THE NIGERIAN MONEY MARKET
The money market is a market for short – term funds: and as the name suggests, it is a market in which money is bought and sold, the market is used by business enterprises to raise funds forthe purchase of inventories, by banks to finance temporary reserve loss, by companies to finance consumer credit and by government to bridge the gap between its receipts and expenditure.
Unlike the market for textiles, for example, there is no place that one can call a money market. Although activities in the money market cam be concentrated in a particular street. For example, all street in New York, Lombard street in London and Broad street in Lagos. Transactions in the market are impersonal taking place mostly by telephone (Ajayi and Ojo, 1981). Thus, it is a market for the collection of financial institutions set up for the granting of short-term loans and dealing in short-term securities, gold, and foreign exchange (Anyanwu, 1993).
11.1 RESONS FOR THE ESTABLISHMENT OF THE NIGERIAN MONEY MARKET
(a) To provide the machinery need for government short-term financing requirements.
(b) It is a part of a modern financial and monetary system which enables the nation to establish the monetary autonomy which is part and parcel of the workings of an independent, modern state.
(c) To domesticate the credit base by providing local investment outlets for the retention of funds in Nigeria and for the investment of funds repatriated from abroad as a result of government persuasions to that effect.
(d) It provides a good barometer to CBN, which can use it to judge the shortage of surplus of funds in the economy.
(e) The existence of the money market enables the central bank to undertake vigorous monetary policy.
11.2 THE DEVELOPMENT OF THE NIGERIAN MONEY MARKET
No money market existed in Nigeria before the establishment of the Central Bank of Nigeria. This is however not to say that a market for short-term funds did not exist before then. Before the advent of commercials banking, there existed some elements of short-term lending and borrowing based of commercial paper. The market was an integral part of the London money market. It worked by moving funds from London to Nigeria during the season in order to finance the export of produce. At the end of the season, the funds were moved back to London, when there was all-season money-market activity. The establishment of the Nigerian money market involved, on the part of the Central Bank of Nigeria, repatriating these “roving” funds to Nigeria for the country’s economic development.
The development of the Nigerian money market is not unconnected with the systematic introduction of the various instruments used in the market. Hence, discussion shall be on these instruments and time of introduction.
1. Treasury Bills (TBS)
These are money-market (short-term) securities issued by the federal government of Nigeria. They are sold at a discount (rather than paying coupon interest), mature within 90 days of the date of issue. They provide the government with a highly flexible and relatively cheap means of borrowing cash.
Thus, TBS and IOUs, are used by the federal government to borrow for short periods of about three months pending the collection of its revenue. Their issue for the first time in Nigeria (in April 1960) was provided for under the Treasury Ordinance of 1959. It was issued in Nigeria in multiples of #2000 (later reduced to #100 in order to expand the coverage of holders for 91 days and at fixed discount. TBS outstanding average #34.421.8 million in 1989 with # 10,879.5 million issued between1992, and 1995, it averaged #2585.05 million.
2. Treasury Certificate (TCS)
These are similar to TBS but are issued at par or face value and pay fixed interest rates. These fixed in interest rates are called coupon rates. Thus, each issue promises to pay a coupon rate of interest and the investor collects this interest by tearing coupons off the edge of the certificate and cashing the coupon at a bank; post office, or other specified federal office. Each coupon is imprinted a year from the date of issue. In the Nigeria context, their rates became market-determined like TB rates following interest rates deregulation.
Thus, treasury certificates are medium-term government securities which mature after a period of one to two tears and are intended to bridge the gap between the treasury bill and long term government securities. They were first issued in 1968 at a discount of 45/8 percent for one-year certificates and 41/2 percent for two year certificates.
At the end of 1990, treasury certificates outstanding had risen to #34214.6 million. This further rose to N36554.32 in 1993, #37342.7 million in 1994 but declined to #23596.5 million in 1995. Thus, between 1990 and 1995 it averaged #39230.2 million. The main holders of treasury certificates are the commercial banks with the CBN ranking second.
3. Call Money Fund Scheme- Money at call or Short Notice
This refers to money lent by the banks on the understanding that it is repayable at the bank’s demand or at short notice (e.g. 24 hours or over-night). Overnight loans are simply bank reserves that are loaned from banks with excess reserves to banks with insufficient reserves. One bank borrows money and pays the overnight interest rate to another bank in order and obtains the lending bank’s excess reserves to hold as one-day deposits. The borrowing bank needs these one day deposits in order to acquire the legal reserves the CBN examiners require banks to maintain.
They act as a cushion which absorbs the immediate shock of liquidity pressures in the market. The scheme was introduced in 1962 in Nigeria. Under the scheme, fund was created at the CBN and the participating banks had to agree to maintain a minimum balance at the CBN. Any surplus above the minimum balance was then lint to the fund. The CBN administered the fund on behalf of the banks and paid interest at a fixed rate somewhere below the treasury bill rate. The CBN then invested the funds in the treasury bills.
The scheme was abolished in 1974 due to buoyant oil revenue of the federal government consequent upon the oil boom. While the scheme lasted, it had a beneficial impact on the efficiency with which the banks managed their cash balances while helping to reduce the degree of dependence of the banks on overseas money market facilities.
4. Commercial Papers or Commercial Bills
These are short-term promissory notes issued by the CBN and their maturities vary from 50 to 270 days, with varying denominations (sometimes #50,000 or more). They are debt that arise in the course of commerce.
Commercial papers may also be sold by major companies (blue-chips-large, old, safe, well-known, national companies) to obtain a loan. Here, such notes are not backed by any collateral, rather, they rely on the high credit rating of the issuing companies. Normally, issuers of commercial papers maintain open lines of credit (i.e. unused borrowing power at banks) sufficient to pay back all of their commercial papers outstanding. Issuers operate in this form since this type of credit can be obtained more quickly and easily than can bank loans.
This instrument was introduced in 1962 to finance the export-marketing operations of the then Northern Marketing Board. Under the arrangement, the marketing boards meet their cash requirements by drawing ninety-day bills of exchange on the marketing boards. The bills are then discounted with the commercial banks and acceptance houses participating in the scheme. The role of the CBN is that to provide rediscounting facilities for the bills.
In 1968, CBN took over the responsibility for the marketing Board crop finance and hence, the demise of the bill market. What remains today of the commercial paper market, following the disappearance of produce bills are import and domestic trade bills.
By 1968, commercial paper outstanding was #5.1 million falling from #36.4 million in 1967. However, in 1989, commercial paper outstanding averaged #868.8 million. Between 1990 and 1995, it averaged #2219.05 million recorded in 1990.
5. Certificates of Deposits (CDS)
Negotiable (NCO) or Non-negotiable (NNCO) deposits are inter-bank debt instruments designed mainly to channel commercial banks surplus funds into the merchant banks. NCO’s are rediscountable with the CBN and those with more than 18 months tenure are eligible as liquid assets in computing a bank’s liquidity ratio. These attributes make the instruments attractive to banks.
It was introduced in Nigeria by the CBN in 1975. They are issued to fellow-bankers within that maturity period, as one of the deposits they accept. The CDS outstanding by 1989 averaged #2079.2 million,