The Nigerian Capital and Money Markets

 

To the ordinary man in the street, a market is a place where goods and services are sold and bought like the

Alaba International Market at Lagos and the Central Market at Kaduna.

Just as people go to such market to sell what they have, and others go there to buy what they need but do

not have, so do firms and individuals who need money (Finance) but do not have money go to a financial

market to buy money (long-term and short-term finance) from those who have it and want to sell. The buyer

pays a price for such money known as interest dividend or discount.

A financial market is a market where long-term and short-term funds are bought and sold. And as Nwanke

(1980) puts it “money like any other commodity, is bought and sold in a market”.

Financial markets are traditionally classified into two broad classes based on maturity funds traded in the

market. The market for short-term funds is known as money market while the market for long-term funds is

known as capital market. The institutions and instruments traded in each market will be discussed in this

unit.

Meaning of Money Market

The money market is a market for short-term funds. Funds obtainable from this market usually include

working capital loans production cycle loans and other funds that are repayable within short period of about

one to three years. Those who need funds for longer period have to go to the capital market.

Or the money market deals in short-term instruments that are readily convertible into cash, and whose

maturity range between a few days to the two years.

Or the money market refers or a group of financial institutions or exchange system set up for dealing in

short-term credit instruments of high quality, such as treasury bills, treasury certificates, call money, commercial

paper Bankers’ Unit Fund, Certificates advance, as well as the dealing in gold and foreign exchange.

Or while denoting trading in money and other short-term financial assets, the money market comprises all

the 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.

Or it is a manifestation of dealing in short-term financial instruments (their sale and purchase as also

borrowing and lending for short periods) on the one hand and a collection of the dealers in these assets on the

other hand.

Or it is thus a collection of financial institutions set up for the granting of short-term loans and dealing in

short-term securities gold and foreign exchange.

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 securities

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-termloans 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 stabilization securities. The features of these instruments are as

follows:

(a) Treasury Bills: Treasury Bills are money market (short-term) securities issued by the Federal Government

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 units 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.

(b) 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 government

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.

(c) Certificate of Deposit: These are inter-bank debt instrument meant to provide outlet for the commercial

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

repay 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.

(d) 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 minimum

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.

(e) 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 units. 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 companies)

to obtain a loan. Here, such units are not backed by any collateral rather; they rely on the high

credit rating of the issuing companies.

(f) Stabilization Security: These are special securities which the law authorizes 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 Stabilization security was introduced in 1976 but was later phased out. It was reintroduced

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.

(g) 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 purpose

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 repayable

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.

(h) 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.

Features/Characteristics of a Developed Money Market

A developed money market refer to one which is comparatively efficient in the sense that it is responsive to

changes in demand and supply of funds in any of its segments and effects initiated in any part of it quickly

spread to others without significant time lag.

To meet the definition, a money market should possess these features:

(a) Presence of a Central Bank

A Central Bank with adequate legal power, sufficient relevant information and the expertise, must

exist as a lender of last resort and as the initiator and executor of monetary policy as a whole.

(b) Presence of a Developed Commercial Banking System, Development banking System

and Merchant Banking System

A well developed money market should be characterised by the presence of a developed Commercial

Banking System, Merchant Banking System and Development Banking System along

with a wide spread banking habit on the part of the public.

(c) Adequate Supply of a Variety and Quantity of Financial Assets

In a well developed money market, there should be an adequate supply of a variety and quantity of

short-term financial assets or instruments such as Trade Bills, Treasury Bills, Treasury Certificates,

Commercial Papers, etc.

(d) Presence of well-developed sub-market

The existence of well-developed sub-markets and their adequate responsiveness to small changes

in interest and discount rates make room for a well developed money market. If the demand and

supply of certain instruments dominate, the interaction between different interest rates will be

limited.

(e) Existence of Specialized Institutions

For competitiveness and efficiency, there must exist specialized institutions, in particular, types of

assets e.g. specialized discount houses, acceptance houses, specialising in accepting bills or Specialized

dealers in government securities.

(f) Existence of Contributory Legal and Economic Factors

For the money to be well-developed, there must exist appropriate legal provisions to reduce transaction

costs, protect against default in payment while prerequisite economic forces such as speedy

and cheap transmission of information, cheap fund remittance and adequate volume of Trade and

Commerce must exist.

Reasons for the Establishment of the Nigerian Money Market

(a) To provide the machinery needed for government short-term financing requirements.

(b) As an essential step on the path to independent nationhood, hence it was part of a modern financial and

monetary system, which was to enable the nation to establish the monetary autonomy which is part and

parcel of the working of an independent, modern state.

The Nigeria Capital and Money Markets 67

(c) To Nigerianise the credit base by providing local investment outlets for the retention of funds in

Nigeria and for the investment of funds repatriated from abroad as a result of government

persuasions to that effects.

