CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND
OF THE STUDY
Globally, money markets remain a key
instrument employed to jumpstart the economy and ensure growth and development
of any Nation (Ajayi, 2008). In every economy,
there often exist financial imbalances and disequilibrium, which calls for the
existence of financial markets. Financial markets are institution or
arrangements which facilitate the exchange of financial assets such as; deposit
and loans, stock and bonds, government securities etc. The market is broadly
classified into money market and capital market. Money market is a series of
closely connected markets, which deals with short – term funds; highly liquid,
and having its maturity less than a year (Agwu 2004). Capital market on the
other hand, provides long term capital to government and corporate bodies with
maturity over a year, and often prone to greater risk of default.
Questions often abound, over the
role of money market in accelerating economic growth. The dominant players in
money market are commercial banks and other itself provides the basis for
operation, manipulation and execution of monetary policies, with discount
houses intermediating funds between the central bank and other banks. Money
market is the greatest indirect instrument used by central bank of Nigeria
(CBN) to control commercials banks. The market provides short – term debt
instruments used to finance the working capital of the firms. It provides
mechanism for government to direct the economy towards the desired national
objectives through the operation of monetary policy. Thus, it facilitates the
pool of funds from surplus sector 10 of the economy to the deficit sector at a
low interest rate (Ajayi, 2008).
Prior to independence in 1960, there
was no organized money market as whatever existed was linked to London based money
market. This economy agent who had surplus funds than they required, had no
market to invest them in Nigeria. Thereby, leading to capital flight in
country, as these funds are only invested oversea. Thus, leaving Nigerian firms
with no funds for investment and consequently hindering economic growth.
Numbers of reason abound for the establishment of Nigeria money market. It
includes the provision of short term funds, to the public and private
institutions, that need such financing for their working capital requirements.
It provides an opportunities to banks and non – bank financial institution to
use their surplus funds profitably. Above all, efficient monetary system is
achieved through central bank of Nigeria (CBN) control of the banking system
via; money market.
STATEMENT OF PROBLEM
It is a well known
fact that, money market plays a very significant role in accelerating economic
growth in any economy. Like, every other market, Nigeria money market has not
been fully explored to its full potential in achieving economic growth and
development, owing to an inefficient institutional framework (Adegbite, 2007).
The inability to provide efficient mechanism for determination of prices of
securities and interest that can be based on the realities of supply and demand
for funds, and their abilities to make available different and adequate
instrument to the market. One would wonder, if the strategies adopted by the
money market in financial intermediation successful; or have money market
operation impacted on the economic growth.
Provides studies show
that, government has not been making adequate effort to capitalize the market,
which impedes the market considerably in performing its primary role of
development. Other studies, shows that the market is actually playing a
significant role in accelerating economic growth in the country. However, all
these studies often exclude government instruments like, treasury bills in
their investigation, which is seeing as one of the dominant player in the
market. This research aim to close this gap in knowledge, by including
government Treasury bill in the study.
1.3 OBJECTIVES OF THE STUDY
This research work aimed at
assessing the impact of Nigeria money market in accelerating economic growth
and development. The objectives will include:
1. To
investigate the impact of money market on economic growth.
2. To
evaluate the success of the money market in financial intermediation between
surplus and deficit units in the economy.
1.4 RESEARCH QUESTION
In the course of this research work,
the following research questions will be raised:
a. Thus the Nigeria money markets impact
the economy?
b. How
successful is the Nigeria money market in its financial intermediation?
1.5 RESEARCH
HYPOTHESIS
The research on the impact of
Nigeria money market on economic growth has led the following hypothesis:
Ho: The Nigeria money market has no
significant impact on economic growth.
HI: the
Nigeria money market has a significant impact on economic growth.
1.6 SIGNIFICANCE
OF THE STUDY
This study will be of great value to
the general public. Its finding will be useful to government, monetary
authorities, banks and other financial institutions. Others include:
a. Business
men, investors and individuals who are interested about the working of the market.
b. Also,
the study will be of great importance to other researchers interested in this
field of study.
1.7 SCOPE
AND LIMITATION OF STUDY
This research study is designed to
investigate the effectiveness of monetary policies in ensuring economic growth,
covering the period of 1981 – 2011. With special emphases on the money market
and its numerous instruments employed.
However, the study no doubt will be
constrained by number of factors to include; inadequate/reliabilities of data,
as data over a particular phenomenon often varies from different source. Others
are: Financial and time constraints that abound in the study making it default
to give a better work than this one.
CHAPTER TWO
LITERATURE REVIEW
2.1 THEORETICAL
LITERATURE: AND OVERVIEW
Money market is a market for short –
term funds, as the name market implies; it is a market in which money is bought
and sold. It facilitate the raising of funds by business enterprises for the
purchase of inventories, by banks to finance temporary reserve loss and by
government to bridge the gap between its receipts/revenue and expenditure
(Noko, 2011).
