Unit 2 The Nigerian Money Market

MODULE 2 OVERVIEW OF NIGERIAN FINANCIAL SYSTEM

UNIT 2 THE NIGERIAN MONEY MARKET
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Meaning of Money Market
3.2 Instruments of the Money Market
3.3 Operators in the Money Market
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

You learnt about the Nigerian financial market in the previous unit. This unit examines the money market, which is an integral part of the financial system of any country. It is, basically, a market for short-term
securities and loans, gold and foreign exchange. Money market can be
intangible, in the sense that, there must be a physical market place.
However, the institutions participating in the money markets are
discount houses, banks (commercial and merchant banks), the central
bank, the government, among others. They are brought into contact via
sophisticated communication networks, available through modern
technology.
The activities in the money market center on borrowing and lending of
funds, which have very low default risk. Generally, the maturity of these
assets varies from one night to one year. In this unit, we will examine
the structure of the Nigerian money market.

2.0 OBJECTIVES

At the end of this unit, you should be able to:
 explain the meaning of money market
 describe the instruments of the Nigerian money market
 discuss the operators in the Nigerian money market.

3.0 MAIN CONTENT
3.1 Meaning of Money Market
Money market is an intermediary for the trading of short-term financial
instruments. The life span of such financial instruments, usually, ranges
from a few hours to about one year. Olowe (2008:60) defines money
market as the market where money is borrowed or invested/lent for
periods of up to one year maturity.
The money market deals in short-term government and private sector
instruments. The instruments traded are readily convertible into cash. An
individual, institution or government that requires funds, creates
instruments with which to source for such funds. The type of instrument
is debt or loans, traded with different names e.g. treasury bills, etc.
In Nigeria, the money market was established by the Central Bank of
Nigeria, primarily, for mobilising domestic savings for productive
investment, as well as, providing the government with funds, to enable it
implement its economic programs. Anyanwu (1993:156) explains that
these short-term instruments involve a small risk, because they are
issued by obligators of the highest credit rating.
He further outlines the function of the money market as follows:
1. It provides the basis for operating and executing an effective
monetary policy
2. It promotes an orderly flow of short-term funds
3. It ensures supply of the necessary means of expanding and
contracting credit.
4. Mobilisation of funds from savers (lenders) and the transmission
of such funds to borrowers (investors)
The Nigerian money market is made up of two segments- the primary
and the secondary markets. The primary market is the market for the
issuance of new financial instruments; while the secondary market is the
market where existing or old financial instruments are traded.

SELF-ASSESSMENT EXERCISE 1

Define money market and highlight the function the Nigerian money
market.

3.2 The Instruments of the Money Market
There are various instruments by which funds can be raised in the
money market. The instruments used in the Nigerian money market are
listed below.
1. Treasury Bills
These are short-term promissory notes issued by the CBN on behalf of
the federal government. This instrument is a default- free instrument,
sold on weekly basis to raise funds for the federal government; and it
matures within 91 days, from the date of issue. The instrument is also
used as a monetary policy tool by the CBN to manage liquidity in the
banking system through Open Market Operation (OMO).
The security could be sold at a price lower than its nominal value;
hence, it is a discountable instrument. At maturity, the bill is redeemed
at its face value.
2. Treasury Certificates
These are medium-term government debt instrument, introduced in
1968. They are of two classes- the one- year treasury certificate and the
two- year treasury certificate; thus bridging the gap between treasury
bills and long-term government securities. They are issued at par or face
value, with fixed interest rate as imprinted on the coupon.
They are similar to treasury bills in all respect, except that they have
longer maturities and higher returns. Unfortunately, this instrument was
phased out in 1997.
3. CBN Certificate
The CBN Certificate was introduced by the Central Bank of Nigeria in
February 2001, in order to address the lingering problem of liquidity
overhangs in the system; with a view to establishing a stable
macroeconomic environment. The instrument was issued in two tranches
of 180-day and 360-day tenors, with a minimum investment of
₦250,000.00, and in multiples of ₦50,000.00 thereof. The security was
open for public subscription through the deposit money banks.
4. Certificates of Deposits
They are inter-bank instruments introduced in March 1975. They are claims to specified sum of money deposited, with a merchant bank name on them. Certificates of Deposits have maturity range of 3 to 36 months.

