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N
I
G E
R
I A
FSS2020:
SECTOR REPORT
MONEY AND FOREIGN EXCHANGE MARKETS
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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
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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
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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
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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
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Instruments:
Deposits (Time, Demand,Savings)
Treasury Bills, TreasuryCertificates, etc
BAs, CPs, OBB, etc
Savers/Lenders:
Individuals,InstitutionalInvestors (PFAs,Insurance Firms, etc)
Figure 1
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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.
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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
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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
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Figure 2
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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
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Figure 3
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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.
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Figure 4
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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.
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Most of the remittances are usually through Money Transfer Organizations
(MTOs).
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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
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Table 2
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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
Source: FDC Research
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.
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Table 3
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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
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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.
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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
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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.
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Table 4
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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)
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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.
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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
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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
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the fact that household mortgages are still largely originated by domestic
financial institutions.
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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.
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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
Source: FDC Research
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
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Nigeria rely on trade flows which is complemented by the external
reserves.
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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.
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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
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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)
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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
Foreign Exchange Market
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
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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
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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.
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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
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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
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Initiatives Deliverable Dependency Action Step Responsiblebody/Org.
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
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Initiatives Deliverable Dependency Action Step Responsiblebody/Org.
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
Foreign Exchange Market
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
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Initiatives Deliverable Dependency Action Step Responsiblebody/Org.
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
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Initiatives Deliverable Dependency Action Step Responsiblebody/Org.
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
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