Infact, money market developed
because parties had surplus funds while others needed urgent cash (funds).
Money market is a market that deals with short – term securities, having its
maturity between one year or less. The debt instrument traded in this market
includes: bankers acceptance, commercial paper, repos, negotiable certificate
of deposit and government Treasury bill. Money market instrument are generally
very safe investment, which return a relatively low interest rate that is
mostly appropriate for temporary cash storage or short time horizons, with high
liquidity.
Unlike the market for textiles for
example, there is no place that one can call a money market. Although
activities in the market can be concentrated in a particular street. For
example, Wall Street in New York, Loan band Street in London and Broad Street
in Lagos. Transactions in the market are impersonal taking place mostly by
telephone (Ajayi & Oyo 2005).
In operating money
market all you need is a desk, a telephone with multiple lines and license to
do business, often referred as money market Desk (Agwu, 2004).
Thus, money market is
described as a wholesale marker for low risk highly liquid, short term loans.
Money market is not just one market, but a series of closely connected markets.
Funds are easily and quickly obtainable in the primary money market at low
interest rates. In the words of Anyawu, “money market is a market for collection
of financial institutions set up for the granting of short – term loans and
dealing in short – term securities, gold and foreign exchange”.
Infact, it is argued that one of the
principal roles of the money market in any economy is that it serves as instrument
by which the government (monetary authorities) uses to control the economic
activities. Thereby, mobilizing funds from surplus sectors of the economy to
the deficit sector of the economy, vis – a – vis its numerous instruments in
the guest to accelerate and promote economic growth and development in large. Money markets serve as one of the
heading instrument employed by the monetary authority (CBN) to control the
activities of the economy (Noko, 2011).
Instrument traded in the money
market have common features which includes: it is debt obligation, maturity
last between one day and full year. Most of the instruments have a high degree
of safety of principal for a number of reasons;
The debt instruments
are issued by borrowers with generally high credit standing.
Money market
instruments have a high degree of liquidity.
These instruments are
usually in high amount units of millions or more.
The short duration of
these instrument mean they negligible interest rate risk.
Most of the
instruments have active secondary markets which facilitate their sales at
maturity (Agwu, 2004). However, for a comprehensive analysis and understanding
of the money market, its operation, function, role in economic development of
any nation. A review of the broad component of money as a concept; its role in
the economy; theories and impact on the economy will be assessed in this work.
MONEY AND ITS ROLE ON THE ECONOMY
In the early days people were mainly
subsistent producers of goods and services. By this we mean that people
produced for themselves all that they needed. They were able to do so because
their wants were very simple and limited. Their primary needs were simply food,
clothing and shelters. At that time, animal’s skin were enough for clothing,
fruits came near to satisfying all their food requirements and caves and
hollows in big tress provided the shelter for them (Okoro, 2009).
Consequently, there was no need for
exchange. But with increase in human needs over the years gave rise to the need
of exchange and consequent money economy. The world to day is bubbling with
economic activities because money has very much facilitated the exchange
system. Every economic phenomenon deals with monetary system or crises. Keynes
(1930) held that money is a far more ancient institution than man had been made
to believe some time ago. Vaish (2005) added that the coming into existence of
money was a multifold blessing to man, introduced as a unit of account to do
away with the need of starting the value of goods and services in relation to
other goods and services which were unmanageable in a simple economy.
Classical economist considered money
to be of trivial importance in economic life, just as Adam Smith was noted to
have compared money with the highway on which no grass grew. Money has brought
together the demands of consumers and large scale production by providing large
markets, means of moving goods and determination of prices. Infact, it is the
existence of money that have made it possible to solve the basic economic problems
of what to produce, how to produce and in what quantities to produce; thereby
facilitating efficient and effective use of the limited resources. Every
efficient production must be evaluated with respect to money (Noko, 2011).
Supporting this, Moolton (1930) added that money is an indispensable condition
to assembling factors of production.
Communists, like Marx Lenin and
other held that money had no place in the economy. They dreamed of an economy
that world be free from the evil of money, and sought to abolish money. In an
attempt to achieve a natural economy in Russia where the evils of money world
have no place, the Bolshevist’s on assuming power in 1917 attempted to abolish
the use of money through extensive direct controls and free distribution of
goods. However, Trotsky (1933); Noko (2011) high – light the importance of
money in a socialist economy; stating that, “blue prints produced by offices
must demonstrate economic expediency though commercial calculation, adding that
without a monetary units accounting in commerce will only increase confusion in
such economy”.
THEORIES OF MONEY
The crude quantity theory of money
represents the earliest attempt to explain the cause of inflation price change.
