NI G E R I A

FSS2020:

SECTOR REPORT
MONEY AND FOREIGN EXCHANGE MARKETS
 CONTENTS
Abbreviations

Introduction
1.0 Sector Overview
Industry Structure
Money Market
Foreign Exchange Market
2.0 Sector Trends
Market Size and Growth
Recent Developments
Products and Services
3.0 G l o b a l T r e n d s
Overview of Trends
4.0 Key Issues and Challenges
Money Market Challenges
Foreign Exchange Market Challenges
5.0 Strategic Direction
Vision
Mission
Impact on Extended Environment
Strategic Objectives
Initiatives
6.0 Implementation Plan
Tables

Page 2 of 43
ACRONYM NAMES
Acronym Description
ADR Alternative Dispute Resolution
ASCE Abuja Stock & Commodity Exchange
ATM Automated Teller Machines
BA Bankers Acceptance
BDC Bureau De Change
BOFIA Banks & Other Financial Institutions Act
BRIC Brazil, Russia, India, China
CAMA Companies and Allied Matters Act
CBN Central Bank of Nigeria
CCI Certificate of Capital Importation
CIS Competency Information System
CP Commercial Papers
COT Commission on Transaction
CSCS Central Securities Clearing System
DAS Dutch Auction System
DFIs Development Finance Institutions
DMBs Deposit Money Banks
DMO Debt Management Office
ECOWAS Economic Community of West African States
EEG Export Expansion Grant
EMP Emerging Markets Partnership
FDC Financial Derivatives Company
FGN Federal Government of Nigeria
FHA Federal Housing Authority
FIS Financial Information System
FOEX Foreign Exchange
FSRCC Financial Sector Regulatory Coordination
Committee
FSC Financial Services Commission
FSS Financial System Strategy
FSI Financial Services Industry
FSS2020 Financial System Strategy 2020
FST Financial Services Tribunal
FTS Financial Trading System
GDP Gross Domestic Product
HCD Human Capital Development
ICAN Institute of Chartered Accountants of Nigeria
ICT Information and Communication Technology
IDC Industrial Development Centre
IFC International Finance Corporation
IOUs I Owe You
IS Act Investment & Securities Act
IST Investment and Securities Tribunal
LIBOR London Inter-Bank Offer Rate
LFC Lekki Financial Corridor
KYC Know-Your-Customer
MPC Monetary Policy Committee
NACS National Automated Clearing System

Page 3 of 43
Acronym Description
NAICOM National Insurance Commission
NDIC Nigerian Deposit Insurance Corporation
NBA Nigerian Bar Association
NEEDS National Economic Empowerment and Development
Strategy
NGO Non Governmental Organisation
NHF National Housing Fund
NHIS National Health Insurance Scheme
NIBOR Nigeria Inter-Bank Offer Rate
NIDS National Instrument Depository Service
NISNPSC National Payments System Committee
NSE Nigerian Stock Exchange
NSITF Nigerian Social Insurance Trust Fund
OBB Open Buy Back
OMO Open Market Operations
OTC Over-The-Counter
PENCOM National Pension Commission
PFA Pension Fund Administrators
PFC Pension Fund Custodian
PMI Primary Mortgage Institutions
PMO Project Management Office
PRISMS Promoting Improved Sustainable Micro, Small and
Medium Enterprise Services
RDAS Retail Dutch Auction System
REITs Real Estate Investment Trusts
RTGS Real Time Gross Settlement System
SBDC Small Business Development Centres
SFEM Second Tier Foreign Exchange Market
SEC Securities and Exchange Commission
MSME Micro Small and Medium Enterprises
SME Small and Medium Enterprises
SMEDAN Small and Medium Enterprises Development
Agency of Nigeria
SMID Small and Medium Industries Department
SRO Self Regulated Organisations
STI Second Tier Institution
TB Treasury Bill
UAE United Arab Emirates
USAID United States Agency for International
Development
VAT Value Added Tax
WDAS Wholesale Dutch Auction System

Page 4 of 43
INTRODUCTION

In this report, an attempt has been made to outline the key

challenges/opportunities in Nigeria’s money market and the strategic
objectives and initiatives needed to position the market to achieve the
mission and vision of the FSS2020 project. For the purpose of this report,
the term Nigeria’s money market refers to the segment of the Nigerian
financial system comprising both the money and foreign exchange
markets. In some cases, the terms are used interchangeably. However, as
is the practice globally, money market generally includes transactions and
dealings in both local and foreign currencies. In most cases, both have the
same dealing room and are not clearly delineated. In the course of the
report also, references are made to the capital market because of its
linkages with the money market. In most markets, the capital market is
considered an extension of the money market and vice versa.

The report also outlines quite succinctly the vision and mission of Nigeria’s
money market and its implications for the overall Financial Services
System. It highlights the critical path for the attainment of the goal of a
financial hub status for Nigeria by the year 2020 and how the money and
foreign exchange markets can facilitate the realization of this goal. The
implementation plan is in a series of sequential steps that will lead to the
accomplishment of the goal of the FSS2020 at the target time.

Page 5 of 43
SECTOR OVERVIEW

INDUSTRY STRUCTURE

MONEY MARKET
The evolution of Nigeria’s money market dates back to 1894 when
commercial banking and a formalized channel of savings mobilization were
introduced into the country. Afolabi (1991) notes that the establishment of
the CBN in 1959 provided an impetus for the development of a virile
money market because it’s enabling Act endowed it with statutory
obligations for savings mobilization. The market as it is today comprises of
all the banks, financial institutions, the Central Bank of Nigeria and all
those other players actively involved in the trading and exchange of money
(local and foreign currency). Its component parts are inclusive of the
following:

Government Securities Market (Treasury Bills)

Treasury bills are IOUs issued by the FGN for a tenor of 91 days. Although,
182 day bills and other tenors have been introduced the 91 day Treasury
Bills are the main bills issued and subscribed. Treasury bill sales by the FG
reflect a desire to reduce money supply and vice versa. However, over
time, Treasury Bills have emerged as the dominant instrument in the
money market.

