CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY 

The money market consists of structures for obtaining or mobilizing short-term funds or exchanging financial assets representing short-term claims.

The market trades on various instruments which essentially have short-dated maturities, usually one year. This market is an important aspect of the financial market in any economy usually a well functioning financial market gives liquidity to financial assets, in addition to the mobilization of funds from surplus units to deficit units.

The money market is better known as a place for large institutions and government to manage their short-term cash needs. However, individual investors have access to the market through a variety of different securities. In this study, various types of money market securities and how they can work in portfolio will be covered.

The money market is a subsection of fixed income market. We generally think of the term-fixed income as being synonymous to bonds. In reality, a bond is just one type of fixed income security. The difference between the money market and the bond is that the money market specializes in very short term debt securities (debt that matures in less than one year). Money market investments are also called cash investment because of their short maturities.

Money market securities are essentially IOU’s issued by government’s financial institutions and large corporations. These instruments are very liquid and considered extra-ordinarily safe. Because they are extremely conservative, money market securities offer significantly lower returns than most other securities.

One of the main differences between the money market and the stock market is that most money market securities trade in very high denominations. This limits access for the individual investor. Furthermore, the money market is a dealer market, which means that firms buy and sell securities in their own accounts, at their own risk. Compare this to the stock market where a broker recover commission to act as an agent, while the investor takes the risk of holding stock. Another characteristic of a dealer market is the lack of central trading floor or exchange. Deals are transacted over the phones or through electronic systems. 

The easiest way to gain access to the money market is with money market mutual funds, or sometimes through a money market bank account. These accounts and funds pool together the assets of thousand of investor in order to buy the money market securities on their behalf. However, some money market instruments, like the treasury bills may be purchased directly. Failing that, they can be acquired through other large financial institutions with direct access to these markets.

As a money market trader you will always be attempting to make more projects than losses from the fluctuations of exchange rate between currencies in the money markets, in short, this is what is called money market trading. The good news is that nobody is going to ask you for a diploma, or somehow verify the amounts of hours you have spent studying the money market (FOREX). All you need is the proper training and the tools that will help you become a profitable trader. But you become a only advantage you get when trading money market, compared to other ways of investment and speculation as stocks. There are other advantages that will inspire the decision for money market and forget about stocks and commodities.

While denoting trading in money and other short-term financial assets, the money market comprises all the facilities of the country for the purchase and sale of money for intermediate and deferred delivery and for the borrowing and lending of money for short period of time. It is a manifestation of dealing in short-term financial instruments on the one had and a collection of the dealers in these assets on the dealers in these assets on the other hand. It is thus a collection of financial institutions set up for the granting of short-term loans and dealing in short term securities gold and foreign exchange.

The existence of a well developed and a sensitive money market is necessary policy of the central bank. This is because through the money market the central bank can influence the short and the term structure of interest rates, and thus make an impact on other rate as well. The existence of efficient money markets enables commercial banks to conduct their operations with smaller cash reserve rations. That is, the money market impacts an element of efficiency to the working of the banks with the existence of a bill market, the money market helps in financial trade and business activities and hence promotes competition and trade generally.

STATEMENT OF THE PROBLEM 

These short-term instruments (money market) involve a small risk due to loss, because they are issued by obligors of the highest credit rating as they mature within one year. The instruments employed and the methods of operation is not strong enough to adapt or changes in the economic and financial structure. Investors in Nigeria have lost confidence in the money market system because of the unstable, inefficient and rigid system, especially in time of financial panic. It is a system that cannot absorb shocks arising from the greater than anticipated risks.

In the money market instrument, the commercial paper is a unsecured money instrument sold in the market. In the others, the investor is liable to any risk that may arise. The impact of money market on the economic development of Nigeria has necessitated several policy measures implemented to deal with the impediments of the money market.

The policy measures geared towards the money market promotion have had their short falls, and limitations have been dealt with and this with go a long way to upgrade economic development in Nigeria.

OBJECTIVES OF THE STUDY

To sustain the temporary financial needs of the governments.

To provide the monetary authorities with the environment for implementing monetary policy.

To provide opportunities for the mobilization of short-term funds to meet the credit and financial needs of the private sector of the economy.

The money market also impact liquidity to short-term financial assets.

The market assist banks to efficiency manage their liquidity position.

The market assists in domestic debt management.

Sustaining of international trade and payment system.

HYPOTHESIS

Ho: Money market has no positive impact on economic 

development in Nigeria.

Hi:Money market has positive impact on economic development in Nigeria.

2. Ho: Money market does not have significant of an 

economy 

Hi: Money markets have significant effect on the 

domestic debt management of an economy.

SIGNIFICANCE OF THE STUDY

The underlying motive of any research is “the deliberate attempt to solve knotty problems of human ignorance”.

Thus, this study is expected to identify the structure of the money market and features of a developed capital market with the identification of these factors the policy market will be in a position to strengthen and regulate those factors that aid improved money market as well as modify and avoid any negative forces.

A surgical review of the money market which is of fundamental importance in the regulation of any various economies is therefore an essential decision in this direction.

This study will therefore assist the policy maker in:

Improving the performance of the money market.

Ensuring easy access to the capital market through money market mutual funds.

Performing for the country all the functions which a money market traditionally performs such as the provision of the basis for operating and executing on effective monetary policy.

Mobilizing resources for investment purpose.

Providing banks the basic financial instruments for effective management of their resources.

It thus helps them to diversity their assets holdings.

LIMITATIONS OF THE STUDY

As it is common to most research, this project is not without limitations. By virtue of the subject matter, with its complex nature, time factor, financial and material requirements, the research has to limit the investigation and findings to the Nigeria economy.

SCOPE/LIMITATION OF THE STUDY 

The project topic “money market and the development of the Nigerian economy” has the entire Nigeria economy as its focus. Because of time and logistic reason, however, some variables will be chosen as the sample in the expectation that the result of such process would present a fair and valid picture necessary for generalization.

The study will also appraise the advantage, features and the policy programs of the money market in Nigeria and how far they have helped in promoting overall growth and development of the Nigerian economy.