They are in two forms- the Negotiable Certificate of Deposit (NCD) and the Non-Negotiable Certificate of Deposit (NNCD). These instruments are issued by merchant banks, and held mostly by commercial banks.
The instrument has been phased out since 1997.
5. Commercial Papers
These are short-term promissory note, issued by corporate entities (companies) showing indebtedness. Commercial papers have a maturity range of 30 days and 270 days. The investors in commercial papers are usually high net-worth individuals, institutional investors, such as banks, etc.
6. Money at Call
Money at Call refers to money lent by banks which could be called back at a short notice, for instance, within 24 hours. Call money is, simply, reserved funds loaned to banks with insufficient reserves. It helps potential erring banks acquire the legal reserves which the CBN requires banks to maintain. They also serve as a buffer against stock of liquidating pressures in the market; thus, helping banks to manage new cash balance.
In 1962, the money at call scheme was introduced in Nigeria, but was
abolished by CBN in 1974.

SELF-ASSESSMENT EXERCISE 2

Next Unit 3 The Nigerian Capital Market

Mention the instruments used in the Nigerian money market.
3.3 Operators in the Money Market
The major operators in the money market, as highlighted by Nnanna, Englama, & Odoko (2004:49) are as follows:
1. Central Bank of Nigeria (CBN)
The CBN is the issuer of the domestic currency. It participates, actively, in the money market in the process of implementing monetary policies, and by virtue of its role as the banker’s bank. As the banker and financial adviser to the federal government, the CBN on behalf of the government, sources funds from the money market through the use of
short-term debt instruments.
The CBN also acts as the lender of last resort; it determines the Minimum Rediscount Rate (MRR) at which it gives short-term credit to banks. The adjustment of the MRR influences other interest rates at
which transactions in the money market are carried out.
2. Deposit Money Banks (DMBs)
They are the largest of the groups that make up the Nigerian money market. They are the largest partner with CBN, in money market transactions.
They equally serve as the intermediary between the central bank and the general public in the processing, sales and purchase of banking products and monetary policy instruments. Thus, the major transaction of converting financial assets into cash, and vice-versa, takes place in DMBs. The DMBs operate under the general guidelines provided by
monetary authorities and are involved in the business of providing financial services to individuals/households, corporate bodies and the government.
3. Discount Houses (DHs)
These are non-bank financial institutions that provide deposit money banks with a convenient window for liquidity management, by contracting from banks, and providing short term market for government securities. They provide secondary market for investors who cannot keep their instrument till maturity.
Such investors can sell their bills to the house at a discount, i.e. - a value less than the maturity value. The discount households such instrument till maturity. The difference between the discounted value and the maturity value is the profit made by the discount house.
4. Finance Houses
Finance houses specialise in short-term, non-bank financial
intermediation. Their main objective is to mobilise funds by providing
consumer credit and other facilities for local purchase order, project
financing, equipment leasing and debt factoring.
They are not allowed by law to accept deposits from members of the public; also, they are not allowed to operate in the foreign market. The main sources of their funds are equity and borrowing.

5. Bureaus de Change
They were granted authority to commence operation in Nigeria, in order to enhance public access to foreign exchange. Under the
recommendations of CBN, a bureau de change can operate in Nigeria, if it has been issued license by the Federal Ministry of Finance.
6. Community Banks
The establishment of community banks in Nigeria can be traced to the federal government pronouncement in the 1990 budget. The initiative was aimed at redressing the lack of adequate and efficient facilities for the mobilisation of savings for productive activities among less privileged members of the society.

SELF-ASSESSMENT EXERCISE 3
Identify operators in the Nigerian money market.

4.0 CONCLUSION
In this unit, you are now aware that money market is an intermediary where short-term financial instruments are traded. The life span of such financial instruments usually ranges from a few hours to about one year.
The instruments used in the Nigerian money market are treasury bills, treasury certificates, and CBN certificate, among others. The major operators in the Nigerian money market are Central Bank of Nigeria, deposit money banks, discount houses, finance houses, etc. All these
institutions contribute to the economic growth of a nation.

Next Unit 3 The Nigerian Capital Market

5.0 SUMMARY
In this unit, you have learnt the meaning and functions of money market.
The instruments used in the Nigerian money market have been analysed.
The unit also discussed the major operators in the Nigerian money market.
In the next study unit, you will learn about the Nigerian capital market.

6.0 TUTOR-MARKED ASSIGNMENT
1. Outline and explain the instruments used in the Nigerian money
market.
2. Mention and discuss the operators in the Nigerian money market.

7.0 REFERENCES/FURTHER READING
Anyanwu, J.C. (1993). Monetary Economics: Theory, policy and
institutions. Onitsha: Hybrid Publishers Ltd.
Nnanna, O.J., Englama, A., & Odoko, F.O. (Eds.). (2004). Financial
Markets in Nigeria. Abuja: Kas Arts Service.
Olowe, R.A. (2008). Financial Management: Concepts, Financial
System and Business Finance. Lagos: Brierly Jones Nigeria

Limited.