The market for Treasury Bills can be segmented as follows:

 Primary Market – Markets for new Issues;
 Secondary Market – where already issued bills are traded;
 Discount Window – where the CBN offers rediscounting facilities for
treasury bills; and
 Open Market Operations (OMO) – which is the primary instrument the
CBN uses for monetary management. Although Treasury Bills are
frequently used for OMO, the CBN had also issued its Bills for monetary
management.

The total value of Treasury Bills issued in 2005 was N2.52trn, a 27.4%
decline when compared with the N3.47trn issued in 2004. This decline was
mainly due to the restructuring of the tenor and issue programme, the
preference for foreign assets with more attractive yield and increased
investment in the capital market driven by the increased number of Initial
Public Offers (IPOs) in 2005. Treasury Bill rates have also plunged in
recent times declining from an average of 12.2% in 2005 to an average of
6% in 2006. An analysis of holdings of the treasury bills outstanding
reveals that deposit money banks (DMBs) and discount houses were the
major holders, jointly accounting for 68.4% of the total; with the non-bank
public holding 21.9% and the balance of 9.7% held by the CBN.

Interbank Market

Page 6 of 43
This is the market where unsecured money is traded by banks and
discount houses. It is a segment within the money market for unsecured
placements and borrowings of currencies amongst the players in the
economy. Banks and Discount Houses are the leading players in this
market. It is however dominated by the big banks who are the net placers
and the structure has remained relatively unchanged post-consolidation in
the banking sector. In 2005, the turnover in the interbank funds market
rose by 21.6% over the preceding year to N5.6trillion. There was marked
preference for investment in government securities by market players to
hedge against risks due to the consolidation in the banking sector. This
coupled with excess liquidity in the system led to a downward trend in
interbank interest rates in all segments of the market compared to the
previous year. Interbank call rates in the market ranged from 3.9% to
10.7% for most of the year with the exception of November when it spiked
to 16.8%, 500 basis points higher than the previous year. On a monthly
basis, call rate declined to an average of 7.9% in 2005, lower than 13.5%
in 2004. In the same vein, monthly average rates for 7-day and 30-day
NIBOR fell to 10.7% and 12.8% compared with 17% and 18.5% for the
previous year.

Nigeria Interbank Offer Rate (NIBOR)

The NIBOR was originally modelled after the LIBOR, but it lags behind on
account of inherent inadequacies such as inefficient pricing rates, high
market volatility, wide spreads between deposit and lending rates, a
relatively short yield curve, frequent market dislocations, etc.

The Commercial Paper Market

The Commercial Paper (CP) is an unsecured obligation issued by a
corporation or bank to finance its short-term credit needs, such as
accounts receivable and inventory. Maturities typically range from 2 to 270
days. Commercial paper is available in a wide range of denominations, and
can be either discounted or interest-bearing. CPs can be resold in a
secondary market. Commercial papers are usually issued by companies
with high credit ratings (blue chips), meaning that the investment is
almost always relatively low risk.

The commercial paper market in Nigeria is still relatively undeveloped as

reflected by its low volumes. In 2005, commercial paper sale amounted
to N194.6billion or 16.9% of total money market instruments. Although,
the value of CPs grew by 54% over the previous year, only a relatively few
companies play in the commercial paper market currently compared with
Britain and other markets. The key problem here is the perception of risk-
by the majority of the companies in the Nigerian market. The existence of
a viable rating mechanism for corporate debt instruments is likely to boost
growth in this market.

Bankers' Acceptance

A bankers' acceptance is a draft or an order to a bank by a bank's

customer to pay a sum of money at a future date, typically within six
Page 7 of 43
 months. Bankers' acceptances are considered very safe assets, as they
allow traders to substitute the bank's credit standing for their own. They
are used widely in foreign trade where the creditworthiness of one trader
is unknown to the trading partner. Acceptances sell at a discount from
face value of the payment order. Bankers Acceptances constitute the least
amongst the instruments traded in the money market.
The BA market in Nigeria is relatively underdeveloped but has the
potential for growth. The stock of Bankers Acceptances rose in 2005 but
at a slower rate than the previous year. The total value of Bankers
Acceptances was N42.35billion or 3.7% of total money market
instruments. The growth rate in 2005 was 2% compared with 27% in
2004. In addition, the share of Bankers Acceptances in total money
market instruments declined from 4.1% in 2004 to 3.7% in 2005,
reflecting the dominance of government treasury bills in the market as
most players stuck to risk free instruments following the banking sector
consolidation exercise.

Table 1: Nigeria’s Money/Financial Market: Looking Ahead

Indicators 2005 2020
Money Supply ($bn) 20.55 81.33
Treasury Bills ($bn) 19.69 42.19
Commercial Papers ($bn) 1.52 46.88
Bankers Acceptances ($bn) 0.331 7.97
Interbank ($bn) 43.75 437.5
Domestic Credit ($bn) 17.97 179.7
Value of Cheques ($bn) 0.109 10.9
% Share of Cross-border bank lending ? 10
% Share of Foreign equities turnover ? 3
% Share of OTC derivatives turnover ? 5
% Share of Marine Insurance net premium income ? 8
%Share of International bonds (secondary market) ? 10
% Share of Hedge-fund assets ? 5
Source: FDC Research

Savers/Lenders: Structure of the Nigeria’s Money Market

Instruments:
Figure 1
 Individuals,  Deposits (Time, Demand,
Institutional Savings)
Investors (PFAs,  Page 8 of 43
Treasury Bills, Treasury
Insurance Firms, etc) Certificates, etc
 BAs, CPs, OBB, etc
  Individuals (Mortgages,
Direct or non-intermediated Asset Acquisition,
Investment, etc)
Finance (Informal Sector)  Corporate (Investment,
Working Capital, etc)
 Banks (to cover short
term position)

Financial
Intermediaries:
 Banks
 Discount Houses
• CBN
The model above shows the flow of money between suppliers and users of money and the
intermediaries and may be useful in explaining the structure of Nigeria’s Money Market.
The model is rather simplistic and does not reflect all the intricacies and nuances in the
money market.

