Impact Of The Money Market In The Growth Of Nigeria In Economy

Project and Seminar Material for Economics

Impact Of The Money Market In The Growth Of Nigeria In Economy


Abstract


This project work reviewed the role of the Nigerian money market in the economic development of Nigeria. Based on the research work carried out we are able to identify the various effect it has in the economic development of the Nigerian economy.


Chapter One


Introduction

1.1 Background of the Study

The financial system of any financial company provide the catalyst through financial intermediation for productive activities to ensure economic growth and development Olowo (2008).

The Nigerian financial sector is undoubtedly the most important in the political economic system because it provides the necessary lubricant that keeps the wheel of the economy turning and it is an engine for economic growth. The sector provides fund for investment and also allocates these funds for investment and also allocates these funds as efficiently as possible to those project that offers best returns to fund owners. The well being of the sector to a very large extent determines a growing economy. However, if the sector happens to be weak, the economy suffers for it.

There are various financial market which are institutional arrangement that facilitates the intermediation of funds in an economy. The market which deals with sort term funds and the capital market that is for long term dealings in loanable funds Anyanwu (1996). The basic of distinction between eh money market and the capital market lies in the degree of liquidity of instrument bought and sold in each of the market which can be subdivided into the primary and secondary market is concerned with raising of new fund, the secondary market exist for the sale and purchasing of existing securities. Therefore enabling savers who purchased securities when they had surplus to recover their money when they are in need of cash Afolabi (1991).

The major concern for the study is the money market, the money market represent the short end of the financial system which provide short term investment having a maturity date of less than one year. Also the money market is an intermediary for short term financial asset that are close substitute for money in Nigerian money market as established by the Central Bank of Nigeria primarily for mobilizing domestic savings for productive investments as well as providing government with funds to enable implement programmes. Nibeabuchi (2004).

The Nigeria money market offers opportunity for trading in the short term instrument which are very liquid and have negligible risk and the money market also provides the basis for implementation of monetary policy. The types of instrument traded are treasury bill, treasury certificate, commercial paper, bankers acceptance etc. commercial papers are the dominant players in the market while the market provides the basis of operations, manipulation and execution of monetary policy (indirect instrument) with discount houses intermediary between the Central Bank and other banks where the former is playing the role of the lender of last resort to the market. Jhingan (2004).

The role of the money market in the development of the economy cannot be overemphasized as the money market plays a key role in banks liquidity management and transmission of money policy by providing the appropriate instrument and partners for liquidity trading, the money market allows re-financing of short term positions and facilitates the mitigation of business liquidity.

However, a developed money market has different types of near asset in large number such as promissory note, treasury bill etc. as the number of near money asset increases, the more developed the money market becomes. The market also attracts adequate funds and easy access to financial sources from within an outside the country.

Thus the development of the money market smoothens the progress of financial intermediation and boost lending to economy which in turn improves the country’s economy and brings about development in its economic activities.


1.2 Research Problem

The Nigerian economy is based on the money which is designed as a means of liquidity adjustment and also a potential path for development. Therefore the money market needs to be infused with more liquidity to ensure safety for investors in order to help fund economic development.

The largest problem with the market is corruption of the system that even transparency cannot fix, provision of more regulation will be appropriate.

Iyiegbuniwe (2005) pointed out that although the Nigerian money market has experienced significant growth, both in breadth of securities as well as the volume of trading since the liberalization of the financial system since 1986, it still needs to be deepened further to achieve the required vibrancy that is expected of a money market. This does not mean that the money market is inefficient, it goes a long way to explain that there is serious need to evaluate its performance in relation to its contribution to economic development of the country.

Therefore, the Nigerian money market should be deep and broad to be able to absorb large volume of transaction without substantial effect on security prices and interest. The above defining feature of the market demands that, there exist many active market participation such that the transaction of an individual investor will have just little impact on security prices and interest rate. It also requires that there are different varieties of securities to ensure that there is always alternative (other options) investment instrument available to be able to satisfy the respective return and risk of investors.

Therefore, a deep and broad market which is very efficient in information and operations including an adequate regulation and more liquidity will contribute to the development of the Nigerian economy.


1.3 Objectives of the Study

The main objective of this study is to examine the role of the money market in the economic development of Nigeria. Some other objectives are written below:

  1. To examine if the Nigerian money market has developed.
  2. To examine the relationship between the money market and the economic development in Nigeria.

1.4 Research Hypothesis

  • H0: The Nigerian money market has not developed
  • H1: The Nigerian money market does not contribute to the economic development of the Nigerian economy.

