Download understanding monetary policy series no 27 the nigerian money

CENTRAL BANK OF NIGERIA
UNDERSTANDING
MONETARY POLICY SERIES
NO 27
THE NIGERIAN MONEY MARKET
POLICY DEPA
RY
10
TH
T
MEN
RT
MONE
TA
Oghenekaro O. Afiemo
Anniversary
Commemorative
Edition
c 2013 Central Bank of Nigeria
Central Bank of Nigeria
33 Tafawa Balewa Way
Central Business Districts
P.M.B. 0187
Garki, Abuja
Phone:
+234(0)946236011
Fax:
+234(0)946236012
Website: www.cbn.gov.ng
[email protected]
E-mail:
ISBN: 978-978-52861-9-9
© Central Bank of Nigeria
Central Bank of Nigeria
Understanding Monetary Policy
Series 27, March 2013
EDITORIAL TEAM
EDITOR-IN-CHIEF
Moses K. Tule
MANAGING EDITOR
Ademola Bamidele
EDITOR
Charles C. Ezema
ASSOCIATE EDITORS
Victor U. Oboh
David E. Omoregie
Umar B. Ndako
Agwu S. Okoro
Adegoke I. Adeleke
Oluwafemi I. Ajayi
Sunday Oladunni
Aims and Scope
Understanding Monetary Policy Series are designed to improve monetary policy
communication as well as economic literacy. The series attempt to bring the
technical aspects of monetary policy closer to the critical stakeholders who may not
have had formal training in Monetary Management. The contents of the publication
are therefore, intended for general information only. While necessary care was
taken to ensure the inclusion of information in the publication to aid proper
understanding of the monetary policy process and concepts, the Bank would not
be liable for the interpretation or application of any piece of information contained
herein.
Subscription and Copyright
Subscription to Understanding Monetary Policy Series is available to the general
public free of charge. The copyright of this publication is vested in the Central Bank
of Nigeria. However, contents may be cited, reproduced, stored or transmitted
without permission. Nonetheless, due credit must be given to the Central Bank of
Nigeria.
Correspondence
Enquiries concerning this publication should be forwarded to: Director, Monetary
Policy Department, Central Bank of Nigeria, P.M.B. 0187, Garki, Abuja, Nigeria,
Email:[email protected]
iii
Central Bank of Nigeria
Mandate
§Ensure monetary and price stability
§Issue legal tender currency in Nigeria
§Maintain external reserves to safeguard the international
value of the legal tender currency
§Promote a sound financial system in Nigeria
§Act as banker and provide economic and financial
advice to the Federal Government
Vision
“By 2015, be the model Central Bank delivering
Price and Financial System Stability and promoting
Sustainable Economic Development”
Mission Statement
“To be proactive in providing a stable framework for the
economic development of Nigeria through the
effective, efficient and transparent implementation
of monetary and exchange rate policy and
management of the financial sector”
Core Values
§Meritocracy
§Leadership
§Learning
§Customer-Focus
iv
MONETARY POLICY DEPARTMENT
Mandate
To Facilitate the Conceptualization and Design of
Monetary Policy of the Central Bank of Nigeria
Vision
To be Efficient and Effective in Promoting the
Attainment and Sustenance of Monetary and
Price Stability Objective of the
Central Bank of Nigeria
Mission
To Provide a Dynamic Evidence-based
Analytical Framework for the Formulation and
Implementation of Monetary Policy for
Optimal Economic Growth
v
FOREWORD
The understanding monetary policy series is designed to support the
communication of monetary policy by the Central Bank of Nigeria (CBN). The series
therefore, provides a platform for explaining the basic concepts/operations,
required to effectively understand the monetary policy of the Bank.
Monetary policy remains a very vague subject area to the vast majority of people; in
spite of the abundance of literature available on the subject matter, most of which
tend to adopt a formal and rigorous professional approach, typical of
macroeconomic analysis. However, most public analysts tend to pontificate on
what direction monetary policy should be, and are quick to identify when in their
opinion, the Central Bank has taken a wrong turn in its monetary policy, often
however, wrongly because they do not have the data for such back of the
envelope analysis.