The key participants or players in Nigeria’s money market include:

 Federal Government of Nigeria which uses the market as a
means of borrowing short and medium term funds to be channelled to
targeted sectors of the economy.
 Central Bank of Nigeria which participates by formulating
monetary policies which set goals and direction for the economy. It utilizes
various measures in determining the level of money supply, credit
availability, and interest rates. These include the cash reserve ratio for
banks, the rate at which it discounts Treasury Bills at the OMO and the
sale and purchase of Treasury Bills to either increase or decrease money
supply. The level and rate of intervention in the market assists the CBN in
maintaining macroeconomic stability.
 Commercial Banks which participate in the market for a variety of

reasons. First, it is a statutory requirement that banks should hold

treasury bills as part of their assets. They also engage in securities trading
in the market as a means of making profit i.e. for investment purposes.

Page 9 of 43
Banks may also patronize the money market to cover their short positions
i.e. to improve their liquidity.
 Discount Houses are specialized financial institutions which
intermediate in the money market by accepting short-term monies for
onward investment in short term financial securities from banks,
institutional investors, non-bank financial institutions and high net worth
individuals. In Nigeria, Discount Houses are the intermediaries in the
government securities market between the CBN and banks. They help in
facilitating OMO of the CBN by acting as market makers.
 Non Bank Financial Institutions are financial institutions
providing advisory services as well as investment and short term lending
to individuals and corporate. Some of the instruments utilized in this
segment are commercial papers and short term deposits. They also act as
advisers for companies intending to raise funds through private placement
or from the stock market, etc.
From available data, the users of the money market instruments can be
segregated as shown in the fig 2 and 3 below using Treasury Bills and the
distribution of credit to the economy:

Figure 2 Holders of instruments e.g. Treasury Bills

Page 10 of 43
 Distribution of T/Bills Subscription (%)

39%

57%

4%

Deposit Money Banks Central Bank Non-Bank Public*

Source: Central Bank of Nigeria

Figure 3 Distribution of Credit to the Economy

Source: CBN

FOREIGN EXCHANGE MARKET

Foreign exchange market is the pivotal facilitator of exports and imports

43%
all over the world. The banking institutions within and outside a particular
country usually drive this market. Within this market, different types of

Page 11 of 43
exchange rate systems are used to estimate the net worth of one
currency in terms of another. The exchange rate is essentially the rate
which a particular currency can be exchanged for and converted to
another currency.

Nigeria’s foreign exchange market is dominated by the Central Bank of

Nigeria which supplies about 40% of total. Other sources include export
proceeds from non-oil sector and international inward money transfers.
The key players in the sector are briefly outlined below:

The Central Bank of Nigeria

The CBN is a major supplier of foreign exchange earned from sales of
crude oil as well as a regulator. It also utilises Foreign Exchange as a
means of liquidity management. Recently, the CBN introduced currency
swaps with some banks and released new guidelines on Foreign Exchange
operations in early December 2006. This relaxed some restrictions on
foreign exchange dealings and introduced derivatives trading. It currently
supplies about 38%–40% of the foreign exchange as against 60%–70% in
the past. The balance of about 60% is currently being supplied by
autonomous sources including diaspora remittances, oil company sales,
and export proceeds.

Figure 4

Page 12 of 43
 Forex Sales to Authorised Dealers
2% 1% 0.6%
12%

10% 39%

34%
2%

CBN Non Oil Exports Ordinary Dom Accounts

Oil Companies Capital Importation OTC Purchases
Home Remittances External Accounts

Source: CBN

The Major Oil companies

These are the key operators in Nigeria’s upstream oil sector in joint
ventures with the Nigerian National Petroleum Corporation (NNPC). These
companies usually sell Foreign Exchange in the interbank to fund their
naira operations in Nigeria. They currently account for about 9.6% of the
market.

Non-oil sector
The non-oil sector accounts for about 1.7%, which is a relatively small
proportion of the market, and which are mainly from Nigeria’s export sales
apart from crude oil. Total foreign exchange earnings from non-oil sector
declined by 21.5% in 2005 to $0.7bn. It is expected that with the recent
focus on the non-oil sector, this sector may become a key source of
foreign exchange earnings.

Diaspora Remittances
This is mainly remittances from Nigerians working overseas. It has been
growing in recent times following the improved macro-economic
environment in Nigeria. It is estimated that this inflow amounts to about
$4bn annually and contribute significantly to the funding of the market.
Page 13 of 43
Most of the remittances are usually through Money Transfer Organizations
(MTOs).

Page 14 of 43
 SECTOR TRENDS
Prior to the banking sector consolidation, the money market was basically
oligopolistic with the top ten banks controlling the lion share of total
deposits, foreign exchange activities, loans and advances etc. Of the 25
existing banks, the top five banks still control a larger share of total
deposits and are dominant in all key operational areas. In the Inter-bank
market, these banks are the net placers of funds and have the largest
share of Treasury Bills holdings.

