Money Forex Report-Minna Final Version

8/6/2019 Money Forex Report-Minna Final Version

http://slidepdf.com/reader/full/money-forex-report-minna-final-version 1/43

N

I

G E

R

I A

FSS2020:

SECTOR REPORT

MONEY AND FOREIGN EXCHANGE MARKETS



CONTENTS

Abbreviations

Introduction

1. 0 Sec tor O verview

Industry Structure

Money Market

Foreign Exchange Market

2.0Sector Trends

Market Size and Growth

Recent DevelopmentsProducts and Services

3.0 Global Trends

Overview of Trends

4 .0 K ey I ss ue s an d Ch al le ng es

Money Market Challenges

Foreign Exchange Market Challenges

5 .0 S tr at eg ic D ir ec ti on

Vision

Mission

Impact on Extended Environment

Strategic Objectives

Initiatives

6 .0 I mp le me nt at io n P la n

Tables

Page 2 of 43









SECTOR OVERVIEW

INDUSTRY STRUCTURE

MONEY MARKETThe evolution of Nigeria’s money market dates back to 1894 whencommercial banking and a formalized channel of savings mobilization wereintroduced into the country. Afolabi (1991) notes that the establishment of the CBN in 1959 provided an impetus for the development of a virilemoney market because it’s enabling Act endowed it with statutoryobligations for savings mobilization. The market as it is today comprises of all the banks, financial institutions, the Central Bank of Nigeria and allthose other players actively involved in the trading and exchange of money(local and foreign currency). Its component parts are inclusive of the

following:

Government Securities Market (Treasury Bills)

Treasury bills are IOUs issued by the FGN for a tenor of 91 days. Although,182 day bills and other tenors have been introduced the 91 day TreasuryBills are the main bills issued and subscribed. Treasury bill sales by the FGreflect a desire to reduce money supply and vice versa. However, overtime, Treasury Bills have emerged as the dominant instrument in themoney market.

The market for Treasury Bills can be segmented as follows: Primary Market – Markets for new Issues;

Secondary Market – where already issued bills are traded;

Discount Window – where the CBN offers rediscounting facilities for

treasury bills; and

Open Market Operations (OMO) – which is the primary instrument the

CBN uses for monetary management. Although Treasury Bills arefrequently used for OMO, the CBN had also issued its Bills for monetarymanagement.

The total value of Treasury Bills issued in 2005 was N2.52trn, a 27.4%

decline when compared with the N3.47trn issued in 2004. This decline wasmainly due to the restructuring of the tenor and issue programme, thepreference for foreign assets with more attractive yield and increasedinvestment in the capital market driven by the increased number of InitialPublic Offers (IPOs) in 2005. Treasury Bill rates have also plunged inrecent times declining from an average of 12.2% in 2005 to an average of 6% in 2006. An analysis of holdings of the treasury bills outstandingreveals that deposit money banks (DMBs) and discount houses were themajor holders, jointly accounting for 68.4% of the total; with the non-bankpublic holding 21.9% and the balance of 9.7% held by the CBN.

Interbank Market

Page 6 of 43



This is the market where unsecured money is traded by banks anddiscount houses. It is a segment within the money market for unsecuredplacements and borrowings of currencies amongst the players in theeconomy. Banks and Discount Houses are the leading players in this

market. It is however dominated by the big banks who are the net placersand the structure has remained relatively unchanged post-consolidation inthe banking sector. In 2005, the turnover in the interbank funds marketrose by 21.6% over the preceding year to N5.6trillion. There was markedpreference for investment in government securities by market players tohedge against risks due to the consolidation in the banking sector. Thiscoupled with excess liquidity in the system led to a downward trend ininterbank interest rates in all segments of the market compared to theprevious year. Interbank call rates in the market ranged from 3.9% to10.7% for most of the year with the exception of November when it spikedto 16.8%, 500 basis points higher than the previous year. On a monthly

basis, call rate declined to an average of 7.9% in 2005, lower than 13.5%in 2004. In the same vein, monthly average rates for 7-day and 30-dayNIBOR fell to 10.7% and 12.8% compared with 17% and 18.5% for theprevious year.

Nigeria Interbank Offer Rate (NIBOR)

The NIBOR was originally modelled after the LIBOR, but it lags behind onaccount of inherent inadequacies such as inefficient pricing rates, highmarket volatility, wide spreads between deposit and lending rates, arelatively short yield curve, frequent market dislocations, etc.

The Commercial Paper Market

The Commercial Paper (CP) is an unsecured obligation issued by acorporation or bank to finance its short-term credit needs, such asaccounts receivable and inventory. Maturities typically range from 2 to 270days. Commercial paper is available in a wide range of denominations, andcan be either discounted or interest-bearing. CPs can be resold in asecondary market. Commercial papers are usually issued by companieswith high credit ratings (blue chips), meaning that the investment isalmost always relatively low risk.