In this series, public policy makers, policy analysts, businessmen, politicians, public
sector administrators and other professionals, who are keen to learn the basic
concepts of monetary policy and some technical aspects of central banking and
their applications, would be treated to a menu of key monetary policy subject areas
and may also have an opportunity to enrich their knowledge base of the key issues.
In order to achieve the primary objective of the series therefore, our target
audience include people with little or no knowledge of macroeconomics and the
science of central banking and yet are keen to follow the debate on monetary
policy issues, and have a vision to extract beneficial information from the process,
and the audience for whom decisions of the central bank makes them crucial
stakeholders. The series will therefore, be useful not only to policy makers,
businessmen, academicians and investors, but to a wide range of people from all
walks of life.
As a central bank, we hope that this series will help improve the level of literacy in
monetary policy as well as demystify the general idea surrounding monetary policy
formulation. We welcome insights from the public as we look forward to delivering
content that directly address the requirements of our readers and to ensure that the
series are constantly updated as well as being widely and readily available to the
stakeholders.
Moses K. Tule
Director, Monetary Policy Department
Central Bank of Nigeria
CONTENTS
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Section One: Introduction
1.1
The Nigerian Financial Markets
1.2
The Nigerian Money Market ..
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Section Two: Evolution of the Nigerian Money Market
2.1
History of Nigerian Money Market
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2.2
Objectives for Establishing the Nigerian Money Market
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4
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Section Three: The Nigerian Money Market Framework
3.1
Regulatory and Supervisory Bodies
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3.1.1 Central Bank of Nigeria (CBN)..
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3.1.2 Nigerian Deposit Insurance Corporation (NDIC)
3.1.3 Federal Ministry of Finance
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3.2
Money Market Institutions
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3.2.1 Debt Management Office (DMO)
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3.2.2 Deposit Money Banks (DMBs) ..
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3.2.3
Discount Houses
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3.3
Money Market Instruments
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3.3.1
Treasury Bills (TBs)
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3.3.2 Treasury Certificate (TC)
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3.3.3 Commercial Papers (CP) or Commercial Bills
3.3.4
Certificates of Deposits (CD) ..
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3.4
The Inter-Bank Market ..
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Section Four:
4.1
4.2
4.3
4.4
4.5
4.6
The Role of Money Market in Economic Growth and
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Development ..
Allocation of Capital ..
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Risk Sharing
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Investment Diversification
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Promoting Saving and Investment
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Regulation of the Flow of Credit
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Transmission of Monetary Policy
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Section Five: Conclusion
5.1
Prospects and Opportunities ..
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5.2
Limitations of the Nigerian Money Market
5.3
Conclusion
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Bibliography
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15
THE NIGERIAN MONEY MARKET
THE NIGERIAN MONEY MARKET1
Ogenekaro O. Afiemo 2
SECTION ONE
Introduction
1.1
The Nigerian Financial Markets
A marketplace where buyers and sellers engage in the trade of financial
securities such as bonds, equities, currencies, derivatives, commodities and other
fungible financial items is broadly referred to as Financial Market. Financial
markets are found globally, and range from being small with limited participants
to those that are large, trading in trillions of dollars daily. They offer investors, both
domestic and foreign, access to a large array of financial products at low
transaction costs and contribute largely to the efficiency of a country‟s financial
system. These markets typically deal in long and short term securities, as well as
debt instruments of similar tenors.
The Nigerian financial market broadly comprises the capital market for trading
corporate shares/stock and long term government debt, the money market for
dealings in short-term finance, the foreign exchange market for currency trades
and a selection of specialized markets that trade in financial derivatives. Capital
market instruments are typically long term, running in excess of a year, while
money market instruments are typically of a shorter duration of less than one
year. The capital market typically offer high returns on higher-risk portfolios, while
access to the money market is for purchase of less risky securities. Money market
returns often tend to be low but stable, while capital markets offer higher but less
frequent returns.