(d) To perform for the country all the functions which money market traditionally performs, such as the

provisions of the basis for operating and executing an effective monetary policy.

(e) To effectively mobilize resource for investment purpose.

Functions of the Nigerian Money Market

(a) It provides the basis for operating and executing an effective monetary.

(b) To provide an orderly flow of short-term funds

(c) To ensure supply of the necessary means of expanding and contracting credit.

(d) It is a Central Pool of liquid financial resources upon which the banking system can draw upon when it

is in need of additional funds and into which it can make payments when it holds funds surplus to its

needs.

(e) It provides the mechanism through which the liquidity of the banking is maintained at the desired level.

(f) To provide banks the basic financial instruments for effective management of their resources. It thus

helps them to diversify their assets holding by providing them with a forum for investment of their

surplus cash.

(g) To provide the machinery needed for the government short-term financial requirement – hence achieving

even seasonal variation in the normal flow of revenue.

(h) Mobilization  of funds from savers (lenders) and the transmission of such funds to borrowers (Investor).

(i) It provides a channel for the injection of Central Bank cash into the system or the economy.

(j) To maintain stable cash and liquidity ratios as a base for the operation of the open market operation.

Meaning of the Capital market

While short-term funds are traded in the money market, the capital market is the financial market for longterm

funds. Those who need long-term capital for projects of long gestation to be repaid after five years, ten

years or more go to the capital market to source such funds. The Capital Market for securities is further subdivided

into two: the primary and secondary market. When new securities like shares, stocks and bonds are

issued, they are sold initially in the primary market. But when the holders of these securities want to re-sell

them, the securities are re-sold in the secondary market. Thus, the primary market is a market for initial issue

while the secondary market is a market for subsequent trading in securities.

The Capital Market refers to a collection of financial institutions set up for the granting of medium and

long-term loans. It is a market for long-term instruments which included market for the government securities,

market for corporate bonds, market for corporate shares (stocks) and market for mortgage loans. That

is a market for the mobilization  and utilization of long-term end of the financial system. Thus, it is the mechanism

whereby economic units desirous to invest their surplus funds, interact directly or through financial

intermediaries with those who wish to procure funds for their business (Phillips, 1985). In the Nigerian

context, participants include the Nigerian Stock Exchange, Discount Houses, Development Banks, Investment

Banks, Building Societies, Stockbroking Firms, Insurance and Pension Organization , Quoted Companies,

the government, individuals and the Nigerian Securities and Exchange Commission (NSEC)

Reason for the Establishment of Nigerian Capital Market

1. To introduce a code of Conduct check, abuses and regulate the activities of operators in the market.

2. To provide local opportunities for borrowing and lending for long-term purposes.

3. To enable the authorities to mobilize long-term capital for the economic development of the country.

4. To provide facilities for the quotation and ready marketability of shares and stocks and opportunities and

facilities to raise fresh capital in the market.

5. To provide foreign business with the facility to offer their shares and the Nigerian public an opportunity

to invest and participate in the shares and ownership of foreign businesses.

6. Through participation and ownership to provide a healthy and mutually acceptable environment for

participation and cooperation of indigenous and expatriate capital in the joint effort to develop the

Nigerian economy to the mutual advantage of both parties.

The following are the functions of an active capital market.

* The promotion of rapid capital.

* The provision of sufficient liquidity for any investor or group of investors.

* The creation of a built-in operational and allocational efficiency within the financial system to ensure

that resources are optimally utilized at relatively little costs.

* The mobilization  of savings from numerous economic units for growth and development.

* The encouragement of a more efficient allocation of new investment through the pricing mechanism.

* The provision of an alternative source of fund other than taxation for government.

* The broadening of the ownership base of assets and the creation of a healthy private sector.

* The encouragement of a more efficient allocation of a given amount of tangible wealth through changes

in wealth ownership and composition.

* Provision of an efficient mechanism for the allocation of savings among competing productive investment

projects.

* It is machinery for mobilizing long-term financial resources for industrial development.

* It is a necessary liquidity mechanism for investors through a formal market for debt and equity securities.

* It is an avenue for effecting payments on debt.

Capital Market Institutions (ORGANS)

Generally, any person who provides long-term capital fund is a participant in the capital market. However in

the organize market as Nigerian Capital Market, participating institutions are as follows:-

(a) The Nigerian Securities and exchange Commission

(b) The Nigerian Stock Exchange

(c) Issuing Houses

(d) Merchant Banks

(e) Central Bank of Nigeria

(f) Commercial Banks

(g) Development Banks

(h) Non-bank Financial Institutions

Having discussed the activities of most of these institutions in the proceeding units, we shall briefly discuss

the activities of the Securities and Exchange Commission, and the Nigerian Stock Exchange.

