Just get It
Just get It



Money market refers to a collection or group of financial institution or exchange system set up for dealing in short-term credit instruments of high quality, such as Treasury bill, treasury certificates, call money, commercial paper, Bankers’ Unit Fund, certificates, ways and means advance, as well as the dealing in gold and foreign exchange. These short-term instruments involve a small risk due to loss, because they are issued by obligors of higher credit rating and they mature with one year.

While denoting trading in money and other short-term financial assets, the money market comprises all facilities of the country for the purchase and sale of money for intermediate and deferred delivery and for the borrowing and lending of money for short period of time. It is a manifestation of dealing in short-term financial instruments (their sale and purchase, as also borrowing and lending for short period) on the other hand, and collection of financial instrument set up for the granting of short-term loans and dealing in short-term securities, gold and foreign exchange (Anyanwu, 1993).

The money market is a short-term debt marketthat deals with different money market instruments'- is the common money market definition.

To understand the money market definition some important issues need to be discussed and they are the money market instruments, the money market account and the money market funds.

Money Market Instruments

The money market instrumentsare basically the tools through which investment in the money marketis done. The money marketinstruments are discussed under the following heads:

Treasury Bills: The Treasury bills are the short-term money marketsecurities that mature in a year or less than that. The purchase price is less than the face value.

Certificate of Deposit: The certificates of deposit are basically time depositsthat are issued by the commercial banks with maturity periods ranging from 3 months to five years. The return on the certificate of deposit is higher than the Treasury Bills because it assumes a higher level of risk.

Banker's Acceptance: It is a short-term credit investment. It is guaranteed by a bank to make payments. The Banker's Acceptances are traded in the Secondary market.

Eurodollars: The Eurodollars are basically dollar- denominated deposits that are held in banks outside the United States.

Repos: The Repo or the repurchase agreement is used by the government security holder when he sells the security to a lender and promises to repurchase from him overnight.

Money Market and Institutions

· Discount Houses

A discount house as a special, non-bank financial institution intervenes in mobilising funds for investments in securities in response to the liquidity of the system. It does this by providing discount/rediscounting facilities in government short-term securities. In the process of shifting the financial system from direct market-based monetary control, discount houses were established to serve as financial intermediaries between the CBN, licensed banks and other financial institutions. Five discount houses are currently in operation in Nigeria. They are First Securities Discount House Limited, Express Discount House Limited, Associated Discount House Limited, Kakawa Discount House Limited and Consolidated Discount House Limited.

· Commercial and Merchant Banks

Commercial and Merchant Banks operate under the legal framework of the Banks and Other Financial Institutions Decree 25 of 1991 (as amended). Prior to this, the banks' activities were governed by the 1952 Banking Ordinance and Banking Act of 1969 (and amendments)

· Commercial Banks

The first commercial bank was established in Nigeria in 1892. Commercial banks perform three major functions, namely, acceptance of deposits, granting of loans and the operation of the payment and settlement mechanism. Since the Government commenced active deregulation of the economy in September 1986, the commercial banking sector has continued to witness rapid growth, especially in terms of the number of institutions and product innovations in the market. The number of commercial banks and their branches rose, respectively, from 30 and 2,397 in 1986 to 64 and 2,402 in 1996. Many branches were closed down in structural rationalisation. The minimum capitalization of both commercial and merchant banks has been increased to a uniform level of N500 million (from N50 million and N40 million respectively).

· Merchant Banks

Merchant banks take deposit and cater for the needs of corporate and institutional customers by way of providing medium and long-term loan financing and engaging in activities such as equipment leasing, loan syndication, debt factoring and project advisers to clients sourcing funds in the market. The first merchant bank in Nigeria, Nigerian Acceptance Limited (NAL), started operations in 1960. By the end of 1996, there were 51 merchant banks with 147 branches, while their total assets amounted to N111,266.9 million.

· People's Bank of Nigeria

The decision to establish the People's Bank of Nigeria was announced by the Federal Government in the 1989 Budget with an initial capital of N30 million. Specifically, the bank is to meet the credit need of small borrowers who cannot satisfy the stringent collateral requirements normally demanded by commercial banks. The bank is expected to facilitate access to credit for urban poor small scale operators and thereby increase their self-reliance. Initially, it granted loans in the range of N50 to N5,000. The lending floor and ceiling have been removed and applications are treated on their individual merits. The activities of the bank have stabilized with 275 branches established.

· Community Banks

A community bank in Nigeria is a self-sustaining financial institution owned and managed within a community to provide financial services to that community. The National Board for Community Banks (NBCB) processes applications for the establishment of community banks. The first community bank commenced operation in December 1990. Since then, NBCB has issued provisional licences to 1,366 community banks and are expected to be issued final licences by the CBN after operating for two years.



