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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 .. .. Section One: Introduction 1.1 The Nigerian Financial Markets 1.2 The Nigerian Money Market .. .. .. .. .. .. .. .. .. .. .. .. .. 1 1 1 .. Section Two: Evolution of the Nigerian Money Market 2.1 History of Nigerian Money Market .. .. .. 2.2 Objectives for Establishing the Nigerian Money Market .. .. .. 3 3 4 .. Section Three: The Nigerian Money Market Framework 3.1 Regulatory and Supervisory Bodies .. .. .. 3.1.1 Central Bank of Nigeria (CBN).. .. .. 3.1.2 Nigerian Deposit Insurance Corporation (NDIC) 3.1.3 Federal Ministry of Finance .. .. .. 3.2 Money Market Institutions .. .. .. .. 3.2.1 Debt Management Office (DMO) .. .. 3.2.2 Deposit Money Banks (DMBs) .. .. .. 3.2.3 Discount Houses .. .. .. .. 3.3 Money Market Instruments .. .. .. .. 3.3.1 Treasury Bills (TBs) .. .. .. .. 3.3.2 Treasury Certificate (TC) .. .. .. 3.3.3 Commercial Papers (CP) or Commercial Bills 3.3.4 Certificates of Deposits (CD) .. .. .. 3.4 The Inter-Bank Market .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 5 5 5 5 5 6 6 6 6 7 7 7 7 7 7 .. .. .. .. .. .. .. 9 9 9 9 10 10 10 Section Four: 4.1 4.2 4.3 4.4 4.5 4.6 The Role of Money Market in Economic Growth and .. .. .. .. Development .. Allocation of Capital .. .. .. .. .. Risk Sharing .. .. .. .. .. .. Investment Diversification .. .. .. .. Promoting Saving and Investment .. .. .. Regulation of the Flow of Credit .. .. .. Transmission of Monetary Policy .. .. .. .. .. .. Section Five: Conclusion 5.1 Prospects and Opportunities .. .. 5.2 Limitations of the Nigerian Money Market 5.3 Conclusion .. .. .. .. Bibliography .. .. .. .. .. vii .. .. .. .. .. .. .. .. .. .. .. .. 11 11 11 13 .. .. .. 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 1 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. 2 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), 3 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. 5 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. 6 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. 9 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. 10 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. 12 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. 13 THE NIGERIAN MONEY MARKET 14 THE NIGERIAN MONEY MARKET Bibliography Adamgbe E. (2004). “Price Volatility, Expectations and Monetary Policy in Nigeria” CBN Economic and Financial Review (4) 12- 27 Anthony S. and Marcia Million Cornett (2001). “Financial Markets and Institutions, A modern Perspective” Central Bank of Nigeria (2004). “Revised Guidelines for Discount Houses. CBN Press” Charles N. H., William P. and Robert H. S. (1975). “Financial Markets and the Economy” Chuku A. C. (2009). “Measuring the Effects of Monetary Policy Innovations in Nigeria: A Structural Vector Autoregressive (SVAR) Approach. African Journal of Accounting, Economics, Finance and Banking Research, Vol. 5, No. 5. Donald L. K. (2008). “Money Markets and Financial Stability” Speech at the Federal Reserve Bank of New York and Columbia Business School Conference on the Role of Money Markets, New York. Ekiran O. (1999). “Basic Understanding of Capital Market Operation” CBN Press Limited Ikechukwu O. I. (2013). “Money Market on the Nigerian Economic Development” Journal of Economics and Sustainable Development, Vol. 4n No, 5. Nehu P. (2012). “Role of Money Market in Context to Growth of Indian Economy” International Journal of Marketing, Financial Services and Management Research, Vol. 1, Issue 9 Nwankwo G. O. (1991). “Monetary and Capital Market”, a Nigeria London Macmillan Publisher. Nwosu C. P. and Hammam H. M. (2008). “The Nigerian Money Market, Issues and Challenges” Central Bank of Nigeria, Bullion, Volume 32, No 2. Obilayo K. M. (2001). “Creating an Enabling Environment for Small Scale Industries” CBN Bullion Vol. 25, No. 3 Ubong U. M. (2010). “Appraisal of the Electronic Implications of Electronic Banking in Nigerian Banks: (A case study of Diamond Bank) 15 THE NIGERIAN MONEY MARKET 16