The commercial paper market in Nigeria is still relatively undeveloped asreflected by its low volumes. In 2005, commercial paper sale amountedto N194.6billion or 16.9% of total money market instruments. Although,the value of CPs grew by 54% over the previous year, only a relatively fewcompanies play in the commercial paper market currently compared withBritain and other markets. The key problem here is the perception of risk-by the majority of the companies in the Nigerian market. The existence of a viable rating mechanism for corporate debt instruments is likely to boostgrowth in this market.

Bankers' Acceptance

A bankers' acceptance is a draft or an order to a bank by a bank'scustomer to pay a sum of money at a future date, typically within six

Page 7 of 43



months. Bankers' acceptances are considered very safe assets, as theyallow traders to substitute the bank's credit standing for their own. Theyare used widely in foreign trade where the creditworthiness of one traderis unknown to the trading partner. Acceptances sell at a discount from

face value of the payment order. Bankers Acceptances constitute the leastamongst the instruments traded in the money market.

The BA market in Nigeria is relatively underdeveloped but has thepotential for growth. The stock of Bankers Acceptances rose in 2005 butat a slower rate than the previous year. The total value of BankersAcceptances was N42.35billion or 3.7% of total money marketinstruments. The growth rate in 2005 was 2% compared with 27% in2004. In addition, the share of Bankers Acceptances in total moneymarket instruments declined from 4.1% in 2004 to 3.7% in 2005,reflecting the dominance of government treasury bills in the market asmost players stuck to risk free instruments following the banking sector

consolidation exercise.

Table 1: Nigeria’s Money/Financial Market: Looking Ahead

Indicators 2005 2020

Money Supply ($bn) 20.55 81.33

Treasury Bills ($bn) 19.69 42.19

Commercial Papers ($bn) 1.52 46.88

Bankers Acceptances ($bn) 0.331 7.97

Interbank ($bn) 43.75 437.5

Domestic Credit ($bn) 17.97 179.7

Value of Cheques ($bn) 0.109 10.9% Share of Cross-border bank lending ? 10

% Share of Foreign equities turnover ? 3

% Share of OTC derivatives turnover ? 5

% Share of Marine Insurance net premium income ? 8

%Share of International bonds (secondary market) ? 10

% Share of Hedge-fund assets ? 5

Source: FDC Research

Structure of the Nigeria’s Money Market

Page 8 of 43

Instruments:

Deposits (Time, Demand,Savings)

Treasury Bills, TreasuryCertificates, etc

BAs, CPs, OBB, etc

Savers/Lenders:

Individuals,InstitutionalInvestors (PFAs,Insurance Firms, etc)

Figure 1



The model above shows the flow of money between suppliers and users of money and the

intermediaries and may be useful in explaining the structure of Nigeria’s Money Market.The model is rather simplistic and does not reflect all the intricacies and nuances in the

money market.

The key participants or players in Nigeria’s money market include:

Federal Government of Nigeria which uses the market as a

means of borrowing short and medium term funds to be channelled to

targeted sectors of the economy.

Central Bank of Nigeria which participates by formulating

monetary policies which set goals and direction for the economy. It utilizes

various measures in determining the level of money supply, credit

availability, and interest rates. These include the cash reserve ratio for

banks, the rate at which it discounts Treasury Bills at the OMO and the

sale and purchase of Treasury Bills to either increase or decrease money

supply. The level and rate of intervention in the market assists the CBN in

maintaining macroeconomic stability.

Commercial Banks which participate in the market for a variety of

reasons. First, it is a statutory requirement that banks should hold

treasury bills as part of their assets. They also engage in securities tradingin the market as a means of making profit i.e. for investment purposes.

Page 9 of 43

Direct or non-intermediated

Finance (Informal Sector)

Individuals (Mortgages,Asset Acquisition,Investment, etc)

Corporate (Investment,Working Capital, etc)

Banks (to cover shortterm position)

FinancialIntermediaries:

Banks

Discount Houses



Banks may also patronize the money market to cover their short positions

i.e. to improve their liquidity.

Discount Houses are specialized financial institutions which

intermediate in the money market by accepting short-term monies for

onward investment in short term financial securities from banks,

institutional investors, non-bank financial institutions and high net worth

individuals. In Nigeria, Discount Houses are the intermediaries in the

government securities market between the CBN and banks. They help in

facilitating OMO of the CBN by acting as market makers.

Non Bank Financial Institutions are financial institutions

providing advisory services as well as investment and short term lending

to individuals and corporate. Some of the instruments utilized in this

segment are commercial papers and short term deposits. They also act as

advisers for companies intending to raise funds through private placement

or from the stock market, etc.

