Written by The Nigerian money market is an important component of the financial system of Nigeria.
It is part of the Nigerian financial system where short-term securities or liquid securities are bought and sold.
In other words, the money market is the market where short-term debt instruments are traded.
Many instruments are traded or have been traded in the Nigerian money market.
They include treasury bills, treasury certificates, commercial papers, certificates of deposit, stabilization securities, banker unit funds, and eligible development funds.
These instruments have varying maturities ranging from overnight to 364 days.
To understand more about Nigerian money market instruments, let’s take a deeper look at each one of them.
Treasury Bills
Treasury bills were first introduced in Nigeria in April 1960, under the 1959 “Treasury Bill ordinance”.
Treasury bills are short-term debt instruments issued by the Central Bank of Nigeria on behalf of the Federal Government of Nigeria.
They are sold at a discount for a period ranging from 91 to 364 days, with the income the holder received equal to the difference between the purchase price and the amount received at maturity or before the sale.
Treasury bills are considered to be default-free since they are backed by the full faith and guarantee of the federal government of Nigeria.
They are merely I.O.U backed only by a promise to pay by the government.
Treasury bills provide the government with a very flexible and low-cost means of raising short-term finance from members of the public
The Central Bank of Nigeria usually used treasury bills to conduct open market operations, which is one of the instruments for controlling the money supply.
Call money Scheme
In Nigeria and other countries alike, all commercial Banks are legally required to keep a certain percentage of their total deposits with the Central Bank of Nigeria.
However, it may happen that one or more commercial banks fall below such legal requirements due to excess withdrawal by bank customers.
When this happens, banks usually seek short-term credit from other banks, who may provide it on an overnight basis.
This short-term credit is called call money.
Call money was institutionalized in Nigeria by the Central Bank of Nigeria in 1962 under the name ‘call money scheme’.
Under the Call money scheme, Participating institutions invest/lend surplus funds on an overnight, 7-day, or 30 days basis.
Only commercial banks were initially allowed to partake in the scheme, but it was extended to include other financial institutions.
The call money scheme was operated in Nigeria for twelve years and was abolished in July 1974 due to a lack of investment outlets for the call money funds.
Treasury Certificates
Having introduced the treasury bills and the call money scheme in 1960 and 1962, the Central Bank of Nigeria felt that there was a need to introduce another instrument that would have a longer maturity period than any of the first two, but not long enough to be used as long term security.
This resulted in the introduction of the treasury Certificate in 1968, with a maturity period of one to two years.
Treasury certificates are short-term debt instruments like treasury bills, but they have a longer maturity period than treasury bills.
Similar to treasury bills, treasury certificates were issued at a discount.
This means that the amount paid on the acquisition of the certificate is normally less than its face value.
At maturity, the holders of these certificates will receive the amount of the face value of the certificates from the CBN.
However, It should be noted that treasury certificates are currently no longer being issued by the Central Bank of Nigeria.
Commercial Bills
Commercial Bills were first issued around 1962.
They were introduced to help marketing boards and other commercial firms raise shorter-term funds through the sales of commercial Bills.
Commercial Bills were divided into two: The ordinary trade bill and the marketing board bill.
- The ordinary bill is a bill drawn by a seller, who may be an exporter. When accepted by commercial banks or acceptance houses, the ordinary bill is usually discounted by a bank. The bank, having relied on the good name of the acceptor and the credit of the drawer, advances money for an amount below the full value of the bill.
- The marketing board bill originated with the inception of the bill market in 1962. It was designed to bridge the gap between the seasonal fluctuation of funds that the marketing boards needed to finance their export produce and that given to them by the commercial banks.
However, the use of commercial Bills was terminated in 1968.
Certificate of Deposits
These are interbank debt instruments that allow commercial banks to send excess funds to merchant banks.
They were first introduced in Nigeria in March 1975 to help channel surplus funds from commercial banks into merchant banks.
Certificates of Deposits are issued in multiples of N50,000 and are re-discountable by the CBN if the issuing bank fails to redeem them at maturity.
They have a maturity period of between 3 to 36 months and may bear interest.
Certificates of Deposits are of two types: Negotiable Certificate of Deposits (NCD) and Non-negotiable Certificate of Deposits (NNCD).
A negotiable certificate of deposit is transferable using sale while a non-negotiable certificate of deposit is not transferrable.
One important thing to note about certificates of deposits is that they were introduced in 1974 to give merchant banks access to the huge reserves of funds in commercial banks.
Stabilization Securities
Stabilization securities are cost-effective instruments of monetary policy introduced in 1976 by the Central Bank of Nigeria to curb banks’ excess liquidity.
It was introduced to facilitate the mopping-up of excess funds of banks.
With stabilization securities, the central bank of Nigeria (CBN) can just issue securities and sell them to banks.
Banks are, as a matter of law, required to take up any assigned amount of the securities or face a penalty.
Bankers’ Unit fund
Six months after the introduction of the Certificate of Deposits, the Central Bank also introduced the Bankers’ Unit fund in September 1975.
The Banker’s Unit Fund(BUF) was a scheme introduced to remove excess liquidity from the Nigerian Banking system.
It was quite similar to the call money scheme. It was designed to encourage short-term investments in government development stocks.
Under the Banker’s Unit Fund scheme, Commercial Banks, Merchant banks, and other financial institutions can invest part of their excess liquid resources with the Central Bank of Nigeria.
Following the receipt of these surplus funds, the CBN will reinvest them into Federal Government Development Loan Stocks.
Bankers’ unit funds are popular for their fixed rate of interest and they were usually issued in multiples of N10,000.
Also, they were payable on demand, provided withdrawals are in multiples of N10,000
The banker’s unit fund failed to achieve its objective and as a result, it ceased to exist in Nigeria in 1989.
Eligible Development Stocks
In 1975/76, the federal government of Nigeria announced that it would stop further issuance of the treasury Certificate.
Despite this, there was no increase in treasury bills.
In a bid to meet the requirements of participants of the money market, the Eligible Development loan stock was introduced in 1975.
The Eligible Development Stocks(EDS) are part of the Federal Government loan stocks with a maturity period of about thirty-six months or less than 3 years.
They are usually issued by the Central Bank of Nigeria on behalf of the central government.
Any bank holding this instrument can present it as part of its total liquid assets. It can therefore be regarded as part of a bank’s liquid asset for the purpose of calculating the bank’s statutory ratio.
It is worth noting that only development stocks with a maturity of less than 3 years are traded in the money market.
Any development stock with a maturity greater than three years is traded in the capital market.
