AN EVALUATION OF THE EFFECTIVENESS OF NEW PRODUCTS IN NIGERIAN COMMERCIAL BANKS: THE ROLE OF THE NIGERIA MONEY MARKET

1.0 Introduction

This chapter deals with the background of the study statement of problem, objective of study, research questions, significance of the study, hypothesis, scope, limitation of the study and definition of terms.

The money market is place or mechanism by which short − term funds or exchanging financial assets representing short-term claim are obtained .

A money market can be simply defined as a market consisting of financial institutions and other dealers in short term money and credit who either want to lend or borrow money .As a group , these financial organization and deders facilitates the borrowing and lending of short − term money by bringing together those institutions with surplus funds which they wish to lend on a short- term basis and those wished to borrow.

The Nigeria money market could be said to love started with the commencement of commercial banking in 1894. However , due to various military factors ,the development of the money market was not possible until the establishment of the Nigeria central bank and the introduction of the money instruments . it is important to note that the money market in Nigeria is not located in any fixed or particular place or building where money is bought and sold . it is merely a term , which embraces all the institutions that handle the purchases , sales and transfer of short term money and credit instruments . The market operates by means of the telephone or personal contacts between the participants. It is only when a deal is struck that most transactions are finally concluded at the central bank were credit and debit are raised. This is the way money market developed economics also operates ( ie mainly by telephone and personal contacts) but does not mean that the market is never a designated place.

Money market activities can be carried out at specific area, street , as in the case of well street in new York or lomba street in London . The later being almost synonymous with the London money market, is the central of bank head offices and discount houses.

The money market provides the central bank of Nigeria with a very important financial environment to implement monetary policy operating through the market , it raises or lowers bank reverse through open market purchase and sales of securities.

1.1 Background Of The Study

The era of oil boom in 1970’s in Nigeria economy lead to the nations over reliance on oil as its main source of revenue and there by ignoring other sectors of the economy hence a mono-product economy. Because of this, most of the industries established during this period depended on imported components and raw materials for their operations, and the upsurge in oil revenue during the period in question and structural distortions, it engendered assumed crisis proportions in 1986 because of the severe decline in crude oil price of that year.

A number of measures were taken by the various governments to correct the situation, but unfortunately these measures failed because the country was on mono-product economy where there are heavy dependence on oil exports and other sectors of the economy were neglected. It would also be recalled that monetary policies within this period were designed for short term crises control management, but by 1986 till date, the situation has been getting out of control which necessitated a long term crises management of the structural adjustment programme (SAP). The policy was to facilitate attainment of a lost objectives and to correct various distortions in the economy, (SAP) sought within a two year-period to correct the distortation and imbalance inherent in the economy by de-emphasing the unhealthy reliance of the country economy on oil as its main source of revenue.

The banks were chosen as main avenue through which the objectives of SAP and second tier foreign exchange market (SFEM) operation could be met, the effect of this was an unprecedented growth in the Nigeria financial sector. SAP bough to eliminate all the complex administrative both necks and this encourages reliance on market force in all sectors of the national economy.

The financial sector being very strategic for progress and development was given the latitude and encouragement to grow. This was aimed at inducing competition so that it’s full potentials particularly in areas of credit expansion and general overall good of the economy. Prior to this period, banking institution was characterized by the arm chair banking and true to their conservative tradition inherited the clearing banks of London, made modest effort, offered limited traditional product rate of growth and in order to this, deregulation has changed permanently the face of the banking industry, and has been characterized by a number of developments which sparked off stiff competition among banks which were the principal actors in the foreign exchange market operation made pretentious profit in their transactions and theirs rose significantly as a result of the boost in the naira hoping of financial institution when their foreign balance were converted to naira.

Because of the heavy turnover in the transactions, the outside investors were motivated into investing in the industry and there was motivated into investing in the industry and there was corresponding proliferation of application for banking license, this subsequently led to the registration of many new banks in the economy which was a welcome development. With this new development of multiple registrations of more banks, all those old grant banks that monopolized the business have to be alert and were ready to scramble for resources that were previously taken for granted. This lead to constant movements of staff, management and boards, in and out, new banks opening almost everyday, frequently destabilizing struggles in board rooms, the potential guidance and frequent change in regulation by the central Bank of Nigeria.

The general deregulation permitted banks to do a lot more business and particularly the distraction between Merchant and commercial Banking became very thin. Other subsequent issues are the guidelines like the increase in the statutory deposit of banks (N25 billion recapitalization) at the CBN, rough cash and liquid ratios, abolition of foreign guarantees as collateral for naira denominated loan, stabilization securities, increase in capital adequacy ratio and the prevention guidelines went further to aggravation and the cash squeeze thereby tightening the already stiff competition.

