Written by The Nigerian Money Market is a critical component of the country’s financial market.
It is the market where short-term securities like treasury bills, certificate of deposits, are traded.
Several institutions participate in the Nigerian Money Markets. These institutions are the commercial banks, the central bank of Nigeria, merchant banks and discount houses.
In this post, we will take a closer look of these institutions and their contributions to the Nigerian Money market.
Central Bank of Nigeria
The Central Bank of Nigeria is the apex banking institution saddled with the responsibility of creating, regulating and controlling the supply of money.
To achieve this purpose, the CBN perform two functions in the Nigerian money market: regulatory function and participatory.
1. Regulatory function: The Central Bank of Nigeria (CBN) is the apex institution in the Nigerian money market.
As the chief regulatory agency of the money market, the CBN collaborates with the Securities and Exchange Commission (SEC) to ensure that financial institutions operate within the rules and regulations of the money market.
Additionally, as the guardian of the monetary policy of the federal government, the Central Bank of Nigeria ensures that the activities of all financial institutions in the money market are aligned with the government’s monetary policy.
2. Participatory function: The Central bank also participates in the Money market by conducting open market operations (OMO).
Open Market Operation is the buying and selling of government securities by the Central Bank.
Routinely, when the central bank needs to increase or decrease the money supply, It trade government securities such as treasury bills in the money market.
For example, during periods of inflation, the Central Bank of Nigeria may try reduce money supply by selling securities, and during period of recession, the CBN will buy securities, so as to inject more money into the economy.
Commercial Banks
Commercial banks are financial institutions established to carry out financial services such as accepting deposits and granting loans for the sole aim of making a profit.
They are also active participants in the money market.
Commercial banks play a major role in the Nigerian money market because they act as both suppliers and users of money market funds.
As suppliers of funds, commercial banks lend money to borrowers in the money market.
As users of funds, commercial banks borrow money from the money market to fund their operations and meet reserve requirements.
For example, the call money scheme introduced by the Central Bank of Nigeria in 1962 serves as an effective mean for banks to borrow money overnight to meet their reserve requirements.
Additionally, commercial Banks also serves as middlemen in the money market, as they sometimes help prospective investors buy and sell money market instruments.
Also, they connect borrowers with lenders and facilitate the transfer of funds between them
For example, a holder of a treasury bill, who did not want to wait till the maturity period, can decide to sell them through his bank.
In this case, the bank will just look for someone else who is willing to buy the treasury bill and sell it to him other.
Furthermore, in most countries, the checking account at commercial banks constitutes a large part of the nation’s money supply and these are essentially part of the money market.
Merchant Bank
According to the Nigerian banking amendment decree 88 0f 1979, ”A merchant bank is any person who engages in wholesale banking, medium and long-term financing, equipment leasing, debt factoring, investment management, issue and acceptance of bills and the management of unit trusts”.
In Nigeria, merchant banks have continued to play an integral role in the Nigerian money market as they serve as an agent between lending and borrowing trader.
Furthermore, merchant banks issue negotiable Certificate of Deposits to the Commercial Banks for resale whenever there is a need for that.
Discount houses
Discount houses are specialized financial institutions that primarily deal in the buying and selling of money market securities in the secondary market.
Discount houses acts as an intermediary between the Central Bank of Nigeria, licensed banks and other financial institution.
They acts as an agent for facilitating the open market Operation of the CBN, and they are considered key players in the Nigerian money market.
The main function of discount houses is to mobilize funds for investments in securities by providing discounting or re-discounting facilities in government short-term securities.