The theory in its crudest form is associated with a French economist, Jean
Bodin, who postulated that increase in money supply would bring about
proportionate increase in general price level. This theory therefore attributed
inflation to increase increases in money supply (Onovkwe, 2011). To elucidate this
theory, Jean Bodin meant that if money supply increases by say, 30 percent over
a period, then prices of goods and services would increase by the same
percentage i.e. 30 percent over the same period of time. This is more specific
term means that, if money supply increases by the say x%. They the general
price level will also increase by same x %.
However, this would quantity theory
of money was later modified by an American scholar, professor lruing Fisher who
introduced the concept of velocity of circulation into the theory and proceeded
to explain the theory with the aid of a four – variable equation which is
expressed as follows: MV = PT. This was later changes as MV = PQ
Where; M = Money supply or money stock
V = Velocity of circulation
P = Average price level
Q = Quantity of item traded (Onwukwe,
2011)
This theory mainly concerned itself
with the monetary variables and the effect of changes in these variables,
different from the value theory. It is noted, that the concept velocity of
circulation means the number of times a unit of money changes hands. Professor
Fisher did not disagree with Bodin earlier assertion that money supply
increases bring about proportionate increase in prices. He simply added that
the more money changes hand, the more the quality of money in circulation and
consequently the more the rate of inflation. In line with Bodin postulation,
the rate of increase in money stock which brought it about. Although the
quality theory of money was popular until the 1930s when it came under attack.
Being criticized by Gowther (1958).
The quantity theory can only explain the “how it works of the fluctuations in
the value of money but not the “why it work”. Patinkin (1965) in criticizing
the quantity equation stated that the familiar equation MV = PT can be looked
upon as determining the equilibrium price level, P as the resultant of force
represented by the aggregate demand for goods, MV and their aggregate supply, T
it restrict monetary theory to the case of an aggregate demand function for
goods, which is independent of the rate of interest and directly proportionate
to the quantity of money, hence, misleading as it is unrealistic.
John Maynard Keynes challenged the
theory in the 1930s, saying that increase in money supply lead to a decrease in
the velocity of circulation and that real income, the flow of money to the factors production, increase. Therefore,
velocity could change in response to changes in money supply. It was conceded
by many economists after him that Keynes’s idea was accurate. Cash balances or
the Cambridge equation, M = KPT, arose from the works of Keynes and Robertson
to integrate the monetary theory with the theory of value. As show that the
technique of the demand and supply cures could be used to determine the value
of money. The famous Cambridge equation, M = KPT was produced by equating the
demand for money to the supply of money.
Furthermore, it is of great
importance, to note that the quantity theory of money was rooted in monetarism,
and popular among economist in the 1980s and a good number of economists such
as the United States and Great Britain under Ronald Reagan and Margaret
Thatcher respectively. At the time, leader tried to apply the principles of the
theory to economics where money growth targets were set. However, as time went
by many accepted that strict adherence to a controlled money supply was not
incessancy the are – all for economic malise. Hence, money supply is not the
sole instrument in controlling economic activities. This, enduce the desire for
a better money instrument that can used to control to control the economy.
MONEY AND INFLATION RATE
Inflation has been variously defined
as a persistent rise in the general price level. Inflation is not measured by
increase in the price of one or two household commodity but a general increase
in the price level of the economy (Noko, 2011). Inflation has become a
household word in Nigeria. It is no longer strange to student or a new jargon
to petty trader in the market. Hardly any Nigeria citizens are affected by
inflation. Uncontrolled can dislocate the economy and cause social upheaval.
Inflation in economics is defined as
a condition at which supply persistently fails to keep pace with the expansion
of demand. It is a state of disequilibrium where too much money is chasing too
few goods (Okoro, 2009) Aekley (1961) has said that inflation is a persistent
and appreciable rise in the general level or average of prices”. Aekley viewed
it as a state of disequilibrium that needs a dynamic analysis rather than
static analysis. In the word of Varsh (2005), inflation is a sustained rise in
the general level of prices brought about by high rate of expansion in the
aggregate money supply. According Jean Bodin crude quantity theory of money, he
argue that if money increase by x% there inflation will increase by x%.
This was further
echoed by Professor Iruing Fisher, that what cause inflation in an economy is
not only money supply but also velocity of circulation. He uses his equation of
exchange (MU = PQ) to explain this concept clearly. An increase in money income
without any corresponding increase in productivity, resulting in increase of
the aggregate demand for goods and services which cannot be met at the current
level by total available supply of goods and services in the economy, this will
facilitate the dominance of inflation in such economy (Noko, 2011).