1.2
The Nigerian Money Market
With the advent of money as a global commodity, the money market developed
as a subset of the financial market that managed short-term lending, borrowing,
1This
publication is not a product of vigorous empirical research. It is designed specifically
as an educational material for enlightenment on the monetary policy of the Bank.
Consequently, the Central Bank of Nigeria (CBN) does not take responsibility for the
accuracy of the contents of this publication as it does not represent the official views or
position of the Bank on the subject matter.
Ogenekaro O. Afiemo is an Assistant Economist in the Monetary Policy Department,
Central Bank of Nigeria.
2
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THE NIGERIAN MONEY MARKET
buying and selling of securities with original maturities of one year or less. The
money market evolved out of the need to match economic agents with surplus
funds, with those in need of funds. Consequently, the money market acts as a
medium to channel short term funds from agents with excess to those in deficit.
Economic agents purchase money market instruments that compensate the
holders with interests that are marked to specific terms of maturities. The
instruments are such that they are highly liquid, and can be converted to cash at
a relatively low cost with low risk premia. Over time, various instruments have
been designed and introduced to provide liquidity funding for the global
financial system. Instruments such as Treasury bills, deposits, bankers'
acceptances, commercial paper, bills of exchange, certificates of deposit,
repurchase agreements, federal funds, short-lived mortgages, and asset-backed
securities were introduced bearing different maturities, currencies, credit risks, and
structure.
The money market is essential for the efficient distribution of liquidity in the
financial system, allocation of capital as well as the hedging of short-term risks.
The money market also performs an important function in credit allocation via the
credit policies of the Government. The Nigerian money market continues to
expand and evolve as more sophisticated financial instruments are designed and
introduced to meet the growing appetite for credit by investors, firms and
governments. The money market is further divided into two sub sections: The
primary and secondary markets. The primary market exists for the issue of new
debt instruments while the secondary market is the market for the trade of
previously issued instruments. It is the existence of the secondary market that
allows for market instruments to be sold before their maturities.
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THE NIGERIAN MONEY MARKET
SECTION TWO
Evolution of the Nigerian Money Market
2.1
History of Nigerian Money Market
Nigeria at pre-independence, had no structured domestic markets as the
financial system was largely owned by foreigners. What existed at the time was a
market linked to the London money market, which before the advent of banking
activities exhibited some elements of short-term lending and borrowing. The
market was a contemporary part of the London money market. It worked by
moving funds from London to Nigeria during the farming season to finance the
export of farm produce and when the season was over with no need for money,
the funds were repatriated back to London.
The establishment of a Nigerian money market required on the side of the Central
Bank of Nigeria (CBN), the domiciling of the „travelling‟ funds to Nigeria for
possible investment and economic development in the country. The Nigerian
money market was officially established in April 1960 with issuance of the first CBN
Treasury bill. The call money arrangement, which had existed between banks,
was officially instituted by the CBN in 1962 and designated the Call Money Fund
Market. The scheme allowed participating institutions to keep temporary surplus
balances with the CBN. The CBN invested such idle balances in short-term money
market instruments, which were remunerated at less than the prevailing Treasury
bill rate. The scheme therefore, not only provided an investment opportunity for
investors but also served as a medium for absorbing excess liquidity pressures in
the money market. The Bank in 1962, further introduced the Finance Bill Scheme
to assist the marketing boards with finance to help improve their export of
agricultural produce.
In 1968, to help bridge the gap in government‟s fiscal operations, Treasury
Certificates were for the first time issued as short-to-medium term government
securities. The market was further complemented with other market instruments
like Bankers Unit Fund (BUF), Special Deposits with the CBN and Certificates of
Deposits (CDs) between 1974 and 1976. The advent of secondary market
dealings in Open Market Operations (OMO) of government securities in 1993,
heralded the growing importance of the money market in Nigeria, as well as its
more prominent role in the conduct of monetary policy.
