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AN EVALUATION OF THE ROLE OF DISCOUNT HOUSES IN THE NIGERIAN FINANCIAL SYSTEM

ABSTRACT

The introduction of discount houses into the Nigerian financial sector in 1993 was a well-applauded idea especially owing to the need for a well-established secondary market for the discounting/re-discounting of government securities as well as other eligible financial instruments. With over ten years of discount house operations in Nigeria, the question of evaluating their specialized role in financial intermediation becomes necessary. In line with CBN guideline for discount house operation, discount houses are established to meet certain objective/functions which includes serving as intermediaries between the CBN and licensed banks as well as between banks. Thus, through an extensive literature review as well as an objective and careful analyses of primary data in the course of this study, discount houses are seen as having contributed immensely to the level of financial intermediation in the economy without necessarily duplicating traditional banking functions. It also becomes evident that discount houses enjoy a very high level of awareness amongst other financial actors especially commercial and merchant banks. As such, to a very large extent, bankers recognize their specialized role as financial intermediaries within the Nigerian economy. However, as this study reveals, discount houses have been greatly saddled with a number of threats to their corporate existence and profitability. Amongst these have been the unhealthy competition from banks as well as the tight-jacket regulation fixed by the CBN on the operations of discount houses within Nigeria.

CHAPTER ONE

INTRODUCTION

BACKROUND OF THE STUDY:

The financial sectors remain the sector of every economy. The specific role of the financial sector to which Discount Houses belong is very crucial to the rapid growth of any economy. Suffice it to say here that the financial intermediation role – that of mobilizing savings from the surplus units and making same available for investment by the deficit units is one, which every modern economy cannot do without. Financial intermediaries evolve to bring the various existing economic sector together. The intermediaries sell their own liabilities to raise funds which are thereafter used to purchase liabilities of other corporate bodies in the economy. Thus, the financial intermediaries satisfy simultaneously the portfolios decision of the surplus units (SU) and the deficit units (DU) in the economy (Robert, 1996). This in effect helps to ensure that such savings are redistributed into their most productive use. Furmore economic output is maximized.

The Nigerian financial sect    or has recorded appreciable growth over the years. This is especially true in terms of the number of existing institutions as well as financial instruments traded there in specifically, the money market sub-sector of the Nigerian financial system has been significant in terms of growth and financial engineering. Since its inception in 1959, the growth witnessed by the Nigerian money market can be viewed from three main perspectives – growth in the number and types of instruments traded, growth in asset and growth in the number of participants. In terms of participants, the number of supply and demand of short term funds in the money market rose from only eight (8) in 1960 to 1,297 in 1985 and increased to about 2000 at the end of 1994. (omolomo 1997:130-135)This astronomical growth in the number of money market operators was largely due to the structural Adjustment programme (SAP) introduced by the Babangida’s administration which brought in its wake the policy of economic deregulation. This policy gave birth to a new breed of banks and other financial institutions.

Over the years, the most dominant and commonly known participants or intermediaries in the financial known participants or intermediaries in the financial sector has been commercial Banks, Merchant Banks, development banks, finance house as well as hire purchase institution. These primary institutions deal directly with the ordinary man on the street, single heritors as well as corporate commercial and industrial bodies. As the number of financial intermediaries increased, it become very obvious that as an industry, they too required intermediaries amongst themselves if they must conveniently meet the ever-growing liquidity need of the financial and industrial world. Thus, intermediation between financial institutions has become the specialty of a unique breed of financial institutions called DISCOUNT HOUSES.

This special breed of financial institutions saw its inception in 1992 when the federal Government and the central Bank of Nigeria (CBN)  brought about the establishment of three discount houses to begin discount operations designed to facilitate monetary policy Via the open Market operation (OMO) . These Discount Houses were – first security Discount House Limited ( (FSDHL), Express Discount Limited (EDL), and Associated Discount Limited (EDL), and Associated Discount House limited (ADHL). As Falegan (1993) observed, these houses served three major purposes. They serve as a means of developing a secondary market for government debt instrument with a view to reducing government dependence on CBN financing. They help promote the market for government securities. Aside of these roles, Discount Houses in Nigeria have performed various functions as stipulated by the monetary authorities. However, despite all of these, there still exist so many questions yet unanswered about Discount Houses –questions to which answers must be provided.