It is possible to have fluctuation
in prices of certain commodities, like agricultural commodities, because of
shortfall in supply due to seasonal factors. This is not inflation, one general
way by which people notice inflation is that once triggered off, the price
increase tends to be general, affecting practically all prices, and it is
continuous. Inflation is a worldwide phenomenon, the most serious in history
being the hyper – inflation of Germany in the 1939s. The resultant effect was
the general loss of confidence in the German money and one of the worst evils
of inflation, as we shall shortly, is that it deprives money of it services as
a store of value. In the midst of the world wars and immediately after, a
number of world economies suffered severe inflation. Hyperinflation in which
the astronomical rise in prices makes money worthless to hold was experienced
in Germany in 1923, in Hungary in 1947 and China in 1959, in which it was
lunatic of a person to hold money for the precautionary and speculative
motives.
Varsh (2005) has noted
that the climax of hyper inflation is reached when the flight from currency
becomes fantastically high causing the velocity of money in circulation to move
towards infinity. A number of measures are adopted by the monetary authority in
controlling conservative and sustainable monetary policy. Central bank had
relied on intermediate targets like monetary aggregates, which most advanced
countries gave up and adopted a frame work of monetary policy known as
inflation targeting. This is on the premise that the main objectives of
monetary policy is to attain and preserve a stable rate of inflation.
This been successful
in advanced countries in maintaining price stability and requires in dependence
of central banks from government control as first requirement, allowing the
monetary authority to gear the monetary policy instrument towards the normal
objectives. Secondly, the monetary authority should consider avoiding the
targeting of any other variables (Vaish, 2005).
In controlling inflation, direct
measures, as well as fiscal and monetary surer may be used. Fiscal and monetary
measures act as complements of anti – inflationary economic policy. Monetary
policy is enforced by using the different monetary instruments aimed at
reducing the supply of money for speculative activities and increasing the cost
of obtaining funds from the banks for stock – pilling and hoarding of essential
goods which are in short supply. Central bank uses a number of measures to
control inflation to include direct, selective and indirect measures. Money
market is a market established by the central bank to facilitate the
mobilization of short – term credit and hence, serve as medium of the bank to
control fluctuation in the prices of stock and achieve a sustainable economic
growth as well (Noko, 2011).
2.2 EMPIRICAL
LITERATURE
The role of money market in any
economy continue to enjoy debates, hence a number of studies have evolved over
the years. Money markets play a key role
in banks liquidity management and the transmission of monetary policy (Rigg and
Zibell, 2009). In normal times money markets are among the most liquid in the
financial sector by providing the appropriate instrument and partners for
liquidity trading, the money markets allows the refinancing of short and medium
terms position which facilitates the mitigation of your business liquidity
risk.
Among the leading
studies on money market, its role in the economy is the research carried by
Owoye and Onafawora (2007). Analyzing the relationship between money supply
(M2), the stability of real money demand and effects of deviation of actual
real Nigerian economy since the introduction of the Structural Adjustment
Programme (SAP) in 1986 found that long – run relationship exists between the
real (world) broad money supply, real GDP, inflation rate, domestic interest
rate foreign interest rate, and expected exchange rate. Ezirim and Eneta (2006)
while studying discount houses, the money market and the Nigeria economy, X –
rayed the operations of discount houses in Nigeria economy in general. They
recognized the central roles which discount houses play in the open market
operations of the central bank (central bank of Nigeria, 2004; Ezirim, 2005).
From the inception discount houses in achieving their expected objectives could
be made. For their study, they were particularly interested in analyzing the
operations of discount housed to expose their relationship with the performance
of the money market and the entire economy. They employed estimation and
analysis of regression models in their investigation covering the period of
1993 to 2004, involving the 5 discount houses in Nigeria at the time. The
deponent variable in the study were the operational performance indices of the
money market and the entire economy namely, the total value of the operations
of the money market and the real gross domestic product (GDP) respectively. The
independent variables were the operational performance indices of the discount
houses, namely the discount houses shareholders’ funds and the discount assets.
The researcher found a significant relationship of the independent and
dependent variables. So, they rejected the null hypothesis of no significant
relationship. They concluded that discount houses operations in Nigeria affect
the Nigeria money market and economy both positively and significantly.
Ogunmuyiwa and Ekonne (2010) in
studying the impact of money supply and economic growth between 1980 and 2006
found that aggregate money supply is positively
related to economic growth and development even through money supply
does not have significant predictive power in predicting growth of real GDP.
In studying the Chinese macro –
economy for the effects of money on price level and output, Chow and Shen
(2004) in attempt to explain inflation from 1954 – 2002. Using vector auto –
regression, they found that output react to money disturbances first, but for a
short period and prices later but last longer to the Chinese economy. Trying
out the vector – auto regression with data from the United States, they found a
similar pattern of occurrences, confirming the proposition of tried man and its
universality (Bermanke, 2003). They concluded that in spite of the
institutional differences between China and the more developed economics, from
which empirical evidence supporting freed man’s proposition was drawn, the same
theory of inflation and of the effects of monetary disturbances on price and
output applies.