The money market today comprises the interbank funds market and short-term
securities market with the Debt Management Office (DMO), the CBN, the
Nigerian Deposit Insurance Corporation (NDIC), Federal Ministry of Finance (FMF),
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THE NIGERIAN MONEY MARKET
Deposit Money Banks (DMBs), Discount Houses and the investing public as active
participants. The CBN and NDIC form the main regulatory and supervisory bodies.
2.2
Objectives for Establishing the Nigerian Money Market
Without an effective domestic market at independence in 1960, the country,
especially the government, had no effective tool for mobilizing the resources
necessary for planned economic development. Consequently, the money
market was established to achieve the following:
i.
To provide the necessary vehicle required for the mobilization and channeling
of savings, which would make funds available to government to meet short
term financing requirements;
ii.
To lay the foundation for a modern financial and monetary system essential
as part of an independent nationhood;
iii.
To provide a medium or channel for operating and executing effective
monetary policy; and
iv.
To provide investment opportunities for funds in Nigeria.
As the Nigerian economy grew and developed, it became pertinent for the
money market to also expand its scope and operations. The money market
developed and helped localize the credit base, which mitigated the
uncontrolled outflow of funds to foreign money markets. This contributed greatly
to meeting the investment needs of the domestic private sector as well as
financing the short term credit requirements of government. Consequently, the
money market evolved to help achieve macroeconomic growth and stability by
aiding the transmission of monetary policy, improving financial intermediary and
promoting the efficient allocation of capital.
4
THE NIGERIAN MONEY MARKET
SECTION THREE
The Nigerian Money Market Framework
3.1
Regulatory and Supervisory Bodies
In order to facilitate the soundness and efficiency of financial institutions as well
sustain the stability of the financial system, it is essential for the regulatory and
supervisory authorities to maintain surveillance and orderly development of the
financial system. The regulatory and supervisory bodies of the money market are
the Central Bank of Nigeria, the Nigerian Deposit Insurance Corporation and the
Federal Ministry of Finance.
3.1.1 Central Bank of Nigeria (CBN)
The Central Bank of Nigeria is the apex regulatory authority in the Nigerian
financial system. It was established by the CBN Act of 1958 and commenced
operations on 1st July 1959. Amongst the CBN‟s primary functions is the objective
of price and monetary stability. The Bank further formulates policies to control the
amount of money in circulation, supervise financial institutions, influence rates
and credit prevalent in the economy and by extension the supply of money in
the economy.
3.1.2 Nigerian Deposit Insurance Corporation (NDIC)
The NDIC was established by Decree No. 28 of 1988 and commenced effective
operations in 1989. It was primarily set up as part of the financial safety net in the
banking sector to complement the CBN in the regulation and supervision of
deposit taking institutions. The NDIC provides advice to the CBN in the liquidation
of distressed banks and manages the assets of distressed banks till they are fully
liquidated. It was set up to provide deposit insurance and related services in the
banking industry, in order to foster confidence as well as provide a safety net for
depositors. The NDIC was authorized to inspect the books and operations of
insured banks and deposit taking institutions. In 1997, the NDIC Act was amended
making the corporation report to the FMF. Supervision involves the on-site
examination of insured banks and off-site surveillance to provide early warning
signs of distress.
3.1.3 Federal Ministry of Finance
The Federal Ministry of Finance was established in 1958 by the Finance
Ordinance, which accorded the Ministry with the responsibility of controlling and
managing the finances of the Federal Government. The Ministry provides advice
on fiscal matters and partners with the CBN on monetary matters and supervises
the activities of the NDIC.
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THE NIGERIAN MONEY MARKET
3.2
Money Market Institutions
The money market encompasses financial institutions and traders in money or
credit who wish to either lend or borrow. Participants generally enter into
transactions or contracts for short periods of time, typically up to twelve months.
The institutional players in the money market include the DMO, the deposit
money banks and the discount houses.