From available data, the users of the money market instruments can be

segregated as shown in the fig 2 and 3 below using Treasury Bills and the

distribution of credit to the economy:

Holders of instruments e.g. Treasury Bills

Page 10 of 43

Figure 2



Distribution of T/Bills Subscription (%)

57%

4%

39%

Deposit Money Banks Central Bank Non-Bank Public*

Source: Central Bank of Nigeria

Distribution of Credit to the Economy

43%

Source: CBN

FOREIGN EXCHANGE MARKET

Foreign exchange market is the pivotal facilitator of exports and imports

all over the world. The banking institutions within and outside a particular

country usually drive this market. Within this market, different types of

Page 11 of 43

Figure 3



exchange rate systems are used to estimate the net worth of one

currency in terms of another. The exchange rate is essentially the rate

which a particular currency can be exchanged for and converted to

another currency.

Nigeria’s foreign exchange market is dominated by the Central Bank of

Nigeria which supplies about 40% of total. Other sources include export

proceeds from non-oil sector and international inward money transfers.

The key players in the sector are briefly outlined below:

The Central Bank of Nigeria

The CBN is a major supplier of foreign exchange earned from sales of

crude oil as well as a regulator. It also utilises Foreign Exchange as a

means of liquidity management. Recently, the CBN introduced currency

swaps with some banks and released new guidelines on Foreign Exchange

operations in early December 2006. This relaxed some restrictions on

foreign exchange dealings and introduced derivatives trading. It currently

supplies about 38%–40% of the foreign exchange as against 60%–70% in

the past. The balance of about 60% is currently being supplied by

autonomous sources including diaspora remittances, oil company sales,

and export proceeds.

Page 12 of 43

Figure 4



Forex Sales to Authorised Dealers

39%

12%

34%

10%

2%

1%2% 0.6%

CBN Non Oil Exports Ordinary Dom Accounts

Oil Companies Capital Importation OTC Purchases

Home Remittances External Accounts

Source: CBN

The Major Oil companies

These are the key operators in Nigeria’s upstream oil sector in joint

ventures with the Nigerian National Petroleum Corporation (NNPC). These

companies usually sell Foreign Exchange in the interbank to fund their

naira operations in Nigeria. They currently account for about 9.6% of themarket.

Non-oil sector

The non-oil sector accounts for about 1.7%, which is a relatively small

proportion of the market, and which are mainly from Nigeria’s export sales

apart from crude oil. Total foreign exchange earnings from non-oil sector

declined by 21.5% in 2005 to $0.7bn. It is expected that with the recent

focus on the non-oil sector, this sector may become a key source of

foreign exchange earnings.

Diaspora Remittances

This is mainly remittances from Nigerians working overseas. It has been

growing in recent times following the improved macro-economicenvironment in Nigeria. It is estimated that this inflow amounts to about

$4bn annually and contribute significantly to the funding of the market.

Page 13 of 43



Most of the remittances are usually through Money Transfer Organizations

(MTOs).

Page 14 of 43



SECTOR TRENDS

Prior to the banking sector consolidation, the money market was basicallyoligopolistic with the top ten banks controlling the lion share of total

deposits, foreign exchange activities, loans and advances etc. Of the 25

existing banks, the top five banks still control a larger share of total

deposits and are dominant in all key operational areas. In the Inter-bank

market, these banks are the net placers of funds and have the largest

share of Treasury Bills holdings.

MONEY MARKET TRENDS

Market Size & Growth

Table 2 below shows the five-year summary of the volumes of the

instruments traded in the Money Market. It was observed that the value of

TBs issued declined by 2.06% to N854 billion in 2005, while the value of

development stocks remains unchanged at N1.25billion. Other instruments

(BAs and CP) rose by 1.92 and 119.1%, respectively over their 2004

levels.

Five-Year Summary of Money Market Instruments

Value of Money Market Instruments (N’bn)

2001 2002 2003 2004 2005

Treasury

Bills

578.5 733.8 825.1 871.6 854

Development

Stocks

3.62 2.37 1.03 1.25 1.25

Bankers

Acceptances

36.5 42.6 32.9 41.6 42.35

Commercial

Papers

35.3 37.14 37.3 88.83 194.59

Source: CBN Annual Reports

Regulation of the Market

Page 15 of 43

Table 2



The money market is regulated by the Central bank of Nigeria. However,

since most of the key players like banks are publicly quoted companies

that are listed on the Nigerian Stock Exchange, they are subject to the

regulatory oversight of the SEC and the NSE. The table below summarizes

how the players in the market are regulated:

Regulation of Money Market

R e g u l a t o r s C o m m e r c i a l B a n k sD i s c o u n t H o u s e sF i n a n c e C o m p a n i e sL e a s i n g C o

C e n t r a l B a n k o f N i g e r i aX X X XS e c u r i t i e s & E x c h a n g e C o m m i s s i o nX X

N i g e r i a n S t o c k E x c h a n g e X

N i g e r i a n D e p o s i t I n s u r a n c e C o r p o r a t i o nX


In June 2004, the CBN introduced industry wide reforms to reposition

Nigerian banks. This resulted in the liquidation of 11 out of the existing 89

banks while the rest merged to form 25 banks. The reduction in the

number would enhance CBN’s regulatory oversight functions as there are

fewer banks to be supervised. The CBN also decided to adopt a more

proactive approach to its regulatory functions. The consolidation

programme was aimed at forestalling bank failures and the likely contagion

effect.

