Money Market Operators and Methods of Sourcing for Funds

Key operators in the Nigeria Money Market are Commercial Banks, Merchant Banks, Community Banks, People’s Bank of Nigeria, the Central Bank, Discount houses and other non-bank financial institutions that provide short-term finance. Since we have discussed the activities of these institutions in the preceeding units, it is no use repeating them here.

When sourcing funds through the money market, two approaches are adopted, namely the use of securi- ties and private negotiation. A borrower can approach lender and negotiate for short-term funds privately without the issue of securities. Funds obtainable in this manner include overdraft facilities and short-term loans and advances.

The market for securities is further segmented into the market for newly issued securities and the market for old and existing securities

Money Market Instruments

Money Market instruments are mainly short term securities that are used to obtain money from the money market. The borrower issues (or sell) the instruments which in fact is piece of paper to the lender who buys and holds them as an evidence of the debt. He can decide to hold it until maturity or re-sell to another person usually at a discount (i.e. below the actual price) if he needs his money before the maturity date. The major instruments currently used to evidence debts are treasury bills, treasury certificates, certificates of deposit, money at call commercial papers, and stabilisation securities. The features of these instruments are as follows:

1. Treasury Bills: Treasury Bills are money market (short-term) securities issued by the Federal Gov- ernment of Nigeria, they are sold at a discount (rather than paying coupon), interest matures within 91 days of the date of issue and are default-free. These instruments are promissory notes to be paid to the bearer 90 days from the date of issue. They provide the government with a highly flexible and relatively cheap means of borrowing cash. They also provide a sound security for dealings in the money market and the Central Bank of Nigeria in particular, can operate on that market by dealing in Treasury Bills. The first money market instrument to be issued in Nigeria was the Treasury bill. It was first issued by the Federal Government of Nigeria through the Central Bank of Nigeria in April 1960. The issue for the first time in Nigeria (in April, 1960) was provided for under the Treasury Bill ordinance of 1956. 
2. Treasury Certificates (TCs): The second money market instruments to appear in the Nigerian money market was treasury Certificates. It was first issued in 1968. Treasury certificates, just like Treasury Bills are short-term government securities designated as Treasury Certificates by which the govern- ment borrows from the public for periods ranging from one to two years. The major difference between Treasury bills and Treasury Certificates is that Treasury Certificate has longer maturities than Treasury Bills. The reason for the issue of Treasury Bills and the issue of Treasury Certificates are the same, namely for development of the money market, government borrowings and for open market operations. 
3. Certificate of Deposit: These are inter-bank debt instrument meant to provide outlet for the commer- cial bank surplus funds. It was introduced in Nigeria by the CBN in 1975. It was also meant to open up a new source of funds for the merchant banks who are the major issuers. Two types of certificate of deposit are the negotiable and the non-negotiable certificate of Deposits. These are short-term debt instruments issued by banks evidencing that the issuing bank has received an amount certain of money from a named person on deposit which the issuing bank undertakes to The Nigeria Capital and Money Markets 65repay on a given date with interest to the named person or to a bonafide holder. It is in fact a form of fixed deposit receipt. Certificates of deposits are issued for various maturities ranging from 3 months to 36 months. The certificate may be designated as negotiable or non-negotiable by the issuer. Negotiable certificate can be transferred from one person to another by endorsement. 
4. Call Money: This instrument is the most liquid money market instruments next only to cash. It is an inter-bank arrangement whereby banks in need of immediate cash can borrow from the participating banks on overnight basis on the conditions that the funds so borrowed are repayable on demand. Initially, the placing of money at call was arranged by banks themselves. By 1962, the Central Bank instituted the call money scheme. Under that arrangement, participating banks that maintained a mini- mum balance with the CBN which banks that have immediate liquidity requirements, can borrow on call basis. This arrangement was later changed. Banks now carry out the arrangements themselves. 
5. Commercial Papers (CP): CP are documents that are issued in the normal course of business as evidence of debt. Examples of such papers are commercial bills of exchange, letters of credit and promissory notes. These debt instruments often have maturities ranging from 330 days to 180 days. Commercial Papers used in the money market are often bills of exchange that carry the acceptable or confirmation of a reputable bank. Such bills can be discounted easily with by the holder. Banks who hold such discounted bill can further rediscount them with the discount houses or the central bank if they have immediate need for liquidity. CP may also be sold by major companies (blue-chips-large, old safe well-known national compa- nies) 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. 
6. Stabilisation Security: These are special securities which the law authorises the CBN to issue and sell compulsorily to banks at any interest rate and such conditions as the CBN may deem fit for the purpose of moping up the excess liquidity of banks. These instruments are not an instrument of the government but that of the CBN. The use of stabilisation security was introduced in 1976 but was later phased out. It was reintro- duced again in1993 but by 1998 further issue was stopped.The issue of this type of security is usually made when banks in the system are perceived to hold excess liquidity. Banks that hold such securities can discount it if they have immediate liquidity need. 
7. Bankers Unit Fund (BUF): This was introduced by the CBN in 1975 and initially meant to mop up excess liquidity in the banking system. It was also designed to sweeten the market for the Federal Government stock. To this end, Commercial banks’ holdings of the stock are accepted as a part of their specified liquid assets and are repayable on demand. Under the BUF Federal Government stocks of not more than 3 years to maturity were thus designated Eligible Development Stock’s (EDS) for the pur- pose of meeting the bank’s specified liquid assets requirements. This placed banks in position to earn long-term rates of interest on what is essentially a short-term investment. Though, initially designed to mop up excess liquidity in the banking system by conferring on instrument cash substitute status repay- able on demand acceptable in meeting reserve requirements, the capability of the banks for credit expansion was unaffected. In effect, the BUF was intended to provide avenue for the commercial and merchant bank and other financial institutions to invest part of their liquid funds in a money market asset linked to Federal Government Stocks. 
8. Ways and Means Advances Section 34 of the CBN Act 1958 (Cap 30 as amended 1962 –1969) empowers the CBN to grant temporary advances in the form of “Ways and means” to the Federal Government to 25 per cent of estimated recurrent budget revenue. 

Students Assessment Exercise

(i) Although money Market instruments are mere pieces of paper, they are used to obtain money. Discuss in details five of such instruments, showing how they can be used to obtain money.