3.2.1 Debt Management Office (DMO)
The Debt Management Office was set up in September 2001, by the Federal
Government, to serve as a one stop clearing shop for all Federal Government‟s
debt. The Office exists to forecast debt services, implement debt service
payments, advise on debt negotiations as well as issue new debt. The strategic
focus of the Office, has led to substantial growth in the money market due to the
increased intermediation activities of the Deposit Money Banks in the purchase
and sale of government debt on behalf of investors.
3.2.2 Deposit Money Banks (DMBs)
Deposit taking banks play a crucial role in the growth and development of any
country‟s financial system. The primary function of deposit money banks is to
mobilize funds and ensure an adequate channel for the flow of funds to service
deficit sectors of the economy. DMBs also exist to facilitate transactions for
economic agents. The channeling of funds, referred to as financial intermediation
is typically from surplus units to deficit units. DMBs further serve as the primary
channel for the transmission of monetary policy by the CBN. They act as
intermediaries between the CBN and the public in the sale and purchase of
money market instruments. There are currently 26 banks in operation in Nigeria,
following the consolidation exercise of 2006.
3.2.3
Discount Houses
Discount Houses were first established in 1993, when three (3) were licensed to
commence operations, which later increased to five (5). They are non-bank
financial institutions that act as intermediaries between the Central Bank of
Nigeria and other licensed banks, in Nigeria, and trade in the secondary money
market segment. They typically trade in large volume Open Market Operations
transactions. They organize funds for further investment by discounting and
rediscounting facilities in government short term securities. The CBN has offered
sizeable support to discount houses as they are privileged to using government
securities in their custody to borrow from the Apex Bank. Discount Houses are
highly regulated such that there is little room for carrying out activities outside
their stipulated guidelines.
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THE NIGERIAN MONEY MARKET
3.3
Money Market Instruments
3.3.1
Treasury Bills (TBs)
These are short-term money-market securities issued by government with
maturities of one year or less. They are sold at a discount and mature within 3 to
12 months from the date of issue. The bills serve as the benchmark risk-free
instrument in the money market as they are guaranteed by government. They
provide the government with a highly flexible and relatively cheap means of
borrowing cash, and are issued through a competitive bid auction.
3.3.2 Treasury Certificate (TC)
Treasury Certificates are similar to TBS but are issued at par or face value and pay
fixed interest rates. These fixed interest rates are called coupon rates. In the
Nigeria market, their rates became market-determined like TB rates following
interest rates deregulation. Accordingly, treasury certificates serve to bridge the
gap between the Treasury bill and long term government securities, which
mature after a period of one to two years.
3.3.3 Commercial Papers (CP) or Commercial Bills
These are short-term promissory notes issued by large corporations and blue chip
companies. Here, the notes are not backed by collateral but their acceptance
relies on the high credit rating of the issuing corporations. CP is an unsecured
debt instrument and trades at a discount. They typically have maturities of
between 1 month and 9 months. Issuers operate this type of credit as it can be
obtained more quickly and easily than bank loans.
3.3.4
Certificates of Deposits (CD)
This refers to the time deposit held with a commercial bank. They have specific
maturity dates ranging from 3 months to 12 months. They offer slightly higher yields
than treasury bills due to the presence of default risk. Deposits up to N200, 000 are
guaranteed by NDIC.
3.4
The Inter-Bank Market
The Nigerian Inter-bank market is a financial market where banks and discount
houses trade in unsecured money. It is a sub set of the money market for
unsecured placements and borrowings of finance amongst players in the
economy. The interbank funds market transacts placement of funds on short-term
basis of overnight, 7-days, 30-days or 90-days. Some banks need to borrow
money in the interbank market to cover temporary shortfalls in liquidity or
regulatory reserve requirements, while other banks on the other hand, may hold
excess liquid assets above and beyond the liquidity requirements, and lend
7
THE NIGERIAN MONEY MARKET
money in the interbank market earning interest on the assets. The interbank
market trades in all the money market instruments using them as security or
collateral.