Recent Developments

In the last 1-2 years, there have been some remarkable developments in

the industry. Some of these are:

Banking consolidation, this reduced the number of banks by 72% from

89 to 25 and increased the minimum shareholders’ funds by over 1000%

to N25billion.

Increased the number and variety of instruments

Restructuring of the national domestic debt, through the introduction of

longer term Treasury Bills (182-day bills, CBN OMO bills, etc) by the CBN.

Page 16 of 43

Table 3



The introduction of FGN Bonds of various maturities by the Debt

Management Office.

The appointment of primary dealers in government securities by the

CBN, thus removing the monopoly held by discount houses.

The reconstitution of National Payments System Committee (NPSC)

with high level representations to ensure effective policy formulation and

execution

Implementation of two major information technology (IT) initiatives –

the Real Time Gross Settlement (RTGS) and Temenos T24. The

deployment of the T24 was operationally test-run in Lagos, Abuja, and

Minna.

The approval of the Nigerian Cheques Printers Accreditation Scheme to

combat the emerging trend of relatively high MICR rejects in cheque

clearing as well as enhancing greater efficiency in the payment system.

Introduction of the National Savings Certificate (NSC)

Movement of Public sector deposits to the Central Bank of Nigeria

Introduction of settlement/clearing banks.

International ratings of some Nigerian banks.

Impact of Recent Initiatives on the Money market

The following are some of the responses noticed in the market to the

reform measures introduced.

The introduction of longer-tenor treasury bills has helped in the

management of liquidity to the extent that M2 growth stayed nearer target

since 2004. Increased number of instruments with varying maturities, leading to

the emergence of a yield curve, which was non-existent before.

The introduction of FGN bonds to some extent has succeeded in

lengthening the maturity profile of domestic debt. In addition, the

composition of domestic debt currently shows a slight reduction in the

share of Treasury Bills.

Bank deposits increased by 44.5% with the introduction of electronic

payment systems and is expected to increase as banks ramp up the ATM

Page 17 of 43





FOREIGN EXCHANGE MARKET TRENDS

Market Share Analysis

The top five (i.e. 20%) of the 25 Nigerian banks currently account for

about 47.5% of total Foreign Exchange market share compared to the pre-

consolidation period when the top 10 banks (11%) accounted for over

80% of total Foreign Exchange market share.

Foreign Exchange demand by Banks in the 1st 12Auctions of the WDAS

Source: CBN

Market Size & Growth Trends

Total Foreign Exchange inflow grew by 38% to $38bn in 2005 with the

CBN accounting for 93.2% and private sources making up the balance of

6.8%. Further breakdown of the private sector receipts indicate that non-

oil receipts declined by 39.5% to $841m whilst capital flows increased by

161% to $1.73bn. The reduction in non-oil receipts was traced to the

removal of the Export Expansion Grant (EEG), which was restored

recently.

Page 19 of 43

WDAS1- 12

11.39

11.28

8.86

8.46

7.55

6.67

6.51

5.21

4.97

4.88

4.39

2.28

2.03

1.71

1.49

1.46

1.46

1.35

1.35

1.22

1.02

1.09

0.39

0.65

0.12

2.20

0 1 2 3 4 5 6 7 8 9 10 11 12

STERLINGBANKPLC

FIRSTINLANDBANKPLC

BANKOFINDUSTRYLIMITED

PLATINUMHABIBBANKPLC

UNITYBANK

AFRIBANKNIGERIAPLC

ETB

SKYEBANK

FCMB

UBNPLC

SPRINGBANKPLC

IBTCCHARTEREDBANKPLC

STANBICBANK

ACCESSBANKPLC

FIDELITYBANKPLC

UBAPLC

STANCHART

ECOBANK

WEMABANKPLC

GTBANK

DIAMONDBANKPLC

OCEANICBANKINT'LPLC

FBN

INTERCONTINENTALBANKPLC

ZENITHBANKPLC

NIB

Figure 5



Foreign Exchange Market Summary

Official Ave. Exchange Ra

Source: CBN

Forex Market Five Yea

According to the CBN, total utilization of official Foreign Exchange receipts

was $24.3bn in 2005, an increase of 58.4% over the preceding year.

Increased out-payments for imports, external debt service and other

official payments were factors accounting for the increase.