Ajisafe and Foluronsho (2002),
studied the relative effectiveness of monetary policy and fiscal policy on
economic activity. The authors used annual series data for 1970 to 1998 from
the central bank of Nigeria (CBN) statistical bulletin. They found from the
result of their analyses that monetary rather than fiscal policy exerts a
greater impact on economic activity in Nigeria, even though they found that
both monetary and fiscal policies should be complimentary.
NIGERIA MONETARY POLICY FRAMEWORK
The core mandate of
Nigeria central bank is the regulation and maintenance of money supply and
monetary policy. The regulation and monetary implementation of monetary policy
is done by the CBN in line with the mandates as specified in the CBN Act of
1958. In addition to price stability, the promotion of growth and employment
are the secondary goals of monetary policy. The monetary authorities’ strategy
for management is based on the view that inflation is essentially a monetary
phenomenon. Because targeting inflation in Nigeria economy, money supply
approach is considered the appropriate methods, the central bank of Nigeria
(CBN) chose a monetary targeting policy framework to achieve the objectives of
price stability. With the broad measure of money (M2) as the intermediate
target, and the monetary base as the monetary target of CBN and the instrument
to achieve the objectives.
These instruments
include reserve requirements, open market operations on Nigeria Treasury Bills
(NTBS), liquid asset ratios and the discount windows.
With these instruments, the CBN
hoped to direct the flow of loanable funds with a view to promoting rapid
economic development through the provision of finance to the preferred sectors
of the economy such as the agricultural sector, manufacturing and residential
housing. During the 1970s, the Nigeria economy experienced major structural
changes that made it increasingly difficult to achieve the aims of monetary
policy. The dominance of oil in the country’s export market began in the 1970s
for example, in 1970, the share of oil revenue in total export value was about
58 percents and this increased to over 95 percent during the 1980s. The
increase in Nigeria’s external reserve in the 1970s. Furthermore, the rapid monetization
of the increased crude oil receipts resulted in large injection of liquidity
into the economy, which induced rapid monetary growth. Infact, between 1970 and
1973, government spending averaged about 13 percent of gross domestic product
(GDP) and this increased to 25 percent between 1974 and 1980. This rapid growth
in government spending came not from increased tax revenues but the absorption
of oil earnings into the fiscal sector, which moved the fiscal balance from a
surplus to a deficit spending, led the government to borrow from the banking
system in order to finance the domestic deficits. At the same time the
government was saddled with foreign deficits, which had to be financed through
massive foreign borrowing and the drawing down of external reserves.
Giving the state of affair in the
economy at this period, government through its monetary authority strives to
reverse the deterioration macroeconomic imbalance; declining GDP, balance of
payment disequilibrium, high inflation rate, heavy debt burden, high rate of
unemployment, rising poverty level. Government embarked on austerity measures
in 1982 which successfully reduced the inflation rate and held to achieve a 9.5
percent growth in real GDP in 1985. Although, the achievement was transitory since
the economy did not establish a strong base for sustained economic growth.
Government of Nigeria in her
attempts to achieve a sustained economic growth adopted the structural
adjustment program (SAP) sponsored by the international monetary fund (IMF) in
June 1986. The SAP was a structural and sectoral macroeconomic policy reform
whose main strategies were;
Ø
The
liberalization of the external trade and payment systems
Ø
The elimination
of price and interest rate control
Ø
The adoption of a
market based exchange rate for the domestic currency (Naira).
Ø
The reliance on
market forces as the major determinants of economic activity.
Infact, with the adoption of SAP in 1986, the CBN reached an important
milestone in 1986 when it decided to adopt M2 as an important and intermediate target for monetary
policy. While this choice raise a key question in terms of why the CBN
considered M2 as the
appropriate intermediate target instead of interest rate or nominal GDP or
inflation targeting. Given the fact that interest rate and prices were
controlled pre – SAP, it is not difficult to see why the CBN ruled out interest
rate targeting or inflation targeting as viable policy options. Furthermore,
the structure of the financial markets in less developed countries renders interest
rate targeting ineffective. As Taylor (2004) pointed out that “if financial
market are weak, the effectiveness of transmitting policy through interest rate
will be limited”. With these controls and the constraints due to weak financial
markets nominal GDP targeting may not have succeeded. As for the commitment to
rules, many countries apply rules because policy rules may aid in focusing
policy discussion in term or intermediate and operating targets. Over the past
decades, many countries adopted the Taylor rule, which Taylor (2004), developed
for the United States.
According to Taylor
(2004), these rules can be part of the monetary policy strategy in emerging
market economics. More recently, Batin (2004) argued that for Taylor rule to be
applicable to emerging market economy like Nigeria, modifications have to be
made because of the specific features of the emerging market economics. From
these analyses, the key issue to applying Taylor rule to monetary policy making
in Nigeria is commitment to target rules.