It has been underscored that discount houses play very important roles in stimulating investments in the economy and in boosting the general operations of the money market. Not only do they serve as catalyst in the market, they are, on their own, large-scale investors in the money market as well. Their role in facilitating profitable open market operations is worth stressing (CBN, 2004; Ezirim, 2005). Not withstanding these and other roles performed by discount houses in a typical economy, the Nigerian money market operations are said to be sub-optimal in terms of engineering desired growth in the economy. The observed sub-optimality of the Nigerian money market is blamed, in part, on the poor performance of discount houses and other money market institutions. Discount houses, from the onset of their operations in the country, were expected to cause the Nigerian money market to operate optimally.

Since the money market is yet to achieve this objective, we can then say that the discount houses have failed in their expected duties.

Furthermore, the entire activity of the discount houses is expected to directly or indirectly boost aggregate domestic investment, output, and income. The levels of these macro magnitudes, even with the advent of discount houses, have left much to be desired.

At inception in 1993, discount house operations were modest as this type of institution was new, while they tried to establish their relevance. Similarly, they were able to adjust quickly in their efforts at integrating their operations within the Nigerian financial system. Also, the initial effort of the houses made them credible avenues for banks call deposits as the confidence in the banking system suffered because of the lingering problem of distress in the system. The resolution of distress in the banking system made the environment more conducive for efficient funds management. However, the introduction of the autonomous foreign exchange market in 1995 made the operations of discount houses less attractive. This impacted negatively on the operations of the houses and had also influenced their clamour for a review of the operation guidelines within which the houses are operating.

Specifically, the operators were of the opinion that the environment should be improved upon to make them more relevant to the financial system. The central focus of their request appears to be the needs to allow them perform some banking and investment functions instead of restrictions imposed on them within the money market. The issue of under writing of the government debt instrument was also seen as a way of divesting the Central Bank of Nigerian (CBN) of this function and made the floating and dealings in the securities more market driven.

Although discount houses have operation for a relatively short period in the Nigerian money market, an appraisal of their operational performance is pertinent, especially in the context of operational performance is pertinent, especially in the context of operational viability and their contributions to the growth of the domestic money market. In this regard, an analysis of their consolidated balance sheet over the period would be appropriate. The number of operating discount houses increased from 3 in 1993 to 5 presently. The initial boom experienced by the houses in their first year of operation showed a reversal in 1995 when total asset of the houses slumped from N9.6 billion in the previous year, to N3.4 billion, following the entry of another participant into the market during the year. This trend abated in 1996 as total assets surged to N11.8 billion but dropped back to N7.0 billion in 1997, before rising modestly to N7.8 billion in 1998. At N7.1 billion at end-June 1999, total assets of the houses remained consistently below the peak attained in 1996.

The crisis facing the discount houses has been largely associated with

Deteriorating liquidity position of the banks. Investible funds available to

the houses have declined as banks’ call deposits with the houses dropped

relative to the position in 1994 and 1995. Their activities in the secondary

market also showed due to paucity of funds for trading in securities. The

interbank and foreign exchange markets have tended to provide more

attractive trading options for the banks, to the detriment of the discount



The discount houses at their inception operated in an environment that could not be considered normal. The distress situation was at its peak and many bank patronized discount houses in order to ensure the safety of their funds. With the return of orderliness and substantial progress made in the resolution of distress in the financial sector, discount houses patronage by banks reduced. The operational performance of the houses had therefore reflected this phenomenon in the last few years and necessitated the need for a comprehensive review of the operational modalities of discount houses.

While the main sources of funds of the houses remained the call deposits

from the banks, the houses are expected to be involved in the promotion of private sector instruments to reduce the dominance of the public sector

securities especially, the treasury bills, for continued relevance.

The constraints to discount houses operations could be viewed from three

perspectives when include, the narrow scope of operations, the absence of an enabling environment that would allow for enhanced competition in the money market and inability to assume underwriting function from the

Central Bank of Nigeria.


The paper traces the emergence of discount houses in Nigeria to the need to strengthen the institutional support within the money market. The

experience of Britain which represents the model of discount house

development was noted with emphasis on the transformation of their

functions over the years. Experience in other countries also recognized the need for the houses to act in such a manner that would justify their existence.

For instance, the houses in some countries have taken on some functions to relieve the monetary authorities of the business of managing liquidity

through under writing of government debt instruments.

The constraints inhibiting the discount houses in Nigeria were reviewed in the paper while challenges facing the institutions in the short, medium and long run were analyzed. The need for the houses to be proactive and ensure efficient resource management as well as the provision of a more conducive operational environment by the authorities are considered crucial for the survival and relevance of discount houses in the financial sector.. The ability of the house to fact the challenges enumerated would ultimately influence the public perception of their contributions to the overall development of the Nigerian financial sector and the economy at large.

Busines and Education

No comments yet.

    0 of 8192 characters used
    Post Comment

    No HTML is allowed in comments, but URLs will be hyperlinked. Comments are not for promoting your articles or other sites.

    Click to Rate This Article