Official Forex Utilisation in 2005.

0.4%

37%

63%

External Debt Services National Priority Project Domestic Use

Source: CBN

Foreign Exchange Market Regulation

The Foreign Exchange market is regulated by the Central Bank of Nigeria.

The CBN issues guidelines in line with its monetary policy management

framework. In recent times, there has been an attempt to liberalize the

market and move the naira towards convertibility. The steps taken so far

as well as the impact on the market are discussed in subsequent sections

of this report.

Page 20 of 43

Table 4

Figure 6





repatriation of the earnings from investments in ordinary domiciliary

accounts

Repayments of foreign currency borrowings from Nigerian banks now

allowed for all projects including those that are capable of conserving

Foreign Exchange through production of goods and services.

Expansion of the dealings in the Foreign Exchange market to include

derivatives such as forwards and swap transactions.

Expanded list of eligible transactions

Liberalization of the Foreign Exchange Market

The recent liberalization of the Foreign Exchange market was aimed at

making the market more dynamic and responsive to the banking sector

reforms. The steps taken since February 2006 were:

Introduction of WDAS eNoodle ( Electronic Naira Dollar Exchange)

Liberalization of the supply side

Liberalization of the demand side

Deepening the market by encouraging the use of derivatives

Enhanced dealing with improved tools and skilled dealers

Daily dealing in addition to weekly auctions

Introduction of two-way quotes

Adoption of multiple-pricing method

Timing for the auctions may or may not be predictable

Results must be known within one hour

PRODUCTS/SERVICES

The key products/services provided in the money and foreign exchange

markets include:

Money Market Products/Services

Treasury Bills (90-day, 182-day, etc)

Commercial Papers

Bankers Acceptances

Treasury Bonds

Federal Government Development Stocks

Deposits ( Time, Demand, Savings),

Loans ( Short or Long Term)

Page 22 of 43



Advisory Services, etc

Foreign Exchange Market Products/Services

The foreign exchange market is predominantly a spot market. However,

the CBN recently introduced swaps & forwards contracts. These products

are relatively undeveloped as only the foreign banks (Standard Chartered,

Citibank, Stanbic) trade in forwards.

Page 23 of 43



GLOBAL TRENDS

OVERVIEW

OF

TRENDS

Money & Foreign Exchange markets in mature economies have undergone

significant changes over time, driven by technology and global

interdependence. This trend is helping to increase the choice available for

global consumers. There is a rush to make domestic markets more

competitive in the quest to achieve financial hub status. Countries like

Singapore, Dubai, Hong Kong, South Korea, are deliberately pursuing the

strategy of attaining the status of financial hubs. The existing global hubs

are also constantly re-evaluating their positions seeking to consolidate and

expand their influence in the global economy e.g. London, New York.

The Competition for Financial Hub status is keen

The competition among the existing financial hubs is keen. For instance,

the Mayor of New York recently commissioned a consulting firm (McKinsey)

to take New York to No. 1 ahead of London. The Mayor of London also

recently celebrated the 20th

year of its dream to emerge as the globalfinancial powerhouse of the world. The City had on October 17, 1986 kick-

started a number of processes later dubbed the “Big Bang” which

transformed London into the Mecca of financial services in the world.

Financial Market Reforms accompanied by Economy-wide reforms

A common factor in most of these economies is that financial market

reforms have been complemented by economic, political & social reforms.

These reforms created the right atmosphere and enhanced the adoption of

market-based strategies as against regulatory dominance. In these

economies also, the transformation process was driven by the adoption of

a single theme. For example, in Singapore the theme “Going Global” was

adopted. The Monetary Authorities of Singapore had as its basic philosophy

the need to ensure that the orientation of the players/stakeholders was

international and not regional. That is, the central focus was to raise the

Singaporean financial markets to global standards. To ensure global best

Page 24 of 43



practices and make the market a melting pot for global financial

transactions.

Investor Protection

In most emerging and existing financial centres, a strong emphasis is

usually placed on “Investor Protection”. This single factor is crucial to

international perception of the safety of investments in key financial hubs.

Investor protection is an essential element for the evaluation of financial

hubs globally. The extent to which local laws and legislation protect

international investors is vital to attracting and retaining global players in

financial centres.

OUTCOME OF FINANCIAL MARKETS REFORM

Financial Markets Reform resulted among other things in the following:

Transformation of the opportunities for borrowing, saving &

investments for households and firms thus increasing the choice available

to customers. For example households now have access to a broader range

of borrowing options (e.g. through the widespread use of credit cards,

home & equity loans) in these markets. Apart from borrowing, the reforms

have also enabled easy investment in financial instruments such as stocks,

bonds, mutual funds and derivatives.