MONEY MARKET TRENDS

Market Size & Growth
Table 2 below shows the five-year summary of the volumes of the
instruments traded in the Money Market. It was observed that the value of
TBs issued declined by 2.06% to N854 billion in 2005, while the value of
development stocks remains unchanged at N1.25billion. Other instruments
(BAs and CP) rose by 1.92 and 119.1%, respectively over their 2004
levels.

Table 2 Five-Year Summary of Money Market Instruments

Value of Money Market Instruments (N’bn)
2001 2002 2003 2004 2005
Treasury 578.5 733.8 825.1 871.6 854
Bills
Development 3.62 2.37 1.03 1.25 1.25
Stocks
Bankers 36.5 42.6 32.9 41.6 42.35
Acceptances
Commercial 35.3 37.14 37.3 88.83 194.59
Papers

Source: CBN Annual Reports

Regulation of the Market

Page 15 of 43
The money market is regulated by the Central bank of Nigeria. However,
since most of the key players like banks are publicly quoted companies
that are listed on the Nigerian Stock Exchange, they are subject to the
regulatory oversight of the SEC and the NSE. The table below summarizes
how the players in the market are regulated:

Table 3 Regulation of Money Market

R e g u la t o r s C o m m e r c i aDl iBs ca on uk ns t HF oi nuas necse C o mL e pa as nini egs C o m p a n i e s

C e n t r a l B a n k o f N i g e r Xi a X X X
S e c u r i t i e s & E x c h a n gXe C o m m i s s i o n X
N ig e ria n S t o c k E x c h a n g e X
N i g e r i a n D e p o s i t In s u Xr a n c e C o r p o r a t i o n

Source: FDC Research

In June 2004, the CBN introduced industry wide reforms to reposition

Nigerian banks. This resulted in the liquidation of 11 out of the existing 89
banks while the rest merged to form 25 banks. The reduction in the
number would enhance CBN’s regulatory oversight functions as there are
fewer banks to be supervised. The CBN also decided to adopt a more
proactive approach to its regulatory functions. The consolidation
programme was aimed at forestalling bank failures and the likely contagion
effect.

Recent Developments
In the last 1-2 years, there have been some remarkable developments in
the industry. Some of these are:
 Banking consolidation, this reduced the number of banks by 72% from
89 to 25 and increased the minimum shareholders’ funds by over 1000%
to N25billion.
 Increased the number and variety of instruments

 Restructuring of the national domestic debt, through the introduction of

longer term Treasury Bills (182-day bills, CBN OMO bills, etc) by the CBN.

Page 16 of 43
 The introduction of FGN Bonds of various maturities by the Debt
Management Office.
 The appointment of primary dealers in government securities by the
CBN, thus removing the monopoly held by discount houses.
 The reconstitution of National Payments System Committee (NPSC)
with high level representations to ensure effective policy formulation and
execution
 Implementation of two major information technology (IT) initiatives –
the Real Time Gross Settlement (RTGS) and Temenos T24. The
deployment of the T24 was operationally test-run in Lagos, Abuja, and
Minna.
 The approval of the Nigerian Cheques Printers Accreditation Scheme to
combat the emerging trend of relatively high MICR rejects in cheque
clearing as well as enhancing greater efficiency in the payment system.
 Introduction of the National Savings Certificate (NSC)
 Movement of Public sector deposits to the Central Bank of Nigeria
 Introduction of settlement/clearing banks.
 International ratings of some Nigerian banks.

Impact of Recent Initiatives on the Money market

The following are some of the responses noticed in the market to the
reform measures introduced.
 The introduction of longer-tenor treasury bills has helped in the
management of liquidity to the extent that M2 growth stayed nearer target
since 2004.
 Increased number of instruments with varying maturities, leading to
the emergence of a yield curve, which was non-existent before.
 The introduction of FGN bonds to some extent has succeeded in
lengthening the maturity profile of domestic debt. In addition, the
composition of domestic debt currently shows a slight reduction in the
share of Treasury Bills.
 Bank deposits increased by 44.5% with the introduction of electronic
payment systems and is expected to increase as banks ramp up the ATM

Page 17 of 43
and electronic payment products in partnership with other sectors like
telecoms and FMCG
Attempts to develop a secondary market for bonds are yet to produce the
desired result due largely to skill gap and risk-averse nature of key
players.

Page 18 of 43
FOREIGN EXCHANGE MARKET TRENDS
Market Share Analysis
The top five (i.e. 20%) of the 25 Nigerian banks currently account for
about 47.5% of total Foreign Exchange market share compared to the pre-
consolidation period when the top 10 banks (11%) accounted for over
80% of total Foreign Exchange market share.

Figure 5 Foreign Exchange demand by Banks in the 1st 12

Auctions of the WDAS
W
DAS1-1
2
N
IB 1
1.3
9

Z
ENIT
H B
ANKP
LC 1
1.2
8
IN
TER
CON
TIN
ENT
ALBA
NKP
LC 8
.86
F
BN 8
.46

O
CEA
NICB
ANKIN
T'LPL
C 7
.55

D
IA
MON
DBA
NKP
LC 6
.67

G
TBA
NK 6
.51

W
EMAB
ANKP
LC 5
.21

E
COB
ANK 4
.97
S
TAN
CHA
RT 4
.88
U
BAP
LC 4
.39
F
IDE
LIT
YBA
NKP
LC 2
.28
A
CCE
SSBA
NKP
LC 2
.20
S
TAN
BICB
ANK 2
.03
IB
TCC
HAR
TER
EDB
ANKP
LC 1
.71
S
PRIN
GBA
NKP
LC 1
.49
U
BNP
LC 1
.46

