An Evaluation of the Role of Discount Houses in the Nigerian Financial System

An Evaluation of the Role of Discount Houses in the Nigerian Financial System

Abstract of An Evaluation of the Role of Discount Houses in the Nigerian Financial System

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 of An Evaluation of the Role of Discount Houses in the Nigerian Financial System

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.

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?