Corporate firms are increasingly able to diversify their financing

needs away from the traditional channels (banks) through the issuance of

corporate bonds in capital market. Banks themselves are increasingly

moving away from plain vanilla services of deposit taking and lending to

fee-generating activities, such as the securitization of loans and the sale of

risk management products. According to experts, this increase in

securitization is through the use of instruments such as collateralized debt

obligations (CDOs). Thus, banks are now able to unbundle financial risks

by repackaging them into portfolios of financial instruments and

transferring it to investors willing to assume such risks. Another

development is the fact that reforms in major financial markets have led to

an expansion of cross-border financial intermediation especially at thewholesale level. This is typified by the increasing foreign investments in

domestic mortgage-backed securities in a number of countries, in spite of

Page 25 of 43



the fact that household mortgages are still largely originated by domestic

financial institutions.

Page 26 of 43



KEY ISSUES AND CHALLENGES

There are several challenges facing the money & foreign exchange markets

in Nigeria currently. An attempt is made hereafter to summarize these

challenges into the following broad categories:

MONEY MARKET CHALLENGES

Market Imperfection and Shallowness: the money market is

characterized by few players and information is not readily available (there

is information asymmetry, as it is an over the counter market). There is

also an inefficient pricing mechanism due to a disconnection between the

anchor rate (MRR) and the market rate. Because of the uncertainty in the

market rate, players are discouraged from taking a long-term position.

Lack of diversity of available instruments: there is a limited variety of

instruments issued in the market.

The secondary market is relatively immature: this is due largely to

the shallowness of the primary market; the repo market is inactive and

does not allow the use of a larger coverage of collateral (only T-Bills and

bonds are allowed and the repo window is largely overnight.

High incidental costs: statutory (primary) costs are high, and non-banks

that wish to play in the money market are subject to paying COT

(secondary costs) which is not required in the inter-bank market e.g. With

Holding Tax (WHT) on interests.

The banking system is highly reliant on government (pubic sector)

deposits: reliance of banks on public sector deposits has an indirect

impact on the money market due to the volatile nature of this source.

Lack of adequate and timely market information: there is no

structure for ensuring that market data are readily available to players in

the market on a need basis and as at when available e.g. the results of the

Open Market Operations (OMO).

Inadequate Skilled Manpower: There is shortage of skilled manpower in

the relevant key disciplines needed for the growth of the market.

Page 27 of 43



Impact of these Challenges on the Money Market

The challenges outlined above are crucial to the elevation of the money

market to the level required of a hub. So far, these challenges have the

following effect on the market.

Impact of Challenges on Money Market

s/n Challenges Impact on the Money Market

1 Relatively Shallow Market Increases market volatility

2 Dependence on Government Results in narrow instrument range/slowgrowth of secondary

3 Information Gap & Asymmetry Market inefficiency

4 Human Capacity Gap Low market development


FOREIGN EXCHANGE MARKET CHALLENGES

Limited Domestic Currency Convertibility: Partial liberalization of the

current account limits the full convertibility of the local currency.

Foreigners are not allowed to invest in instruments with less than one-year

maturity and Nigerians are not allowed to purchase the value of foreign

exchange that they desire. The market is relatively a spot market: there is currently limited

platform for the trading of foreign exchange futures, forwards, swaps, etc.

Over dependence on oil as the source of foreign exchange: oil

earnings account for over 95% of foreign exchange earnings for the

country, which are only supplied via the Central Bank of Nigeria to the

market. The market is vulnerable to exogenous shocks and the currency

could be susceptible to speculative attack.

The Nigerian external sector relies mainly on trade flows and

supported by external reserves: investment flows are limited and thus

Page 28 of 43

Fi ure 7



Nigeria rely on trade flows which is complemented by the external

reserves.

Page 29 of 43



Strategic Direction

The FSS2020 vision for the Nigerian financial system is to develop thesafest and fastest growing financial system among emerging markets by2020, catalyse the national economy to become one of the top 20economies in the world by 2020, and create the Africa region internationalfinancial centre.

VISION

Vision Statement for the Money and Foreign Exchange Markets “To be the No. 1 Money & Foreign exchange markets amongst emergingmarkets and to rank in the top 5 globally”

MISSION

“To provide safe, liquid and competitive money & foreign exchangemarkets, operating on global best practices”

IMPACT ON EXTENDED ENVIRONMENT

In essence, our mission will have the following impact on the extended

environment Safety (Investor Protection) – this implies ensuring that local and

foreign investors are protected

Product variety – To expand the breadth and depth of the market by

introducing a wide variety and multiplicity of instruments/products

Market depth –To grow the value of money and Foreign Exchange

market instruments to attain the requisite depth and robustness that can

protect it against external shocks.

Convenience - To guarantee consumers and players ease and

convenience of doing business by removing unnecessary constraints and

restrictions.

Competitiveness - To make the market highly competitive and

attractive to foreign players, regionally and globally

Best practice - To adopt global best practices and good corporate

governance and instill it amongst market players through incentives and

sanctions.