F
CMB 1
.46

S
KYEB
ANK 1
.35

E
TB 1
.35

A
FRIB
ANKN
IG
ERIAP
LC 1
.22
U
NIT
YBA
NK 1
.09

P
LAT
INU
MHA
BIBB
ANKP
LC 1
.02

B
ANKOFIN
DUS
TRYL
IMIT
ED 0
.65

F
IR
STIN
LAN
DBA
NKP
LC 0
.39

S
TER
LIN
GBA
NKP
LC 0
.12

0 1 2 3 4 5 6 7 8 9 1
0 1
1 1
2

Source: CBN

Market Size & Growth Trends

Total Foreign Exchange inflow grew by 38% to $38bn in 2005 with the
CBN accounting for 93.2% and private sources making up the balance of
6.8%. Further breakdown of the private sector receipts indicate that non-
oil receipts declined by 39.5% to $841m whilst capital flows increased by
161% to $1.73bn. The reduction in non-oil receipts was traced to the
removal of the Export Expansion Grant (EEG), which was restored
recently.

Page 19 of 43
Table 4 Foreign Exchange Market Summary

Forex Market Five Year Su

According to the CBN, total utilization of official Foreign Exchange receipts

was $24.3bn in 2005, an increase of 58.4% over the preceding year.

Official Receipts
Increased out-payments for imports, external debt service and other
official payments were factors accounting for the increase.

Official Sales ( WDAS/DAS

Figure 6

Official Forex Utilisation in 2005.

Official Ave. Exchange Rat

37%

Source: CBN
63%
0.4%

External Debt Services National Priority Project Domestic Use

Source: CBN

Foreign Exchange Market Regulation

The Foreign Exchange market is regulated by the Central Bank of Nigeria.
The CBN issues guidelines in line with its monetary policy management
framework. In recent times, there has been an attempt to liberalize the
market and move the naira towards convertibility. The steps taken so far
as well as the impact on the market are discussed in subsequent sections
of this report.

Page 20 of 43
Recent Developments
The steps taken in the last three to four years by the CBN has altered the
dynamics in the foreign exchange market significantly. A number of
initiatives were implemented which yielded positive results including the
convergence of the various segments of the market. Some of the
initiatives included but not limited to the following:

 Wholesale Dutch Auction System (WDAS): This was introduced by

the CBN to replace the Retail Dutch Auction System which had operated
for four years. WDAS was preceded by some policy measures aimed at
smoothening the transition process. These were:
− special Foreign Exchange auctions to deposit money banks which
were allowed to purchase on their own account; and
− reduction of documentation requirements as a mark of the imminent
liberalization of the market.
 Sales of Foreign Exchange to Bureau de Changes (BDCs): This
step was taken to further enhance the foreign exchange market
liberalization. The BDCs are serving as brokers to the market in order to
increase foreign exchange supply to the third level of the market. This
policy helped to revive the otherwise dormant BDCs segment of the
market and reduced significantly the premium between the official and
parallel rates. Many banks now run their own BDCs to take advantage of
the policy. The increased supply has led to has meant that the exchange
rate in the parallel segment appreciating significantly resulting in the
convergence of rates.
Other reform measures in the Foreign Exchange market include:
 Relaxation of the restrictions on Foreign Exchange transactions such as
allowing another authorized dealer apart from the initial dealer to use a
Certificate of Capital Importation ( CCI)
 Removal of the restrictions subjecting the use of foreign trade finance
facilities to the purchase of plant, machinery and raw material
 Negation of the need to get CBN approval for foreign bank guarantees
 Allowing Nigerian residents abroad to source funds from the Foreign
Exchange market in foreign currency-denominated securities, subject to

Page 21 of 43
repatriation of the earnings from investments in ordinary domiciliary
accounts
 Repayments of foreign currency borrowings from Nigerian banks now
allowed for all projects including those that are capable of conserving
Foreign Exchange through production of goods and services.
 Expansion of the dealings in the Foreign Exchange market to include
derivatives such as forwards and swap transactions.
 Expanded list of eligible transactions

Liberalization of the Foreign Exchange Market

The recent liberalization of the Foreign Exchange market was aimed at
making the market more dynamic and responsive to the banking sector
reforms. The steps taken since February 2006 were:

 Introduction of WDAS eNoodle ( Electronic Naira Dollar Exchange)

 Liberalization of the supply side
 Liberalization of the demand side
 Deepening the market by encouraging the use of derivatives
 Enhanced dealing with improved tools and skilled dealers
 Daily dealing in addition to weekly auctions
 Introduction of two-way quotes
 Adoption of multiple-pricing method
 Timing for the auctions may or may not be predictable
 Results must be known within one hour

PRODUCTS/SERVICES

The key products/services provided in the money and foreign exchange

markets include:

Money Market Products/Services

 Treasury Bills (90-day, 182-day, etc)
 Commercial Papers
 Bankers Acceptances
 Treasury Bonds
 Federal Government Development Stocks
 Deposits ( Time, Demand, Savings),
 Loans ( Short or Long Term)

Page 22 of 43
 Advisory Services, etc

Foreign Exchange Market Products/Services

The foreign exchange market is predominantly a spot market. However,
the CBN recently introduced swaps & forwards contracts. These products
are relatively undeveloped as only the foreign banks (Standard Chartered,
Citibank, Stanbic) trade in forwards.

Page 23 of 43
 GLOBAL TRENDS
OVERVIEW OF TRENDS
Money & Foreign Exchange markets in mature economies have undergone
significant changes over time, driven by technology and global
interdependence. This trend is helping to increase the choice available for
global consumers. There is a rush to make domestic markets more
competitive in the quest to achieve financial hub status. Countries like
Singapore, Dubai, Hong Kong, South Korea, are deliberately pursuing the
strategy of attaining the status of financial hubs. The existing global hubs
are also constantly re-evaluating their positions seeking to consolidate and
expand their influence in the global economy e.g. London, New York.