THE DEVELOPMENT OF THE NIGERIA MONEY
MARKET
No money market
existed in Nigeria before the establishment of the central bank of Nigeria
(CBN) in 1958 via CBN act of 1958. This however not to say that money market
for short – term funds did not exist before then. Before the advent of central
bank of Nigeria (CBN) and commercial bank, existed some elements of short –
term lending and borrowing. The market was an integral part of the London money
market, it worked by involving funds from London to Nigeria during the season
and in order to finance the export produce at the end of the season (Noko,
2011). The market comprising banks and other financial institutions such as
discount houses, finance house etc. dealing in monetary assets. These markets
have witnessed tremendous changes from start to date informing the numerous
amendments of the CBN act to reflect the changing economic circumstances. Being
largely responsible for implementing monetary policy in the country under the
close watch of the CBN, institutions in the money market through their
instruments and operations are the key to a monetary economy such as we have in
Nigeria. These have implications for economic growth and development.
The establishments of central bank
of Nigeria as the apex regulatory authority of the financial sector of the
country by CBN act of 1958. Although, the apex bank started operation in July
1959 with an initial capital of N17million
naira. The banks function as enshrined in section 54 of the CBN Act 1958. The
objectives of the CBN have remained largely unchanged to include:
Ø
To issue legal
tender currency note coins in Nigeria
Ø
To act as lender
of last resort
Ø
To maintain
Nigeria’s external reserves to safeguard the value of the naira in
international markets.
Ø
To promote and
maintain monetary stability and a sound and efficient financial system.
Ø
To act as a
banker and financial adviser to the federal government of Nigeria.
Hence, to achieve the above objectives, the CBN as part of its
statutory functions formulates and implements the monetary policy through
direct and indirect control techniques. Direct techniques like interest rate
ceilings, administrative determination of interest rate, restriction of banks
credit expansion, mandatory holding of government securities, and sectoral
allocation of credit were abandoned when it was obvious that monetary resources
were misallocated as price did not reflect their true value. Indirect
techniques, which the CBN has adopted since SAP in 1986, rely on underlying
demand for supply of monetary assets, targeting the balance sheet of deposit
money banks. Adopting indirect control techniques involved regulating credit
banks using the minimum anchor for all money market interest rates, to alter
variations in the demand for and supply of monetary assets in the direction
that is consistent with price stability.
Money market as the greatest CBN
indirect monetary control instruments, comprising banks and non – banks
institutions. These include:
Commercial bank,
merchant banks, development banks, discount houses, financial houses, primary
mortgage institutions, insurance companies. They are operators in the money
market in Nigeria, contributing to the allocation of monetary assets between
economic units. Banks in a financial system performs intermediating rates by
mobilizing role resources and channeling then to productive activities in the
economy, thereby channeling productive resources from surplus sectors to the
deficit sector, so, ensuring a more efficient resources allocation and utilization.
A measure of the
performance of the banking sector lies in its ability to promote banking habit
captured in the currency ratio (currency outside banks to broad money). Infact,
as at May, June & July 2010, the currency ratio stood at 7.6%, 7.3% and &.4%
respectively (CBN money and credit statistics, 2010). Banks major function
however, is to mobilize saving to GDP ratio, at the prime of the market in 1960
the ratio was 1.96 percent, for 1970, it was 7.8 percent 1984, 11 percent in
1989.90 and grew to 13 percent as at 2007 (CBN statistical bulletine
2008).money market ensure the maintenance of equilibrium between the demand and
supply of funds, hence it always equilibrate saving and investment in an
economy. It ensures the application of economy in the use of cash.
MONEY MARKET ROLE IN ECONOMIC GROWTH
There are various
channels by which monetary policy works. Monetary policy are carried by the
central bank of Nigeria to facilitate the regulation and control of the various
macroeconomic goals such as full employment, price stability, economic growth,
balance of payment equilibrium etc which is mostly facilitated by the
activities of the money market. These controls of the CBN on the money market
affect the quantity of fund in the economy, where sales or purchase of Treasury
bill reduce or increase the stock of reserve money. On the relevant of money
and monetary policy in controlling economic activities, the monetarist view has
been divided into weak and strong monetarist thesis. The weak thesis is
compared with some aspects of the income – expenditure approach to the
determination of national economic activity discount from face value. The
amounts of discount are set by the agency and its duration ranges between three
months and a year. Like the federal agency discount note, short term municipal
security is a note issued by government when they are expecting receipt from
tax and other revenue either from sales of bound etc. It is both interest
bearing and discount notes. Although interest is a more common feature of the
note. Other instrument not traded by government in the market includes
Negotiable certificate of deposit, which is tradable instrument issued it is
issued in high quantities in 100’s. it has a maturity date of seven and a year.