(a) The Nigeria Securities and Exchange Commission

The Securities and Exchange Commission (NSEC) is the apex institution for the regulation and

monitoring of the Nigerian capital market. The commission was established under the security and

Exchange Commission Decree 1979, operating retrospectively from 1st April 1978.

Prior to the SEC, two bodies had in succession been responsible for the monitoring of capital market

activities in Nigeria. The first was the capital issues committee, which operated between 1962 and

1972. It could not bee seen as the superintendent of the capital market because its functions were more

or less advisory without the force of instruction even though its functions included the co-ordination of

capital market activities. The next body was the Capital Issues Commission (CIC), which came into

being in March 1973. The CIC, unlike its predecessor, had full powers to determine the price, timing and

volume of security to be issued. Despite these wider powers, the CIC could not be seen as the apex of

the Capital Market because it concerned itself with public companies alone and its activities did not

cover the stock exchange and government securities.

The enabling Act of the Securities and Exchange Commission specifies its overriding objectives as

“investors protection and development while its functions were divided into two: regulatory and Developmental.

To the extent that it combines developmental functions with regulatory matters, it could be

seen to be fully established as the apex of the Capital Market. Its functions, as contained in SEC

Quarterly Journal Vol. No 1 December, 1984 are as follows:-

(1) to determine the price, amount and time at which security of the company are to be sold either

through offer for sale or subscription companies within the grip of the Commission’s functions are:

(a) all public companies and

(b) all enterprises with foreign interest.

(2) to determine the basis of allotment of Security of a public offering to ensure wider spread of share

ownership,

(3) to monitor the activities of the Nigerian Stock Exchange trading floors in order to ensure orderly,

smooth and equitable dealings in securities to forestall illegal deals by privileged insiders at the

expense of the innocent and often ignorant investors,

(4) to register:

(a) all securities proposed to be offered for sale to or subscription by the public or offered

privately

(b) stock exchange and its branches.

(c) person/instruction involved in securities dealings in stock and securities, registrars, security,

brokers and their agents, issuing house, fund managers, etc.

(d) securities to be traded or being traded (share, debentures)

(5) though the above, to sustain and uplift the integrity and ethical standard of the security market and

enhance the public confidence and mass participation in Capital Market activities.

(6) to create the necessary atmosphere for orderly growth and development of the capital market

through public enlightenment processes, seminars, workshops, publicity, etc., stimulating ideas,

initiating policy and programmes and innovation for the growth of security market.

(7) to protect investors against misleading or inadequate information, fraud, deceit on the part of

securities offered for sale hence acting as the watch dog of the public.

(8) to remove all bottlenecks which may hinder easy transfer of shares

(a) to provide avenue for wider spread in ownership this avoiding monopolistic tendencies or

concentration of shares in few but influential hands.

(b) The Nigerian Stock Exchange (NSE)

Formation of NSE

Following the favorable report of the Barback Committee (Set up in May, 1958) the Lagos Stock Exchanges

was established. It was granted certificate of registration of business name on 1 March 1959 and incorporated

on 15 September 1960 commencing business on the 5 June 1961.

This exchange is the key player in the Nigeria Capital Market. Although the activities of the exchange is

regulated by the Securities and Exchange Commission, it is privately owned. The exchange has three categories

of membership. These are the foundation members, the ordinary members and the dealing members.

The foundation members are the seven members that signed the memorandum of association on inception:

Shehu Baker, Theophilus B. Doherty, Sir Odumegwu Ojukwu, Akintola Williams, C.T. Boweighs and Co.

(Nig) Limited, Investment Company of Nigeria and John Holt Nigeria Limited. The ordinary members are

shareholders of the Register of members. This category of members are those who share any profit or loss

made by the exchange.

The dealing members are those ordinary members who are licensed by the council to trade in the floors of

the exchange. They act as intermediaries between buyers and sellers of securities. In doing this, they advise

their clients on lasting procedures, act as their agents when they want to buy or sell securities and also offer

professional advise on portfolio selection.

In order to meet the aspirations of the users of its services, the Lagos Stock Exchange was transformed by

the Federal Government on 2 December 1977 into the Nigerian Stock Exchange (NSE) with additional

branches at Lagos, Kaduna, Port Harcourt, Kano, Onitsha, Ibadan.

A new Stock Exchange is also to be opened at Abuja known as Abuja Stock Exchange as contained in the

1998 Presidential Budget Speech.

Functions of NSE

(a) To provide appropriate machinery to facilitate further offerings of stocks and shares to the public.

(b) To promote increasing participation by the public in the private sector of the economy.

(c) To encourage the investment of savings as soon as it is clear that stocks and shares are readily available

as Professor G. O. Nwankwo (1980) noted other functions as in other economics books.

(d) To provide a central meeting place for members to buy and sell existing stocks and shares and for

granting quotations to new ones.

