Money Market Instruments and Financial Deepening in the Nigeria Emerging Economy

Florence Modupe Fapohunda ,Sunday Oseiweh Ogbeide ,Olajumoke R Ogunniyi

doi:10.7176/rjfa/10-16-07

Abstract

The study examined money market instruments and financial deepening in the context of an emerging economy like Nigeria. The study used money market instruments like Treasury bills (TBs), Bankers’ acceptances (BAs), Certificate of deposits (CDs) and Commercial papers (CPs). The ratio of money supply to gross domestic product was a proxy for financial deepening. Time series data was generated from Central Bank of Nigeria Statistical Bulletins in the period 1981 to 2016 for the study. Preliminary tests including Augmented Dickey Fuller (ADF), unit root test and descriptive statistics were carried out before the main econometric procedures were employed to analyze the data. The econometric procedures carried out include granger causality test, the ordinary least square multivariate regression method; the Johansen co-integration and the error correction mechanism methods (ECM). The study found strong effect of money market instruments on financial deepening in Nigeria in the long run. Granger causality test result revealed no directional causality relationship between Treasury bills and financial deepening, while bi-directional causality exists between Certificate of deposits and financial deepening; unidirectional causality exists between Bankers’ acceptances, Commercial papers and financial deepening. The study recommends that policies that promote trading in international money market instruments like Bankers’ acceptances should be strengthened by the Federal government of Nigeria to deepen the financial market as well as enhance the competitiveness of the Nigerian money market in the global market. This should consequently translate to financial deepening in Nigeria and improvement of the economy at large. Keywords: Financial Deepening, Treasury Bills, Bankers’ Acceptances, Certificate of Deposits and Commercial Papers. JEL CLASSIFICATION: M10 DOI : 10.7176/RJFA/10-16-07 Publication date : August 31 st 2019

Highlights

Money market as a segment of the financial markets is a market for short-term investments and in the promotion of liquidity
The study findings reveal that treasury bills (TBs), treasury certificates (TCs) and commercial paper (CPs) had no significant effect on gross domestic product but certificate of deposits (CDs) had significant impact on GDP
The findings indicate that certificate of deposits and commercial papers and treasury bills majorly determine the development of money market in Nigeria

Summary

Introduction

Money market as a segment of the financial markets is a market for short-term investments and in the promotion of liquidity. The existence of a well functioning money market is fundamental for safe income producing channel for short-term investments of funds both for banks and firms as well as for enhancement of quick liquidity (Igbinosa & Orobator, 2016). They opine that a highly developed money market is an essential prerequisite for the efficiency of monetary policy in a deregulated financial environment with the Central Bank having to increasingly use direct tools of monetary control such as open market operations to equilibrate the demand and supply for bank reserves. The role of money market instruments in financial deepening cannot be overemphasized

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Methods

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Conclusion