On the other hand commercial papers
is a short term unsecured promissory notes. It is the second money market
instrument in terms of outstanding after treasury bills commercial papers are
issued by banks is issued at a discount from face value, which is matured at a
specific days. Unlike bankers acceptance which is used to facilitate
international trade. It is used munipal notes, federal agency discount notes.
Other negotiable note includes Banker’s acceptance, commercial papers, re –
purchase agreement etc.
However, Treasury bill was the first
money market instrument to be used in Nigeria. It was issued by the federal
government of Nigeria in April 1960 through the central bank of Nigeria.
Treasury bill is a debt obligation of the federal government. It is free of
default risk, though no stated interest on the bill but is issued at a discount
from face value. The returned earned from the bill is the difference a discount
issue price and free value paid on the bill at maturity. The maturity date
takes between three months, six months and a year.
Certificates of deposit are issued
by commercial banks at a discount on face value. The discount rate is
determined by the money market and the maturity is between three to twelve
months. They can be transferred from one person to another by endorsement,
whoever is the Bonafide holder than receive it at maturity (Agwu, 2006).
Federal agency discount notes which
like Treasury bill in that it is a short term credit, it bear no interest but
are rather offered at a discount development in an economy. They provide such
service as advisory role to the government, long – term credit facilities to
the public, facilitate the development of specific sector such as agricultural
sector, industries and trade etc. The first development bank in Nigeria is
Nigeria industrial development bank (NIDB) established in 1964 with the support
of the international bank for reconstruction and development. Other development
bank include; the Nigeria bank for commerce and industry (NBCI), Nigeria
agricultural and cooperative bank (NACB), the federal mortgage bank and the Nigeria export – import bank (NEXIM).
Other non – banks financial
institutions that operate in the financial market includes insurance companies,
discount houses, financial house, investment houses, stock broking firms etc.
MONEY MARKET INSTRUMENTS
There are many
instrument traded in the money market of Nigeria. Money market instrument are
those instrument used in the market to mobilize fund in the market from the
surplus sector of the economy to the deficit sector with a giving interest rate
(Noko, 2011). Infact, government trade mainly on three instruments which
include; Treasury bills commercial banks were the first types of banks to
appear on the Nigeria financial scene. African Banking Corporation, an
expatriate bank from South Africa was first commercial bank to open office in
Nigeria. Its operational problems necessitated the closure and take over by
banks of British West Africa, now first bank, which was established in 1894.
the bank and other financial institution degree (BOFID ) of 1991 defined
commercial banks as any bank in Nigeria whose business includes acceptance of
deposits, which can be drawn by cheque. The function in mobilization of funds,
financial intermediation, credit extension, safe – keeping of depositors and
customers valuable properties, agent of economic development etc.
However, merchant bank which
provides wholesale banking to the public and other bank came into Nigeria with
establishment of Philip Hill Nigeria limited. As wholesale banks they are
mainly concentrated in large cities where economic activities are in high
scale. Other functions of the bank includes; debt factoring, equipment leasing,
investment advisory & brokerage acceptance and negotiable bill of exchange,
portfolio management etc. Development banks on the other hand were set up by
government to facilitate the provision of funds for development purpose to the
general public. Thus, they accelerate economic growth & to facilitate trade
between parties that do not which to expose each other credit risk. It is a
certificate to the bank of the exporter by the bank of importers stating that
the bill on the note will be paid at maturity. Promissory note which is one of
the earliest type of bill. It is a written promise on the part of businessman
to pay another a certain sum of money at an agreed future date. However, niter
bank term market is a market instrument exclusively for commercial banks which
borrow and lend funds for a period of over fourteen days and up to ninety days
without any collateral.
Stabilization securities are special
securities which the CBN sells compulsory to banks at interest rate and such
conditions that it deems fit for mopping up excess liquidity off banks. It is
an instrument reserved for use by the central bank. It was authorized by law
when first used in 1976 and il later phased out; reintroduced in 1993 and
further issue stopped in 1998. All these instrument used in the money market,
although a good number of instrument were not mentioned here.
THE ROLE OF MONEY MARKET IN THE DEVELOPMENT OF NIGERIA
ECONOMY
Arguable, Nigeria
money market plays a vital role in the economic development of the country.
Money market is integral part of the financial sector and is among the largest
financial market in the world. Money market is the key facilitate of monetary
policy in any economy. It facilitates the transmission/transfer of funds in an
economy. It provides funds to the public and private institution that need such
financing for their working capitals requirements (Noko, 2011).