1.2  STATEMENT OF RESEARCH PROBLEM

Presently, the number of licensed Discount Houses operating in Nigeria has increased from its initial number of three to its present five However, it is observed that the development of these Discount Houses has not in reality kept pace with the growth of the economy particularly the financial sector. (Omolomo 1997). Besides, owing to their specialized nature, Discount Houses have not been particularly vocal over the years. Observation has revealed that a good number of corporate bodies, institutions s well as individual who directly or indirectly participate in financial intermediation, know little or nothing about the existence and specialized roles of Discount Houses in the Nigerian financial sector.

Against this backdrop, it therefore becomes very pertinent to address certain critical issues – questions which form the bedrock of this research work. What special roles have discount Houses played in the Nigerian financial sector since their creation in 1992? Are Discount houses still effectively dispensing these functions? Are discount houses relevant to the effective and efficient allocation of economic resources in the country? Are discount houses contributing to economic growth and development in the financial sector and in the national economy as a whole?

5) Are    other  financial actors aware of the existence and roles of Discount Houses in Nigeria?

6) How often do other financial actors in the Nigerian financial system, make use of Discount  Houses?

7) Are Discount Houses simply a duplication of banks and banking functions?

8) What are the problems and prospects of Discount House in Nigeria?

9) Should Discount Houses be encouraged or should they be scrapped? Considering the present trend of universal banking, does the financial sector still have need of Discount Houses?

1.3    OBJECTIVES OF THE STUDY

The objectives of this study are simply stated as follows:

To assess the role of Discount Houses in financial intermediation within the Nigerian context.

To determine know effectively Discount Houses enhance or affect the level of economic activities within the country.

To ascertain the level to which other financial actors are aware of the existence and performance of Discount Houses in Nigeria.

To ascertain the extent of use or application of Discount Houses by other major player in the financial sector.

To ascertain the level of inter-sectoral co-operation between banks and Discount Houses.

To identify the problems and prospects facing discount houses in Nigeria.

To determine through active survey, any form of intersection between the specialized roles of discount houses and that of conventional banks –ie any duplication of structure and functions.

To make recommendation based on the research findings.

1.4   SIGNIFICANCE OF THE STUDY

The result of this study will be useful to operators of discount houses in order to position their discount house appropriately within he financial sectors. This will ensure their continued relevance within the sector. The survey of this study will reveal so much about the degree of acceptability and popularity of these houses amongst other financial actors and thus significantly assist operators of discount houses to be more innovative and ereative in order to sustain and enhance the level of acceptance of their performance. Bankers and other players in the Nigerian financial system will be made more aware of the various potential benefits that can be derived from using the services and products of discount houses.

1.5    SCOPE AND LIMITATIONS OF THE STUDY

This study is designed to evaluate in a general sense, the case, the activities of discount houses as financial intermediaries within the Nigeria context. While a constructive review shall be made of the origin and general functions of discount houses, the scope of this study shall more specifically be delimited to the specialized role of these house in the financial sector ie that of intermediation between other financial institutions especially banks. Through an objective survey, this study shall seek to identify how significantly or otherwise the financial intermediation of discount houses has contributed to the existing level of growth in the Nigeria economy. Hence, this study shall examine discount houses in the li9ght of their role as financial intermediates between banks as well as their contribution to the national economy. While it is a non-debatable fact that there exist several actor in the Nigerian financial system (e.g individuals and non-bank financial institution). The scope of this stud’s survey shall be restricted to the commercial and merchant Banks since these are the major or key players of the financial sector in Nigeria.

LIMITATIONS

The imitations of this study are: TIME: The time frame available for this study is very short and this will affect the extent to which data is gathered. FINANCE: More practically, a study of the nature will require a huge amount of financial involvement. However available finance to pursue this project is limited LIMITED INFORMATION: It has been observed that not much secondary data exist on Discount Houses in Nigeria. Available materials are also sparsely distributed all over the country. This makes the gathering of secondary data slightly more challenging then envisaged, especially when consideration is given to the time available for this study.

It has also been observed that responses rate questionnaire administered has always been very how, as many Nigerians are some how reluctant to giving information as required. This behavioural pattern will expectedly limit the amount of primary data to be gathered in the course of the study’s survey. Despite the above mentioned limitations, this research work shall be effectively tailored to provide all relevant information to meet its stated objective. In this respect, Optimal use shall be made of the available time resources and information.

1.6    RESEARCH METHODOLOGY

The result of this study be based on the analysis of both primary and secondary data, which shall be gathered in the course of this which shall be gathered  in the course of this research work. Secondary data shall be gathered from various sources. Extensive use shall be made for the university’s library as well as other libraries from which texts, journals, newspaper articles,, central Bank of Nigeria. Economic reviews as well as other periodicals shall be gathered. Another source of secondary data to be harnessed is the Internet. Since the Internet serves as a storehouse of information in different fields, its relevance in this study cannot be under estimated.