The Competition for Financial Hub status is keen

The competition among the existing financial hubs is keen. For instance,
the Mayor of New York recently commissioned a consulting firm (McKinsey)
to take New York to No. 1 ahead of London. The Mayor of London also
recently celebrated the 20th year of its dream to emerge as the global
financial powerhouse of the world. The City had on October 17, 1986 kick-
started a number of processes later dubbed the “Big Bang” which
transformed London into the Mecca of financial services in the world.

Financial Market Reforms accompanied by Economy-wide reforms

A common factor in most of these economies is that financial market
reforms have been complemented by economic, political & social reforms.
These reforms created the right atmosphere and enhanced the adoption of
market-based strategies as against regulatory dominance. In these
economies also, the transformation process was driven by the adoption of
a single theme. For example, in Singapore the theme “Going Global” was
adopted. The Monetary Authorities of Singapore had as its basic philosophy
the need to ensure that the orientation of the players/stakeholders was
international and not regional. That is, the central focus was to raise the
Singaporean financial markets to global standards. To ensure global best

Page 24 of 43
practices and make the market a melting pot for global financial
transactions.

Investor Protection
In most emerging and existing financial centres, a strong emphasis is
usually placed on “Investor Protection”. This single factor is crucial to
international perception of the safety of investments in key financial hubs.
Investor protection is an essential element for the evaluation of financial
hubs globally. The extent to which local laws and legislation protect
international investors is vital to attracting and retaining global players in
financial centres.

OUTCOME OF FINANCIAL MARKETS REFORM

Financial Markets Reform resulted among other things in the following:
 Transformation of the opportunities for borrowing, saving &
investments for households and firms thus increasing the choice available
to customers. For example households now have access to a broader range
of borrowing options (e.g. through the widespread use of credit cards,
home & equity loans) in these markets. Apart from borrowing, the reforms
have also enabled easy investment in financial instruments such as stocks,
bonds, mutual funds and derivatives.
 Corporate firms are increasingly able to diversify their financing
needs away from the traditional channels (banks) through the issuance of
corporate bonds in capital market. Banks themselves are increasingly
moving away from plain vanilla services of deposit taking and lending to
fee-generating activities, such as the securitization of loans and the sale of
risk management products. According to experts, this increase in
securitization is through the use of instruments such as collateralized debt
obligations (CDOs). Thus, banks are now able to unbundle financial risks
by repackaging them into portfolios of financial instruments and
transferring it to investors willing to assume such risks. Another
development is the fact that reforms in major financial markets have led to
an expansion of cross-border financial intermediation especially at the
wholesale level. This is typified by the increasing foreign investments in
domestic mortgage-backed securities in a number of countries, in spite of
Page 25 of 43
the fact that household mortgages are still largely originated by domestic
financial institutions.

Page 26 of 43
 KEY ISSUES AND CHALLENGES
There are several challenges facing the money & foreign exchange markets
in Nigeria currently. An attempt is made hereafter to summarize these
challenges into the following broad categories:

MONEY MARKET CHALLENGES

Market Imperfection and Shallowness: the money market is

characterized by few players and information is not readily available (there
is information asymmetry, as it is an over the counter market). There is
also an inefficient pricing mechanism due to a disconnection between the
anchor rate (MRR) and the market rate. Because of the uncertainty in the
market rate, players are discouraged from taking a long-term position.

Lack of diversity of available instruments: there is a limited variety of

instruments issued in the market.

The secondary market is relatively immature: this is due largely to

the shallowness of the primary market; the repo market is inactive and
does not allow the use of a larger coverage of collateral (only T-Bills and
bonds are allowed and the repo window is largely overnight.

High incidental costs: statutory (primary) costs are high, and non-banks
that wish to play in the money market are subject to paying COT
(secondary costs) which is not required in the inter-bank market e.g. With
Holding Tax (WHT) on interests.

The banking system is highly reliant on government (pubic sector)

deposits: reliance of banks on public sector deposits has an indirect
impact on the money market due to the volatile nature of this source.

Lack of adequate and timely market information: there is no

structure for ensuring that market data are readily available to players in
the market on a need basis and as at when available e.g. the results of the
Open Market Operations (OMO).

Inadequate Skilled Manpower: There is shortage of skilled manpower in

the relevant key disciplines needed for the growth of the market.

Page 27 of 43
 Impact of these Challenges on the Money Market
The challenges outlined above are crucial to the elevation of the money
market to the level required of a hub. So far, these challenges have the
following effect on the market.

Figure 7 Impact of Challenges on Money Market

s/n Challenges Impact on the Money Market

1 Relatively Shallow Market Increases market volatility

2 Dependence on Government Results in narrow instrument range/slow

growth of secondary
3 Information Gap & Asymmetry Market inefficiency

4 Human Capacity Gap Low market development

Source: FDC Research

FOREIGN EXCHANGE MARKET CHALLENGES

Limited Domestic Currency Convertibility: Partial liberalization of the

current account limits the full convertibility of the local currency.
Foreigners are not allowed to invest in instruments with less than one-year
maturity and Nigerians are not allowed to purchase the value of foreign
exchange that they desire.

The market is relatively a spot market: there is currently limited

platform for the trading of foreign exchange futures, forwards, swaps, etc.

Over dependence on oil as the source of foreign exchange: oil

earnings account for over 95% of foreign exchange earnings for the
country, which are only supplied via the Central Bank of Nigeria to the
market. The market is vulnerable to exogenous shocks and the currency
could be susceptible to speculative attack.