Money market provides an opportunity to banks and
other institutions to use their surplus fund profitable for short period. It
provides no need commercial bank borrowing from the CBN when they run in short
supply of cash. According to Noko (2011) money market help the government to
easily borrow with a low interest on the basis of Treasury bill rather than
borrowing from CBN that might lead to inflation in the economy. An efficient
monetary policy is achieved through CBN control of the money market activities.
It facilitates & promotes the safety of financial asset and thus encourages
savings and investment in the economy thereby accelerating economic growth.
The strong thesis
approach supplements the weak thesis with special assumptions about our
environment in order to establish the role of monetary forces in business
cycle.
The role of money market in
accelerating economic growth cannot be overemphasized, giving the fact that it
facilitates the control of money supply in the economy by CBN, it help to
mobilize household saving for investment purpose, firms seek for funds here to
facilitate their working capital, through this the output of the firm increase
in the output of the firm increase their income. If this is the case of a good
number of firm in the country the aggregate output of the nation increase
drastically, and this increase the living standard of average Nigerians. This
increase in output in an indicator of economic growth while enhanced standard of
living is an indicator of economic development. Hence, the motion that, “money
market drastically accelerate economic growth in the economy of any nation”.
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 INTRODUCTION:
RESEARCH DESIGN
In the course of this research, the
researcher employs regression analysis based on the classical linear regression
model, otherwise known as ordinary least square (OLS) techniques is chosen by
the researcher. The researcher’s choice of the technique is based not only by
its computational simplicity but also as a result of its optimal properties
i.e. BLUE properties (Best, linear, unbiased estimator), others includes
minimum variance, zero mean value of the random terms. (Koutsoyiannis, 2001 and
Gujarati, 2004).
3.2 MODEL
SPECIFICATION
In the quest of this
study, hypothesis has been stated with the view of ascertaining if money market
development has nay significant impact on the economic growth of Nigeria. The
model to be used is multiple linear regression model between the explanatory
variables and the endogenous variable.
The model is represented in a
functional form below:
GDP = F (TBILLS, INF,
M2, INT) ……………………………
3.1.1
Its statistical form
is as represented below;
GDP = bo + b1TBILLS + b2INF + b3M2
+ b4INT + Ut
…… 3.2.1
For research purpose the model, is
re – specified in its log form below;
Log GDP = bo + b1 log TBILLS + b2 log INF + b3 log M2
+ b4 log
INT + Ut ……………… 3.2.2
Where;
GDP = Nominal gross
domestic product (dependent variable)
TBILLS = Government
treasury bills (Independent variable)
INF = Inflation rate
(Independent variable)
M2 = Broad money supply (Independent variable)
INT = Money market interest rate
t = Time
from 1980 – 2011
bo = Constant
b1, b2, b3, b4 are the relative parameter or coefficient of the
independent variables.
3.3 SOURCES
OF DATA
The data for this
research project is obtained from the following sources:
Ø
Central bank of
Nigeria statistical bulletin for various years
Ø
National Bureau
of statistics publication – Annual reports of various years.
Ø
Central bank of
Nigeria economic and financial review for various years.
Ø
Others includes;
textbooks, journals, magazines etc.
3.4
MODEL EVALUATION
Hence, the test that will been considered in this study include:
Ø
Coefficient of
multiple determinant (R2)
Ø
Standard error
test (S.E)
Ø
T – test
Ø
F – test
Ø
Durbin – Watson
statistics
COEFFICIENT OF MULTIPLE DETERMINATIONS (R2): It is used to measure the proportion of variations in
the dependent variable which is explained by the explanatory variables. The
higher the (R2) the greater the proportion of the variation in the dependent
variable caused by changes in the independent variables.
STANDARD ERROR TEST (S.E): It is used to test for the reliability of the
coefficient estimates
DECISION RULE:
If S.E < 1/2bi, reject the null hypothesis and conclude that the
coefficient estimate of the parameter is statistically significant. Otherwise
accept the null hypothesis.
T – TEST: It
is used to test for statistical significance of individual estimate parameter.
In this research, T – test is chosen because the population variance is unknown
and the sample size is less than 30.
DECISION RULE
If T – cal > T –
tab, reject the null hypothesis and conclude that the regression coefficient is
statistically significant. Otherwise accept the null hypothesis.
DURBIN WATSON (DW): It is used to test for the presence of auto – correlation (serial
correlation).
DECISION RULE
If the computed Durbin Watson
statistics is less than the tabulated value of the lower limit there is
evidence of positive first order serial correlation. However, if it lies
between the upper limit, there is inconclusive evidence regarding the presence
or absence of positive first order serial correlation.
3.5
DATA DESCRIPTION AND TRANSFORMATION
The data obtained were transformed into logarithm to
obtain growth rates. Among such transformation were GDP, TBILLS, INF, M2 and INT, as gotten from
CBN statistical bulletin. The choice of logging this data is to further access
their reliability and significance. E – View econometric software is used to
run this regression.