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

1.   H0:    The Nigerian money market has not developed

2.   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.