The Nigerian external sector relies mainly on trade flows and

supported by external reserves: investment flows are limited and thus
Page 28 of 43
Nigeria rely on trade flows which is complemented by the external
reserves.

Page 29 of 43
 Strategic Direction
The FSS2020 vision for the Nigerian financial system is to develop the
safest and fastest growing financial system among emerging markets by
2020, catalyse the national economy to become one of the top 20
economies in the world by 2020, and create the Africa region international
financial centre.

VISION

Vision Statement for the Money and Foreign Exchange Markets

“To be the No. 1 Money & Foreign exchange markets amongst emerging
markets and to rank in the top 5 globally”

MISSION

“To provide safe, liquid and competitive money & foreign exchange
markets, operating on global best practices”

IMPACT ON EXTENDED ENVIRONMENT

In essence, our mission will have the following impact on the extended
environment
 Safety (Investor Protection) – this implies ensuring that local and
foreign investors are protected
 Product variety – To expand the breadth and depth of the market by
introducing a wide variety and multiplicity of instruments/products
 Market depth –To grow the value of money and Foreign Exchange
market instruments to attain the requisite depth and robustness that can
protect it against external shocks.
 Convenience - To guarantee consumers and players ease and
convenience of doing business by removing unnecessary constraints and
restrictions.
 Competitiveness - To make the market highly competitive and
attractive to foreign players, regionally and globally
 Best practice - To adopt global best practices and good corporate
governance and instill it amongst market players through incentives and
sanctions.

Page 30 of 43
KEY ISSUES THAT COULD FRUSTRATE VISION/GOAL OF THE
MONEY & FOREIGN EXCHANGE MARKET
The following direct and indirect issues are capable of derailing the
vision/goal of making Nigeria’s money market the No. 1 among emerging
markets.

Direct Issues
Money Market:
 Shallow Secondary market
 Lack of Broking, market making and underwriting capacity
 Lack of Repo facility
 Lack of low and sustainable tax rate that is harmonised across the
board
 Policy disallowing Banks from utilizing sub-ordinated debt like lower
Tier-2 capital for computing single and total obligor limits. This is
considered as an impediment to credit creation by banks.

Foreign Exchange Market:

 Lack of mechanism that will support trading of derivatives like
futures, forwards, options e.g. a futures and options exchange
 Sharp decline in foreign exchange earnings which limits inflow from
official sources into the market
 Lack of Naira convertibility
 Lack of requisite skills for trading in derivatives i.e. understanding of
financial futures
 Non diversification of the forex earnings base.

Indirect Issues
Money & Foreign Exchange Markets:
 Legislative & regulatory reforms yet to take off fully. This includes
the creation and passage of laws by the legislative arm of government that
will facilitate the growth of money and foreign exchange markets.
Examples include reorganizing the activities of the DMO and the CBN to be

Page 31 of 43
able to issue debt instruments whether short or long term in a harmonized
and structured pattern with the emergence of a proper yield curve.
 Setting up of legislative processes and laws for investor protection
 Suboptimal corporate governance
 Introduction of broad based Capital market reforms
 Infrastructural Inadequacy
 Risk of regional conflict involving neighbouring countries and
contagion effect
 Cross border finance and banking risks – risk of a meltdown in
regional financial markets where Nigerian banks are currently expanding.

STRATEGIC OBJECTIVES

Strategic Objectives have been developed based on the issues and

challenges identified for Nigeria’s money and foreign exchange markets.
These strategic objectives are:

Money Market Objectives:

 Facilitate the development of a more robust, vibrant and deep

money market
 Facilitate a more market oriented MPC
 Increase the volume of corporate bills and financial instruments
issued relative to government treasury bills in the market
 Align statutory and transaction costs in Nigeria with other emerging
markets
 Intensify the phased withdrawal of public sector funds from banks
 Increase coordination between the DMO and the CBN

Foreign Exchange Market Objectives:

 Accelerate/intensify the process of currency convertibility
 Facilitate the development of a more robust, vibrant and deep
foreign exchange market

General Issues:
 Improve the judicial process and the enforcement of rights
 Improve Nigeria’s rating with Transparency International (TI)

Page 32 of 43
 INITIATIVES

Money Market
Objective 1 - Facilitate the development of a more robust, vibrant and
deep money market
 Increase the number of primary dealers
 Extend the maturity profile of instruments to a maximum of 364
days

Objective 2 – Facilitate a more market oriented MPC

 Increase the number of private sector and market-based members
in the MPC and institutionalise their membership

Objective 3 – Increase the volume of corporate bills and financial

instruments issued relative to government treasury bills in the
market
 CBN should look into the possibility of qualifying highly rated short-
term commercial papers as liquid assets to count towards bank’s liquidity
ratio

Objective 4 – Align statutory and transaction costs in Nigeria with

other emerging markets
 Benchmark statutory and transaction costs to emerging markets.

Objective 5 – Intensify the phased withdrawal of public sector

funds from banks
 CBN should net off the quantum of public sector deposits from the
computation of liquidity ratio.

Objective 6 - Increase coordination between the DMO and the CBN

 Institute regular meetings between the DMO and the CBN to develop
a harmonised framework and issuance timetable for debt instruments

Foreign Exchange Market

Objective 1 - Accelerate/intensify the process of currency
convertibility
 Further dismantling of the remaining exchange controls regulations
 Repeal all existing laws that impede currency convertibility

Objective 2 - Facilitate the development of a more robust, vibrant

and deep foreign exchange market

Page 33 of 43
 Create a framework for multiple currency activities e.g. issuance of
foreign currency instruments both by government and private sector
 Establish a Lagos International Futures and Forwards Exchange
 Discount houses should be allowed to trade in foreign exchange

Page 34 of 43
 IMPLEMENTATION PLAN

The implementation plan comprises the strategies to be adopted to

implement the recommendations. It highlights the responsibilities,
dependencies, key deliverables, and timelines to achieve the stated goals
and attain the vision articulated for the money and foreign exchange
markets.

