the nigerian money market

CENTRAL BANK OF NIGERIA

UNDERSTANDING MONETARY POLICY SERIES

NO 27

c 2013 Central Bank of Nigeria

THE NIGERIAN MONEY MARKET

Oghenekaro O. Afiemo Oghenekaro O. Afiemo Oghenekaro O. Afiemo

10TH

ICYL DO EP PY AR RA TT ME EN NO TM

AnniversaryCommemorative

Edition

Central Bank of Nigeria33 Tafawa Balewa WayCentral Business DistrictsP.M.B. 0187Garki, AbujaPhone: +234(0)946236011Fax: +234(0)946236012Website: E-mail:

www.cbn.gov.ng [email protected]

ISBN: 978-978-52861-9-9

© Central Bank of Nigeria

iii

Central Bank of Nigeria

Understanding Monetary Policy

Series 27, March 2013

EDITORIAL TEAM

EDITOR-IN-CHIEF

MANAGING EDITOR

EDITOR

ASSOCIATE EDITORS

Aims and Scope

Subscription and Copyright

Correspondence

Email:[email protected]

Moses K. Tule

Ademola Bamidele

Charles C. Ezema

Victor U. ObohDavid E. Omoregie

Umar B. Ndako Agwu S. Okoro

Adegoke I. AdelekeOluwafemi I. Ajayi Sunday Oladunni

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 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.

Enquiries concerning this publication should be forwarded to: Director, Monetary

Policy Department, Central Bank of Nigeria, P.M.B. 0187, Garki, Abuja, Nigeria,

iv


Mandate

Vision

Mission Statement

Core Values

§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

“By 2015, be the model Central Bank delivering

Price and Financial System Stability and promoting

Sustainable Economic Development”

“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”

§Meritocracy

§Leadership

§Learning

§Customer-Focus

v

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


Mission

To Provide a Dynamic Evidence-based

Analytical Framework for the Formulation and

Implementation of Monetary Policy for

Optimal Economic Growth

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. TuleDirector, Monetary Policy DepartmentCentral Bank of Nigeria

FOREWORD

CONTENTS

vii

Section One: Introduction

Section Two: Evolution of the Nigerian Money Market

Section Three: The Nigerian Money Market Framework

Section Four: The Role of Money Market in Economic Growth and Development

Section Five: Conclusion

Bibliography

.. .. .. .. .. .. 1

.. .. 32.1 History of Nigerian Money Market .. .. .. .. 32.2 Objectives for Establishing the Nigerian Money Market .. 4

.. .. 5

1.1 The Nigerian Financial Markets .. .. .. .. 11.2 The Nigerian Money Market .. .. .. .. .. 1

3.1 Regulatory and Supervisory Bodies .. .. .. .. 53.1.1 Central Bank of Nigeria (CBN).. .. .. .. 53.1.2 Nigerian Deposit Insurance Corporation (NDIC) .. 53.1.3 Federal Ministry of Finance .. .. .. .. 5

3.2 Money Market Institutions .. .. .. .. .. 63.2.1 Debt Management Office (DMO) .. .. .. 63.2.2 Deposit Money Banks (DMBs) .. .. .. .. 63.2.3 Discount Houses .. .. .. .. .. 6

3.3 Money Market Instruments .. .. .. .. .. 73.3.1 Treasury Bills (TBs) .. .. .. .. .. 73.3.2 Treasury Certificate (TC) .. .. .. .. 73.3.3 Commercial Papers (CP) or Commercial Bills .. 73.3.4 Certificates of Deposits (CD) .. .. .. .. 7

3.4 The Inter-Bank Market .. .. .. .. .. .. 7

.. .. .. .. .. .. 94.1 Allocation of Capital .. .. .. .. .. .. 94.2 Risk Sharing .. .. .. .. .. .. .. 94.3 Investment Diversification .. .. .. .. .. 94.4 Promoting Saving and Investment .. .. .. .. 104.5 Regulation of the Flow of Credit .. .. .. .. 104.6 Transmission of Monetary Policy .. .. .. .. 10

.. .. .. .. .. .. 115.1 Prospects and Opportunities .. .. .. .. .. 115.2 Limitations of the Nigerian Money Market .. .. .. 115.3 Conclusion .. .. .. .. .. .. .. 13

.. .. .. .. .. .. .. .. 15


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T H E N I G E R I A N M O N E Y M A R K E T 1

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.

2 Ogenekaro O. Afiemo is an Assistant Economist in the Monetary Policy Department,

Central Bank of Nigeria.


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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.


3

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),


4

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.


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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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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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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


8

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.


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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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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 well-

structured 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 long-

term 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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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


12

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.


13

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.


14


15

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the nigerian money market

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