1.5 Significance of the Study

  1. The study will explore the effectiveness and usefulness of the money market to the economy.
  2. The study will be a reference material for further study on the market and the economic development of Nigeria.
  3. The result of the study will contribute to practical knowledge, the existing body knowledge advancement and stability of the Nigerian economy.
  4. The bank and other financial sectors of the economy will be well guided in the effect of the money market to the development of the Nigeria economy.
  5. It will provide various policy recommendations to policy makers on ways to use money market instrument more effectively in the developing Nigerian economy.

1.6 Scope of the Study

The study cannot cover all the areas of the financial sector, it is therefore limited to the money market, its instruments and policies and regulation used by the government to stabilize its road to economic development.

The empirical investigation of the role of money market in the development of the Nigerian economy shall be restricted to the period from 1980-2009.


1.7 Limitation of the Study

  1. Time constraint
  2. Another limitation shall be based on data collection and methodology, which have various impacts. The data to be used for the regression are annual data sourced from different authorized bodies such as the Central Bank of Nigeria etc. the unavailability of the data for some variables using previous years act as a hindrance in the range of data. The accuracy of the data is subject to sincerity and dedication of the officials involved in the collection and collation of data.
  3. All the above may not be achieved due to time constraint.

Chapter Five


Summary of Findings, Conclusion and Recommendations

5.1 Introduction

This is the last chapter of this research work, it will give an overview of the process involved in conducting the research work. It presents an insight of our findings in the previous chapter and discussions of the findings. It further presents futuristic ideas in terms of policy recommendations and project some issues for further research purpose and how to improve on the subject matter. And finally conclusion is made concern the whole project and this will bring the project to the end.


5.2 Summary of Findings

The aim of this research work was to determine the relationship between the Nigerian money market and economic development using the OLS estimation technique. In précised terms, it is aimed at investigating the relationship between variables of the money market as selected by the researcher and that of economic development.

Furthermore, considering the variables used to capture the Nigerian money markets, it was discovered that the coefficient in interest rate (LINT) has a positive relationship with GDP and an increase in INT will result in an increase in GDP. The result also revealed that the coefficient of Banker’s credit (LTBCR) has a negative relationship with GDP i.e. increase in LTBCR will lead to decrease in GDP i.e. it is not an effective too. Same also applies to the coefficient of treasury bill issue (LTRB) which has a positive relationship with GDP. An increase in LTRB will result in an increase in GDP. Finally, there is positive relationship between the coefficient of money supply (LMI) and GDP as an increase in LMI will lead to an increase in GDP.


5.3 Policy Recommendations

The Central Bank of Nigeria should implement friendly policies on interest rates on loans so as to encourage credit availability to the government by various institutions. Effective policies that affect exchange rate should be put in place by the Central Bank of Nigeria as this will increase the volume of money exchange for the period and this will increase GDP and enhance economic development.

Treasury bill is positively related to GDP, this means that if the Central Bank of Nigeria can implement policies to ensure effectiveness and efficiency of treasury bill since this is a major money market indicator used by government, it will definitely contribute to the development of Nigerian’s economy.

Finally, there must be a generally sound macroeconomic policy and reforms, a favourable macroeconomic environment is very important in ensuring economic development.

5.3.1 Recommendations

Considering the fact that time was a major constraint and a limiting factor to this research, due explanation and interpretation was not done hence the need for recommendation for future research

Basically, this research work was done empirically by considering the relationship between variables. Thus, there is need to consider qualitatively the impact of money market on the Nigerian economy development. This may be done by seeking personal opinion from person involved in money market operations on how their activities has improve on the economy socially and otherwise. This may be tested using the chi-square method.

Furthermore, there is need to consider the impact of other variables of money market to determine the overall impact on economic development.

Finally, due, consideration on how the money market is regulated in terms of rules and regulations governing their activities must be considered. This will broaden and educate the public on matters relating tot eh money market and how they have enhanced economic development.


5.4 Conclusion

From the findings gotten from this research work, we have come to a general conclusion that the Nigerian money market has grown tremendously since its inception. This is evidenced by the growth in numbers of branches and in the volume of the money market assets as specified in literature review in chapter two.

In addition, from our empirical findings, it is no doubt that the variables used to capture the activities of the Nigerian money market are indeed major determinant of economy development as it relates to this sector.

Furthermore, the money market activities as means of economy development have helped the basis of operating and executing an effective monetary policy. It is an avenue to promote an orderly flow of short term funds and has ensure supply of the necessary means of expanding and contracting credit, which from our empirical findings has a positive significant relationship with economic development.


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