Page 35 of 43
 Implementation Plan

Money Market
Initiatives Deliverable Dependency Action Step Respons Support Time
ible Line
body/Or
g.
Objective 1 - Facilitate the development of a more robust, vibrant and deep money market

1.1.1 Increase the Higher number CBN to expand the CBN Done
number of primary of licensed number of primary
dealers primary dealers dealership licenses in
govt securities and
relax the conditions
for prequalification
1.1.2 Extend the To have the Continued CBN should transfer CBN DMO Dec,
maturity profile of issuance of all relationship the management of 2008
instruments to a govt securities between the the T-bill programme
maximum of 364 and the yield CBN and the to DMO and come up
days curve managed DMO with other Monetary
by one agency Policy instruments
which should not
To allow the exceed 90 days
CBN to focus on
its core CBN to intensify the
mandate use of instruments

Page 36 of 43
 Initiatives Deliverable Dependency Action Step Respons Support Time
ible Line
body/Or
g.
like OMO, forex
swaps, etc to manage
liquidity and inflation
STRATEGIC OBJECTIVE 2 – Facilitate a more market oriented MPC

Increase the Increased CBN to select CBN Dec,

number of private transparency in members from the 2007
sector and Monetary Policy private sector with
1.2.1 market-based Formulation requisite credentials
members in the which would in and experience
MPC and turn increase
institutionalise market
their membership confidence
STRATEGIC OBJECTIVE 3 – Increase the volume of corporate bills and financial instruments issued relative to
government treasury bills in the market

1.3.1 CBN should look AAA and other SEC accredited CBN Rating Quick Win
into the possibility highly rated agencies to develop Agencies
of qualifying highly commercial risk acceptance
rated short-term papers or other criteria for qualifying
commercial papers liquid instruments

Page 37 of 43
 Initiatives Deliverable Dependency Action Step Respons Support Time
ible Line
body/Or
g.
as liquid assets to instruments,
count towards issued by
bank’s liquidity corporate
ratio entities
STRATEGIC OBJECTIVE 4 – Align statutory and transaction costs in Nigeria with other emerging markets

1.4.1 Benchmark Low cost of Harmonise FIRS,CB Quick Win

statutory and doing business transaction and N, CSCS
transaction costs and a statutory costs with
to emerging harmonised tax other emerging
markets system markets
Remove regulatory
restrictions & barriers
STRATEGIC OBJECTIVE 5 – Intensify the phased withdrawal of public sector funds from banks

1.5.1 CBN should net off Less incentive CBN to issue circular CBN Govt, December
the quantum of for banks to to this effect. Banks 2007
public sector attract these
deposits from the funds and
computation of therefore govt
liquidity ratio. agencies would
be more
inclined to

Page 38 of 43
 Initiatives Deliverable Dependency Action Step Respons Support Time
ible Line
body/Or
g.
channel it into
productive
sector
STRATEGIC OBJECTIVE 6 - Increase coordination between the DMO and the CBN

1.6.1 Institute regular Regular The CBN & the DMO DMO & Quick Win
meetings between meetings to increase frequency CBN
the DMO and the between the of meetings and
CBN to develop a DMO and the coordination of
harmonised CBN. activities. The
framework and Increased DMO should
issuance timetable efficiency in the concentrate on the
for debt issuance of govt issuance of bonds of
instruments bonds 91 days and above
Foreign Exchange Market
STRATEGIC OBJECTIVE 1- Accelerate/intensify the process of currency convertibility

1.1.1 Further More CBN to further CBN Quick Wins

dismantling of the investment liberalise and amend
remaining inflows exchange control
exchange controls circulars and
regulations guidelines. CBN to
continue with policy

Page 39 of 43
 Initiatives Deliverable Dependency Action Step Respons Support Time
ible Line
body/Or
g.
on easy repatriation
of profits & assets.
The CBN to sustain
the no surrender
requirement for
exports
Repeal all existing CBN to submit CBN, Quick Win
laws that impede proposed revised LEGAL
currency laws to National
convertibility Assembly for
consideration and
approval
STRATEGIC OBJECTIVE 2- Facilitate the development of a more robust, vibrant and deep foreign exchange
market

1.2.1 Create a Increase in Naira Current Account CBN, Private April 2008
framework for outright Convertibility Liberalization DMO Sector
multiple currency forward market Organis
activities e.g. and the ations
issuance of foreign development of
currency currency swap
instruments both market.
by government

Page 40 of 43
Initiatives Deliverable Dependency Action Step Respons Support Time
ible Line
body/Or
g.
and private sector
Establish a Lagos Coordination of CBN, Private End 2009
International activities of SEC sector
Futures and commodities
Forwards exchange
Exchange ASCE/NSE/SEC to
work in conjunction
with a major
international
exchange like the
LIFFE ( London
International
Forwards & Futures
Exchange), the
Chicago Exchange,
NASDAQ, etc to,
establish a derivative
exchange. To be
established as a
public, private
partnership
Discount houses DHs trading in Discount houses CBN, Private Phase 1
should be allowed Foreign should be converted SEC sector FX trading

Page 41 of 43
Initiatives Deliverable Dependency Action Step Respons Support Time
ible Line
body/Or
g.
to trade in foreign Exchange and and given license to (Immediat
exchange ultimately trade in foreign e)
issued license exchange. License
to convert to Issue license (JAN2009)
investment
banks.

Page 42 of 43
Page 43 of 43