In addition to the competition between Banks and individual, the industry as a whole has been competing with non-Banks financial institutions have now become similar to those provided by commercial Banks. As a result of the competitive environment, Banks have been scrambling for deposits, which formed the main raw materials for their operations.

Banks traditionally perform the function of intermediary between savers and investors, the mobilize depositors from the surplus sector which is made up of those with many investment projects requiring more funds than they have. They also act as catalyst in capital formation which is regarded as the major policy governing the rate of economic growth and self reliance. In addition they occupy a prime and sensitive position in accelerating the development of other units in the system.

The resultant effect of licensing more Bank, monetary measures and deregulation in that the Banks are forced out to look for other avenue for deposit hence the craving to introduce new financial products to win more client and increased deposit base to enable them survive the rest of time. The growth in the number of financial products being offered by banks has been of the most striking development in the industry over the years and which has been associated with deregulation of the system in the wake of SAP.

The number of such products has grown to a far reaching competitive level and many more products are still to come, the ones in circulation now includes, weekend services , farmers guide to agricultural lending vigor, money transfer, western union money transfer, value card, smart card, UBA save for school, UBA money gram, Diamond paycard. All these products have been introduced as a result of the increased competition within the environment to enable the commercial Banks survive the stiff situation.

1.2 Statement Of The Problem:

A part from performing traditional function of the money market , are of the main reasons for establishment of Nigerianzation of the credit basis . A money market was therefore necessary in the achievement of this objective by providing outlets in term of local money assets for the investment of surplus funds in the country as well as funds repatriated from abroad . it was also necessary to provide for government a source for short- term financing which among other things can release for capital expenditure some of the fund which at that time government deployed as work capital.

The study is to assess the role of the operation of the Nigeria money market in indigenising the credit base of the Nigeria economy.

1.3 Objective Of The Study:

The objective of the study is to assess the role of the Nigeria money market in indigenising the credit base of the economy by assessing particularly:

1. The availability, adequacy and defects if any of money market instruments in Nigerian money market.
2. The level of achievement of the objectives for which it was establishment
3. The effect of money market operations on the level of external borrowing by Nigeria.
4. To make appropriate recommendations for up grading the effectiveness and efficiency of the Nigerian money market in achieving its major objectives.
5. The principal suppliers to and borrowers of fund from the Nigerian money market. What factors are responsible for this?
6. How can the defective factors identified be removed or corrected?

1.4 Significance Of The Study

The mobilization of money is an essential and important factor developing economics like Nigerian. The money market plays a significant role in the process discharges important functions to the economy by ensuring that no loose funds lie idle and by promoting efficient allocation and utilization of the resources in the economy effective performance of these and other related functions will promote the indigenization. Of the credit base of the country ‘s economy which the one of the main reason for which the money market was established.

This study will access how effectively the role of indigenization of the credit base has been played and elicit any defects in the operation of the market, the corrections of which will assist in achieving greater heights in the objective for which the Nigerian money market was established.

1.5 Scope And Limitations Of The Study

The study covered the major objectives for which the Nigeria money market was established with particular reference to the achievement of the policy indigenising the credit base of the Nigerian economy. The availability, adequacy and attractiveness of money market instruments were covered .A great majority of Nigerian banks both indigenous and mixed were involved in the study. Ample literature on the subjects was easily accessible.

The study was limited in the sense that it was not possible to visit various headquarters of the bank for oral interviews to supplement and expatiate the responses to the questionnaire. This was due to lack of funds and time as the headquarters are as far spread as Lagos, kaduna, uyo, illorin, owerri, port Hacourt, jos, Maiduguri Benin , kano and calabar etc .

1.6 Definition Of Key Terms

1. Indigenization Of The Credit Base:

Ensuring that it’s available within the country from internal sources for lending to businessmen, nascent industrialists and givernent

2. Local Monetary / Assets:

Such Nigerian money market instrument as treasury bill, treasury certificate, call money , commercial bill etc as opposed to foreign counterparts.

3. Short Term Financing / Loans:

Loans obtained or granted whose maturing period is less than 3years.

4. Mobilization Of Funds:

The process where by surplus loose and idle money circulating outside the banking system is bought within the financial system of the nation.

5. Open Market Operation (O.M.O):

The buying and selling of securities in the money and capital market by the C B N with the purpose of increasing or restrict bank lending.