The major source of primary data for this study shall be survey in the course of the survey, questionnaires shall be  administered to key players in the financial system specifically commercial and merchant Bankers. Since these have direct dealings with discount Houses they have no doubt be in a position to help determine the degree of relevance and effectiveness of discount house operations in the Nigerian economy. Individual responses to question asked shall be analyzed  individually based on percentages. Also based on the questionnaires, responses to specific questions shall also be used to test the various hypotheses of this study.

1.7    STATEMENT OF HYPOTHESES

In line with the aforementioned objectives of this study, the following hypotheses have been postulated for testing.

(1) Ho Discount houses do not significantly enhance the level of financial intermediation in the economy.

(1).H1: Discount Houses significantly enhance the level of financial intermediation in the economy

(2)  Ho: Bankers are not aware of the existence of Discount Houses and do not use them in the process of financial intermediation.

(3) Ho: Financial intermediation by discount houses is not a mere duplication of banking functions and should be encouraged.

H1: Financial intermediation by discount houses is a mere duplication of banking functions and should be encouraged.

1.8.1    BANKER /BANK: (1998:Pg 1)

There is no clear definition of a bank (or banker) in either statute or case low; although the use of the word “bank” in various pieces of legislation is of assistance defining these terms (Koca Hassan 1998). For the purpose of this study therefore, a banker will refer to any person who carries on banking business especially the treasury function, for upward of one year, either within a commercial or merchant Bank. Bank shall also refer to either commercial or merchant Bank.

1.8.2 COMMERCIAL BANK: (1989:Pg 11)

Is any bank whose business includes the acceptance of deposit and who allows withdrawal by cheque. In Nigeria, commercial Banks are retail banks which mobilize funds from members of the public to lend to borrowers. In aggregate, they are the most dominant financial institution (Madura 1989).

MERCHANT BANKS:

These are wholesale banks in nature. They accept strictly huge deposits mostly from businesses and corporate organizations and these are not withdrawn with the use to cheques. They mobilize large deposits from institutional investors for onward lending

1.8.3  MERCHANT BANKS:

These are wholesale banks in nature. They accept strictly image deposits mostly from business and corporate organizations and these are not withdrawn with the use of cheques. They mobilize large deposits from institutional investors for onward lending.

1.8.4  DISCOUNT HOUSES:

These are non-bank financial institutions which through discounting/rediscounting facilities, intervene in mobilizing funds for investment in securities, in response to the liquidity needs it the system. They are specialized institutions (Express Discount LTD, 2003). According to the CBN Guideline, a discount house is defined as “any financial institution in Nigeria who transactions a discount house business which in the main, consist of trading in holding of treasury bills commercial bills and other securities and whose operations are, in the opinion of the CBN, those of Discount House”. Majekodunmi (1995) provides a more functional definition of a Discount House. In this definition, a Discount House is “any form of specialized financial institution whose activities involves the acceptances of money at call from commercial, merchant, investment and development banks, building societies and other financial institutions and investing these funds and making a market in short term financial security”. The operational domain of Discount Houses is the money market.

1.8.5  FINANCIAL INTERMEDIATION: (1989:PgII)

This is the process through which a financial institution can intermediary) mobilizes deposits from the surplus units of the economy and them on-lends it to the deficit unit of the economy (Madura 1989). This is a form of indirect finance. It then follows that financial intermediation is aimed at improving the lending and borrowing process in the economy. The difference between interest received from deficit spenders and the interest paid to surplus spenders represents they intermediary’s gross earnings (NIPC I2000).

REFERENCES

Express Discount limited (2003) Discount Houses in

Nigeria. http: 11 www Expdisc

Com/FAQS Htm (2003 Sept 23)

Hassan Kola (1998), Domestic Banking Abiodun

Kingston Enterprises Lagos. Pg1

Madura jeffrey (1989) financial market and institutions :

West Publishing Company, Usa Pp11

Majekodunmi, A.O. (1995), Tino years of Discount

House Operation: Challengers and the future of the OMO, the Nigerian Treasurer, Vol,5, No 3, July –Sept.

Nigeria Investment Promotion Commission –NIC

(2002), Banking and Finance. http//www.nipc.

Nigeria. Org/infss.htm (2003, Spet 24)

Omolumo I.G. (1997), Financial Management and company policy.

Omolumo consult, Lagos Pp 130 –5

Robert W.K. and Ricardo J.R. (1996) Principles of

Finance Blaxwell Publishers

Oxfprd, U.K. Pp 95-97.

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