8
THE NIGERIAN MONEY MARKET
SECTION FOUR
The Role of Money Market in Economic Growth and Development
The financial system, in particular the banking sector provides an exclusive setting
for the conduct of monetary policy. It is recognised that a developed, efficient
and active interbank market improves the efficiency of a central bank‟s
monetary policy. Furthermore, sustained money market development offers a
means of improving the country‟s social and economic welfare, through not only
the advancement of financial intermediation in the economy, but also
enhancing investment opportunities. The role of the money market in economic
growth and development can be summarised as follows:
4.1
Allocation of Capital
One of the main roles of the money market is the allocation of capital, matching
economic units that have capital to those in need of it. The money market
facilitate the raising of short term capital through various money market
instruments as well as providing the channel for successive transfer and ownership
of such liquid instruments via the secondary market. In effect, the money market
attracts investors‟ funds and channels same to economic agents, who use such
funds, to finance their operations or expand economic activities.
4.2
Risk Sharing
A developed and well-structured money market is typically made up of diverse
financial products as well as participants, who deal collectively in not only large
volume transactions, but also large volume deals. As such, risk is typically shared
across the board on a variety of debt instruments and products. Different
maturities and rates of different products, generally, mean liabilities and gains do
not fall due at the same time, and offer investors and borrowers flexible financing
arrangements where overall risk is mitigated. Money market instruments are
typically less risky than longer term instruments, and generally offer a lower but
more frequent rate of return.
4.3
Investment Diversification
Money markets deal with a variety of debt instruments having different maturities,
rates of return and attendant risk premia. The money market, thus, offers investors
depending on their risk appetite, the opportunity to spread such risk across a
variety of products. A diversified portfolio of assets, thereby hedges the investor
against surprise market volatility or potential loss. Consequently, the gains of
holding a diversified portfolio of different asset classes not only reduces risk, but
also promotes investment in more diversified areas of the economy, which is
essential for economic growth.
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THE NIGERIAN MONEY MARKET
4.4
Promoting Saving and Investment
A core function of the money market is the mobilisation of loanable funds and
the channelling of such funds to those deficit units that require them. A wellstructured money market is capable of achieving this through the efficient
dissemination of information to both respective parties; the borrowers and the
lenders. Information shared has to be timely, relevant and credible, while
financial services must be of high quality and innovative. Also, key to attracting
participants is having an open market with easy entry and exit. Consequently, a
stable financial system, which promotes efficient savings and investment would
not only promote democracy, but also a thriving economy.
4.5
Regulation of the Flow of Credit
The CBN, through its statutory control over the banking system, influences the flow
of credit to priority sectors, which assists government in realizing its developmental
objectives. Through prudential guidelines, moral suasion and policies, the CBN
formulates credit policy that favours the flow of credit according to the sector
requirements of the economy.
4.6
Transmission of Monetary Policy
In Nigeria, the money market forms the first and primary channel for the
transmission and conduct of monetary policy. It signals the position of the central
bank, and the operational mechanism of the money market serves as the primary
conduct of key policy rates to the economy, in particular, the price level. Based
on the anticipated direction of monetary policy, market participants form
expectations about the future path of market-based short-term rates, which
influence the determination of long-term yields and interest rates. It is these longterm rates that influence the savings and investment decisions of market
participants and the price level in particular. In the CBN‟s pursuit of price stability,
monetary policy in recent years has targeted the monetary aggregates. This is
through policy interventions and open market operations, which target the
quantum of system liquidity. These monetary authority activities influence asset
prices as well as the availability of credit in the economy. In periods of inflationary
pressure linked to excess liquidity, monetary policy targets liquidity in the financial
system. As excess liquidity in the money market is mopped up, the cost of
borrowing become higher and this tends to slower the pace of economic
activities and constrains inflationary pressures. Similarly, to stimulate economic
activities, policy measures may free up liquidity in the money market to reduce
asset prices and encourage lending, which should stimulate investment.
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THE NIGERIAN MONEY MARKET
SECTION FIVE
Conclusion
The money market has evolved as an efficient mechanism for trading in short
term funds. The Nigerian money market after the reform period, has witnessed
tremendous growth and diversification. The financial system through its institutions
has over time met the short-term financing requirements of priority sectors like
aviation, services, industry and agriculture. Over the past two decades, the
Nigerian money market under the supervision and control of the Central Bank,
has exhibited the requisite maturity and resilience required for sustainable growth.
