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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
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:
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.
Bankers' Acceptance
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.
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:
Page 10 of 43
Distribution of T/Bills Subscription (%)
39%
57%
4%
Source: CBN
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.
Figure 4
Page 12 of 43
Forex Sales to Authorised Dealers
2% 1% 0.6%
12%
10% 39%
34%
2%
Source: CBN
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.
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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.
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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:
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
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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.
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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.
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
Page 19 of 43
Table 4 Foreign Exchange Market Summary
Official Receipts
Increased out-payments for imports, external debt service and other
official payments were factors accounting for the increase.
Source: CBN
63%
0.4%
Source: CBN
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:
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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
PRODUCTS/SERVICES
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Advisory Services, etc
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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.
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.
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:
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.
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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.
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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
MISSION
“To provide safe, liquid and competitive money & foreign exchange
markets, operating on global best practices”
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.
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
General Issues:
Improve the judicial process and the enforcement of rights
Improve Nigeria’s rating with Transparency International (TI)
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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
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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
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
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
1.5.1 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
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.
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