Money Market And the Economy

By providing short-term liquidity to government, commercial banks, and other large organizations, the money contributes to the economic stability and development of a country

As the Corporate Finance Institute describes it ‘the money market is an organized exchange market where participants can lend and borrow short-term, high-quality debt securities with average maturities of one year or less.’

It can be then seen as a market which warrants that institutions as big as governments, as well as banks and other large institutions to sell marketable assets to fund their cash flow needs.

However there also provisions for individual investors, as it allows them invest small amounts of money in a market of low-risks. Some of the instruments traded in this market include treasury bills, certificates of deposit, commercial paper, federal funds, bills of exchange, and short-term mortgage-backed securities and asset-backed securities.

In a form of market that allows the participation of private & public sectors and individual & collective sectors, there is bound to be an improvement in economic value at the different areas every participant is operating from. It could regional, sub-regional, national and even international.

By providing short-term liquidity to government, commercial banks, and other large organizations, the money contributes to the economic stability and development of a country. Investors with excess capital with no business to implement on, can invest in the market and interest.

Other sectors of the economy, such as the agricultural sector, and small and medium enterprises have the opportunity to access funds from the money market. The idea is to be able to grow the economy.

It also helps in the implementation of monetary policies, formation of adequate capital, provision of non-inflationary source of funding, accommodation of bank dealings.

Money market comprises instruments for negotiation such as treasury bills, commercial papers, certificates of deposit, banker’s acceptance, purchase agreements, and more. Money market is essentially considered to be safe to invest due to high liquidity of securities.

According to Michael Obaga on Business Daily Africa, money market funds typically mimic bank accounts, but as opposed to direct investment in specific asset instruments, they benefit the investor with portfolio diversification, liquidity, and economies of scale, fund manager’s expertise, principal preservation and the power of compounding interest.

Banks have rivalled investment and banking options, through offering high returns, funds protection and ability to withdraw ones funds and make investment top-ups anytime. No doubt, the money market is a good tool for the risk averse investor.

However, recent trends in the money market, especially the treasury bills market has been worrisome. The country’s yields have dropped to single digits. According to data from the Central Bank of Nigeria, 364-day treasury bills have fallen to below 5% which is the lowest seen in almost a decade.

While there are many reasons for this, the primary reason is that there had been excess demand over supply of treasury bills.

With the current state of the treasury bills market, there is no gainsaying the fact that dividend stocks in the Nigerian stock exchange now serves as an a more alluring option to earn and maintain a stable value for your investments.

Written by Lawretta Egba.