Coupled with the government‟s policy on private sector involvement, it has
fostered healthy competition and continued improvement in the market‟s
functioning. Sequel to the global financial crisis, a major concern for most
economies has been the insulation of domestic markets from volatility in the
international markets. A number of monetary authorities have sought to restrict
exposure of investors to loss and enhance market confidence as well as financial
stability.
5.1
Prospects and Opportunities
Notwithstanding the significant challenges facing the financial markets, the
outlook for the money market in particular is bright. It exhibits among others, the
potential to attract more investors into the economy. Taking into account the
huge potentials of the country in terms of natural resources, human capital and
the strategic focus of government, the money market is perceived by investors as
a well supervised and controlled establishment, vibrant in nature and capable of
offering consistent returns on investment. However, in the attempt to attract and
retain foreign capital in the Nigerian money market, there is need to improve the
economic fundamentals that drive investments. There is need to provide an
enabling environment, complemented with a stable political and economic
structure, backed by appropriate legislature.
Nigerian financial institutions in a bid to improve service delivery and catch up
with global developments have invested heavily in technology, anchored on
electronic and telecommunication networks to introduce new and innovative
products and services. The new pension scheme and other similar reforms
introduced are also indicative of new opportunities in the money market in
Nigeria.
5.2
Limitations of the Nigerian Money Market
First, the Nigerian money market when compared to markets of developed
economies is still infantile and lacks depth in terms of product diversification and
11
THE NIGERIAN MONEY MARKET
technological infrastructure. The market lacks the appropriate legal framework
required for the introduction and operation of new financial products.
Second, the primary money market is also virtually dominated by government
activity on the demand side via government‟s borrowing during deficit budget
financing. The market is typically awash with large issues of government
instruments. Government issues also form the bulk of instruments in the secondary
market, as they further serve as collateral for short term interbank transactions.
Correspondingly, the dearth of private sector instruments limits the supply of
money market products available to possible investors wishing to diversify their
portfolios.
Furthermore, the banking sector is still plagued with large margins between
lending and deposit rates. This has a significant impact on savings and
investment. Low deposit rates hinder savings, while high lending rates make
borrowing expensive, which restricts private sector investment and growth.
Third, the global financial crisis of 2008, put significant pressure on the money
markets of many economies due to the limited restriction of capital movement
across many market exchanges. The contagion effect of the crisis had significant
consequences for the Nigerian money market, which culminated in the Nigerian
banking crisis of 2009. Subsequently, there has been some uncertainties and lack
of confidence in the market, coupled with foreign exchange rate volatility. This
has prompted significant interest rate movements in the banking system, a
negative indication for investors.
In addition, the Nigerian financial system following the banking crisis of 2009 has
witnessed sustained excess liquidity, following the mitigating intervention policies
of the CBN. The liquidity surfeit has inadvertently blunted the impact of monetary
policy in influencing money market rates, credit conditions and bank lending to
priority sectors. This has serious implications for sustaining price and monetary
stability, necessary for promoting economic development.
Finally, the high returns offered in the money market on government securities
when compared to other developed and developing nations has led to
significant capital inflows of a short-term nature. The fear of capital repatriation is
ever present, with negative consequences for the nation‟s foreign reserves and
currency valuation. Retention of short-term portfolio investment poses a serious
concern for the monetary authorities, due to its knock on effects on price and
monetary stability.
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THE NIGERIAN MONEY MARKET
5.3
Conclusion
The Nigerian money market continues to evolve and grow; coupled with product
innovation and the adoption of new technology, the CBN‟s continued effort at
sustaining welcomed change in the market and the Government‟s commitment
to long term growth the stage has therefore been set for the Nigerian money
market to become a key player in fostering private sector investment and
spurring economic growth and development in the economy.
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14
THE NIGERIAN MONEY MARKET
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