Page 30 of 43



KEY ISSUES THAT COULD FRUSTRATE VISION/GOAL OF THE

MONEY & FOREIGN EXCHANGE MARKET

The following direct and indirect issues are capable of derailing the

vision/goal of making Nigeria’s money market the No. 1 among emerging

markets.

Direct Issues

Money Market:

Shallow Secondary market

Lack of Broking, market making and underwriting capacity

Lack of Repo facility

Lack of low and sustainable tax rate that is harmonised across the

board

Policy disallowing Banks from utilizing sub-ordinated debt like lower

Tier-2 capital for computing single and total obligor limits. This is

considered as an impediment to credit creation by banks.

Foreign Exchange Market:

Lack of mechanism that will support trading of derivatives like

futures, forwards, options e.g. a futures and options exchange

Sharp decline in foreign exchange earnings which limits inflow from

official sources into the market

Lack of Naira convertibility

Lack of requisite skills for trading in derivatives i.e. understanding of

financial futures

Non diversification of the forex earnings base.

Indirect Issues

Money & Foreign Exchange Markets:

Legislative & regulatory reforms yet to take off fully. This includes

the creation and passage of laws by the legislative arm of government that

will facilitate the growth of money and foreign exchange markets.

Examples include reorganizing the activities of the DMO and the CBN to be

Page 31 of 43



able to issue debt instruments whether short or long term in a harmonized

and structured pattern with the emergence of a proper yield curve.

Setting up of legislative processes and laws for investor protection

Suboptimal corporate governance

Introduction of broad based Capital market reforms

Infrastructural Inadequacy

Risk of regional conflict involving neighbouring countries and

contagion effect

Cross border finance and banking risks – risk of a meltdown in

regional financial markets where Nigerian banks are currently expanding.

STRATEGIC OBJECTIVES

Strategic Objectives have been developed based on the issues andchallenges identified for Nigeria’s money and foreign exchange markets.These strategic objectives are:

Money Market Objectives:

Facilitate the development of a more robust, vibrant and deepmoney market

Facilitate a more market oriented MPC

Increase the volume of corporate bills and financial instruments

issued relative to government treasury bills in the market

Align statutory and transaction costs in Nigeria with other emerging

markets

Intensify the phased withdrawal of public sector funds from banks

Increase coordination between the DMO and the CBN

Foreign Exchange Market Objectives:

Accelerate/intensify the process of currency convertibility

Facilitate the development of a more robust, vibrant and deep

foreign exchange market

General Issues:

Improve the judicial process and the enforcement of rights

Improve Nigeria’s rating with Transparency International (TI)

Page 32 of 43



INITIATIVES

Money Market

Objective 1 - Facilitate the development of a more robust, vibrant anddeep money market

Increase the number of primary dealers

Extend the maturity profile of instruments to a maximum of 364

days

Objective 2 – Facilitate a more market oriented MPC

Increase the number of private sector and market-based members

in the MPC and institutionalise their membership

Objective 3 – Increase the volume of corporate bills and financialinstruments issued relative to government treasury bills in themarket

CBN should look into the possibility of qualifying highly rated short-

term commercial papers as liquid assets to count towards bank’s liquidity

ratio

Objective 4 – Align statutory and transaction costs in Nigeria withother emerging markets

Benchmark statutory and transaction costs to emerging markets.

Objective 5 – Intensify the phased withdrawal of public sectorfunds from banks

CBN should net off the quantum of public sector deposits from the

computation of liquidity ratio.

Objective 6 - Increase coordination between the DMO and the CBN

Institute regular meetings between the DMO and the CBN to develop

a harmonised framework and issuance timetable for debt instruments


Objective 1 - Accelerate/intensify the process of currencyconvertibility

Further dismantling of the remaining exchange controls regulations

Repeal all existing laws that impede currency convertibility

Objective 2 - Facilitate the development of a more robust, vibrantand deep foreign exchange market

Page 33 of 43



Create a framework for multiple currency activities e.g. issuance of

foreign currency instruments both by government and private sector

Establish a Lagos International Futures and Forwards Exchange

Discount houses should be allowed to trade in foreign exchange

Page 34 of 43



IMPLEMENTATION PLAN

The implementation plan comprises the strategies to be adopted to

implement the recommendations. It highlights the responsibilities,dependencies, key deliverables, and timelines to achieve the stated goalsand attain the vision articulated for the money and foreign exchangemarkets.

Page 35 of 43



Implementation Plan

Money Market

Initiatives Deliverable Dependency Action Step Responsiblebody/Or

g.

