Economy



THE ROLE OF THE NIGERIA MONEY MARKET IN INDIGENIZING THE CREDIT BASE OF THE ECONOMY

Money, like any other commodity. is  bought and sold in a market called money market . Nigeria had no such market at the time the central bank of Nigeria was established in 1959. This had many consequences for the Nigerian economy.

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It meant first that Nigeria’s business and nascent industrialists had no     market where they could raise capital.

The construction and operation of their business, secondly, those who had funds surplus to their immediate requirement had no market for them in Nigeria. They therefore expatriate those funds for investment overseas in London, particularly during the oft-season and drew on them, during the busy season this resulted in a net expert of capital from Nigeria at a time when the country badly needed all the capital it could lay its hands upon for development thirdly, the country particularly the government had no effective machinery for mobilizing its resources at a time when independence was insight and the country was poised for planned development and it meant, finally that in these circumstances monetary policy and monetary control’s as well as the mobilization of the country ‘resources for development would be futile when the financial apparatus was dominated by institution whose policies were  primarily determined  by financial and economic conditions overseas, a consequence of the absence of local investment outlets . This phenomenon effectively ensured that no such outlets would develop as long as the conditions making for their continued absence prevailed, unless something was done .that something was the establishment of a market for mobilizing short-term capital in the country .

The money market is that segment of the financial market that provides facilities for the exchange short-term  funds . The securities traded in the money market are treasury bills, treasury certificate commercial papers , certificates of deposits , banks unity funds and stabilization securities.

The money market in Nigeria is composed of the central bank of Nigeria (C B N), commercial bank merchant banks and other financial institutions, The federal savings banks, insurance companies , the federal government and statutory compression commerce banks dominates the market accounting for over 50% of average total holdings of money market instrument outstanding in 1996. The federal government  borrows through large sums of money the market through its weekly issue of treasury bills.

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BASIC CONDITION, WHICH MUST BE MET BEFORE A MONEY MARKET CAN FUNCTION:

There are three (3) basic conditions, which must be met before a money market can function effectively –

There must be a central bank capable and willing to act as “lender of last resort ‘’  This enables the banking system to operate at lower level of liquidity , making full use of available resources.

Another advantage it that when the central bank wishes to influence the amount of cash and other liquid assets available by creating shortages or surpluses in the money market them its effects are felt much more and a given intervention has larger repercussions.

 

There must be an integrated structure of financial organization holding levels and profitability. This will facilitate the free movement of money and financial assets so that funds can be moved from sectors in the economy where there are surpluses to sectors where deficits occur . there must be a large number of institutions operating on the market if it is not to be limited in scope.

A system of control and classification of market assets must be formulated and implemented to in spire confidence in the system . This can be achieved through the supervision of the central bank . Also the market must have depth and breath. The number of participants must be sufficiently large to ensure both an effective market together with adequate liquidity for the investors.

THE REASON FOR THE ESTABLISHMENT OF THE NIGERIA MONEY MARKET:

 

It is obvious from the introductory analysis above why the Nigeria money market was established the issue of

Treasury bill will enable the government to even out seasonal variation in the normal flow of revenue they should also enable us to release for capital expenditure, some of the funds now deployed as working capital. Furthermore, they will enable to finance expenditure in anticipation of the receipt of loan monies, these are the immediate advantages to government for the country at large they provide one means of hastening  establishment of a local money market .

Hither to there have been no opportunity for the banks , commercial houses and other financial institutions to employ surplus funds locally ,other money market instruments were created and introduced in march 1975, the first of which were certificate of deposit.

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CERTIFICATE OF DEPOSIT:

These are inter-bank debt instrument meant to provide outlet for the commercial banks surplus funds .it was introduced in Nigeria by the central bank of Nigeria in the year 1975. it was also meant to open new  source of funds for the merchant banks who are the major issuers .The maturity dates range 3 months to 3 years.

BANKER’S UNIT FUND (BUF): –

This was introduced in the Nigeria money market in year 1075. It was issued to mop up excess liquidity in the banking system . it was also meant to act as sweetener for the market for federal Government stock .In effect, the bankers unit fund was introduced to provide  avenue for the commercial and merchant banks and other financial institutions to invest part of their liquid funds in money market assets linked to the federal Government of Nigeria . participants in the scheme supply funds which are invested in government stocks of varying maturity periods.

 

ELIGIBLE DEVELOPMENT STOCKS (EDLS):-

These are investments on Government stocks which matures within 3years. Banks are encouraged to invest directly in development loan stocks being satisfied that those with less then 3years maturity could be regarded as liquid assets.

 

STABILIZATION SECURITIES:

These were introduced in 1976 by the CBN to automatically withdraw the excess liquidity from the economy . Allocations of stabilization securities are made to banks by the central banks of Nigeria . The banks transfer such money to the central Bank in exchange for stabilization securities issued to them . such financial institutions are required by law to taken up any amount allocated to them. Failure to do so attracts penalties from the monetary control authority. It is also regarded as a very effective instrument of monetary policy.

 

OTHER MONEY MARKET INSTRUMENT:

Such instrument like banker’s acceptance commercial papers commonly used   abroad. For example, in the United States. These instruments are now appearing in the Nigeria money market.

 

AN APPRAISAL OF THE NIGERIAN MONEY MARKET

The objectives of this appraisal is to find out the extent to which the market has discharged or is discharging its functions. Traditionally, money market performs certain functions for the economy commercial banks and government. In its function as a borrower and lender of short-term funds money market discharges an important function for the economy by ensuring that no loose funds lie idle . It therefore promotes an efficient allocations and utilization resources in the economy.

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Judged by this citerion, it can be said that the Nigeria money market is currently not discharging these functions effectively. There are many loose funds lying idle in the economy and owing to the abolition of the call money fund and the dearth of acting effectively as a borrower. Many banks , particularly some merchant banks have been known to refuse with interest for lack of investment outlets for their effective and profitable utilization.

One of the objectives of establishing the money market is to bring an effective indigenization on the credit base.  The market was effective and instrument in achieving this objective in the 1960’s.

However, owing to the dearth of investment since the abolition of the bill market scheme in 1968, it cannot be said that the market now effectively provides facilities for retention of funds in or attraction of funds to the economy. Funds are of course, retained in the economy. But this is not because of the availability of investment outlets but mainly because of the foreign exchange.

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