(e) To provide opportunities for raising new capital.

(f) To provide the machinery for mobilizing private and public savings and making these available for

productive investment through stocks and shares. That is to assist in the mobilization  and allocation of

the nation’s capital resources among numerous competing alternative uses.

(g) To facilities dealings in Government securities and foreign investment in Nigeria Manufacturing since

Government goes into joint venture with foreign investor.

(h) To act as a channel for implementing the indigenization policy by providing facilities to foreign business

to offer their shares to the Nigerian public for subscription.

(i) To reduce the risk of liquidity by facilitating the purchase and sale of securities.

(j) To protect the public from shady dealings and practices in quoted securities as to ensure fair trading

through its rules, regulations and operational codes.

Capital Market Instruments

This comprises long-term securities traded in the capital market. These instruments include the following:

(a) Shares: A share is a security evidencing part ownership in a company. According to Orji (1996), it is a

unit of ownership interest which a holder has in a business unit translated into financial terms. There

are two types of shares traded in the exchange – Ordinary Shares and Preference Shares.

(b) Debentures: These are long-term instruments evidencing the borrowing of funds by a company from

the holders measured in units with a financial value. They carry fixed interest charged. Debenture

holders are creditors to the company and are given preference on liquidation over all classes of shareholders.

(c) Government Stocks: These are long-term debt instruments evidencing that the government has borrowed

from the holder. It is similar to debentures, and carries a fixed amount of interest. Government

stocks are often issued for to raise development funds. They include treasury stocks, and development

stocks.

(d) Bond: A bond is a long-term debt instrument which carries a definite understanding of the (issuer or

borrower) to repay the amount so borrowed on a given date with interest. It carries a fixed interest.

Problems of the Nigerian Capital Market

The experience of our capital market will not be complete without recounting the challenges and problems

which are historical, institutional and structural.

Perhaps the most important single challenge that faces all those interested in the emergence of an active

capital market is the problem of impacting depth and breath to the market. By breadth is meant the number

and range of securities, which are available for trading, and by depth is meant the volume and the value of

such securities. The market has not succeeded in generating sufficient securities from companies and institutions.

The number of equities is considered grossly inadequate. The situation has not encouraged active

buying and selling in the market.

Second as with the money market, the nation’s capital market is dominated by the government securities

in value terms.

Thirdly, the market is characterized by infrastructural inadequacies. There are delays in effecting transactions

between issuing houses broker – dealers, registrars, investors and their banks due largely to the inadequacy

of postal and telegraphic services. The drag in the delivery services discourages many investors who

sometimes view with distrust their registrars and brokers when shares certificates are undelivered or proceeds

of shares are not received promptly. Infrastructural limitations insulate many investors, especially

those in the rural areas from broker-dealers, thereby restricting trading in securities.

Other problems of this market have to do with ignorance on the part of most members of the Nigerian

Public as to the meaning of shares and stocks as well as benefits derivable from market operations and the

reluctance of the Nigerian businessman to go public for fear of losing control of family business.

Conclusion

The financial market is segmented into two: the money market which deals in short- term funds and the

capital market for long-term dealings in loanable funds. The basis of distinction between the money market

and the capital market lies in the degree of liquidity of instruments bought and sold in each of these markets.

Suffice it to say, therefore, that both the Money and Capital Market exist to cater for the fund requirements

of both the public (government) and private sector of the economy. Through the Money Market, for

example, the government obtains some of its funds to bridge budgetary gaps and business enterprises to

realize cash for working capital purposes by issuing short-term debt instruments. The Capital Market makes

it possible for the government to raise long-term capital to execute its development programmes and

also facilitates the establishment, expansion and modernization of businesses for increased output

employment and income.

In Nigeria, the debt instruments traded in the money market include treasury bills, treasury

certificates, commercial papers bankers’ acceptances, promissory units, certificates of deposits

bankers unit fund and money at call.

Participants in the money markets include – the most dominant of the financial institutions in the

intermediation of short-term funds, merchant banks, insurance companies and other savings type

institutions such as savings banks, individuals, and others. The Central Bank supports the market as

lender of last resort.

The financial instruments or securities traded in the market include equities or ordinary shares,

industrial loans and preference shares, Federal Government development stocks, state government

bonds, company bonds and debentures and mortgages. Participants include the commercial,

merchant and development or specialized banks finance and insurance companies, provident and

pension funds, other financial intermediaries like the Federal Savings Bank and individuals. The nonbank

financial institutions are dominant in this market just as commercial banks dominate the money

market. As with the Money Market, the CBN is a major participant in the Capital Market as it is

statutorily required to absorb unsubscribed portions of government debt issues into its portfolio.

Summary

In this unit, an attempt has been made to examine the structure and roles of the money and Capital

Markets in Nigeria, and the evolution of the markets including institutional developments in the

markets.

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