Support TimeLine

Objective 1 - Facilitate the development of a more robust, vibrant and deep money market

1.1.1Increase thenumber of primarydealers

Higher numberof licensedprimary dealers

CBN to expand thenumber of primarydealership licenses in

govt securities andrelax the conditionsfor prequalification

CBN Done

1.1.2Extend thematurity profile of instruments to a

maximum of 364days

To have theissuance of allgovt securities

and the yieldcurve managed

by one agency

To allow the

CBN to focus onits coremandate

Continuedrelationshipbetween the

CBN and theDMO

CBN should transferthe management of the T-bill programme

to DMO and come upwith other Monetary

Policy instrumentswhich should notexceed 90 days

CBN to intensify theuse of instruments

CBN DMO Dec,2008

Page 36 of 43



Initiatives Deliverable Dependency Action Step Responsiblebody/Org.

Support TimeLine

like OMO, forexswaps, etc to manageliquidity and inflation

STRATEGIC OBJECTIVE 2 – Facilitate a more market oriented MPC

1.2.1

Increase thenumber of privatesector and

market-basedmembers in theMPC andinstitutionalisetheir membership

Increasedtransparency inMonetary Policy

Formulationwhich would inturn increasemarketconfidence

CBN to selectmembers from theprivate sector with

requisite credentialsand experience

CBN Dec,2007

STRATEGIC OBJECTIVE 3 – Increase the volume of corporate bills and financial instruments issued relative togovernment treasury bills in the market

1.3.1CBN should lookinto the possibilityof qualifying highlyrated short-term

commercial papers

AAA and otherhighly ratedcommercialpapers or other

liquid

SEC accreditedagencies to developrisk acceptancecriteria for qualifying

instruments

CBN RatingAgencies

Quick Win

Page 37 of 43




Support TimeLine

as liquid assets tocount towardsbank’s liquidity

ratio

instruments,issued bycorporate

entitiesSTRATEGIC OBJECTIVE 4 – Align statutory and transaction costs in Nigeria with other emerging markets

1.4.1Benchmarkstatutory andtransaction costs

to emergingmarkets

Low cost of doing businessand a

harmonised taxsystem

Harmonisetransaction andstatutory costs with

other emergingmarketsRemove regulatoryrestrictions & barriers

FIRS,CBN, CSCS

Quick Win

STRATEGIC OBJECTIVE 5 – Intensify the phased withdrawal of public sector funds from banks

1.5.1CBN should net off the quantum of

public sectordeposits from thecomputation of liquidity ratio.

Less incentivefor banks to

attract thesefunds andtherefore govtagencies wouldbe more

inclined to

CBN to issue circularto this effect.

CBN Govt,Banks

December2007

Page 38 of 43




Support TimeLine

channel it intoproductivesector

STRATEGIC OBJECTIVE 6 - Increase coordination between the DMO and the CBN

1.6.1Institute regularmeetings betweenthe DMO and theCBN to develop a

harmonisedframework andissuance timetablefor debtinstruments

Regularmeetingsbetween theDMO and the

CBN.Increasedefficiency in theissuance of govtbonds

The CBN & the DMOto increase frequencyof meetings andcoordination of

activities. TheDMO shouldconcentrate on theissuance of bonds of 91 days and above

DMO & CBN

Quick Win


STRATEGIC OBJECTIVE 1- Accelerate/intensify the process of currency convertibility

1.1.1Further

dismantling of theremainingexchange controlsregulations

More

investmentinflows

CBN to further

liberalise and amendexchange controlcirculars andguidelines. CBN tocontinue with policy

CBN Quick Wins

Page 39 of 43




Support TimeLine

on easy repatriationof profits & assets.The CBN to sustain

the no surrenderrequirement for

exports

Repeal all existing

laws that impedecurrencyconvertibility

CBN to submit

proposed revisedlaws to NationalAssembly forconsideration andapproval

CBN,

LEGAL

Quick Win

STRATEGIC OBJECTIVE 2- Facilitate the development of a more robust, vibrant and deep foreign exchangemarket

1.2.1 Create aframework formultiple currencyactivities e.g.issuance of foreign

currencyinstruments bothby government

Increase inoutrightforward marketand thedevelopment of

currency swapmarket.

NairaConvertibility

Current AccountLiberalization

CBN,DMO

PrivateSectorOrganisations

April 2008

Page 40 of 43




Support TimeLine

and private sector Establish a Lagos

International

Futures andForwardsExchange

Coordination of

activities of

commoditiesexchangeASCE/NSE/SEC towork in conjunction

with a majorinternationalexchange like theLIFFE ( LondonInternational

Forwards & FuturesExchange), theChicago Exchange,NASDAQ, etc to,establish a derivative

exchange. To beestablished as apublic, privatepartnership

CBN,

SEC

Private

sector

End 2009

Discount housesshould be allowed

DHs trading inForeign

Discount housesshould be converted

CBN,SEC

Privatesector

Phase 1FX trading

Page 41 of 43





Documents

Money Forex Report-Minna Final Version