IMPACT OF TREASURY BILLS RETURNS ON FINANCIAL INTERMEDIATION IN NIGERIA
| Format: Ms Word | 1-5 Chapters | Table of Content|
INSTANT PROJECT MATERIAL DOWNLOAD
Study Level: BTech, BSc, BEng, BA, HND, ND or NCE
This study aims to investigate how deposit money banks’ investments in Treasury Bills affect the quantity of credit these banks offer to the Nigerian private sector. According to the study’s estimated model, the total deposit, Treasury Bills, FGN Bonds, interbank rates, and the yield differential between loans and Treasury Bills all had an impact on the supply of loans and advances made by DMBs. For the years 2003 through 2013, quarterly data were utilized to estimate the model using the Vector Error Correction (VEC) method. The analysis concludes that: (i) There is a bad correlation between DMBs’ holdings of treasury bills and their loans to the private sector. In the short run, their demand was controlled by the spread between loans to the private sector and Treasury Bill returns, and FGN Bonds had a greater detrimental impact on financial intermediation than Treasury Bills. The analysis finds that although the effect is more pronounced with FGN Bonds than with Treasury Bills, the demand for government’s deficit finance instruments decreased financial intermediation in Nigeria. Based on these findings, the study suggests that policies that could stabilize the economy and stimulate high investment returns over the long term could encourage banks to focus more on intermediation activities, and policies that would realign the returns of government and private sector debt instruments could deepen the market and stimulate competition between them.
1.1 Background to the Study
The Nigerian government has relied heavily on short-term borrowing from the banking system, more specifically through the use of Treasury Bills, despite having a number of other financing options available to it, including selling some of its assets like properties or selling some of its cash reserves. The most important actors in the Nigerian financial system are Deposit Money Banks (DMBs), which held 68 percent of the total deposits in the financial sector in 2012 (CBN, 2013). The efficiency and efficacy with which excess money are transferred between surplus units and deficit units, as well as how to improve it, are some of the enduring policy difficulties facing the banking system in Nigeria and, in fact, most developing countries. Numerous reforms of Nigeria’s banking industry have been centered on these challenges. To make sure that the sector is actively positioned to perform the duty of intermediation and play a catalytic role in economic development, the majority of the reforms have been concentrated on the deregulation of the financial system (Ogege and Shiro, 2012).
The financial subsector has been regularly punctuated by a number of factors that have rendered it sensitive to systemic distress, macroeconomic instability, and policy fine tuning (Kama 2006). As a result, these measures have not produced the expected results. Between 2003 and 2013, DMBs’ credit to the private sector (measured as a percentage of total assets) did not significantly improve. It continued to fluctuate between a top of 42.28% in 2010 and an average of about 35.82%. From 31.70% in 2003 to 33.89% in 2004, it increased. It continued to fall after that, reaching 30.43% in 2007. Nevertheless, it rose to 42.28% in 2010 before sliding once more to 35.85% in 2012 (CBN, 2013).
Treasury Bills are one of the main ways that the Nigerian government obtains short-term funding. Treasury Bills alone accounted up around 34% of all government debt instruments in Nigeria in 2012, and Deposit Money Banks held roughly 67% of all issues (CBN, 2013). It is clear that the amount of Treasury Bills as a percentage of the DMBs’ total assets fluctuated along with the Treasury Bill discount rate. As of 2003, the Treasury Bill discount rate was 15.02%, which was comparable with the volume (as a percentage of total assets) of 14.39%. After that, both the rate and volume held by DMBs (as a percentage of total assets) decreased to, respectively, 6.13% and 2.89%, decade minimums in 2009. The global recession that affected the world economy was consistent with this time period. After that, Treasury Bills rates started to rise, which caused the amount of DMBs held (as a percentage of total assets) to soar from 2.89% in 2009 to roughly 10.21% in 2012 before significantly decreasing to 6.34% in 2013. The Treasury Bill rate increased throughout this time, rising from 6.13% in 2009 to 17.20% in 2012 and then falling to 13.34% in 2013.
Treasury bills are typically used in bank portfolios since banks are more susceptible to economic instability and need to manage a robust portfolio. Due to their resemblance to retaining cash while earning a respectable return, Treasury bills may fulfill this purpose (Takele, 2013).These assets are now competitive in the asset portfolios of DMBs due to the high return and high risk characteristics of loans compared to the high return and low risk characteristics of treasury bills, and the difference in returns on the two assets may serve as an incentive for the banks to increase their investment in one asset over the other. One of the factors that has kept Nigeria’s lending rate higher than the rate on Treasury notes is the risk premium on lending. However, in order to close the growing fiscal deficit gap, the government has increased the market’s supply of Treasury bills and set a favorable interest rate. decreasing the difference between the lending rate and the rate on government bills. The competition between the two assets has become more intense due to this and a number of other variables (Obioma, 2012).
In a non-competitive market, it has been suggested that an attractive Treasury bills rate forces banks to rebalance their portfolios toward risk-free, high-quality assets, which in turn lessens their intermediation function. Furthermore, it has been demonstrated on both theoretical and empirical grounds that an excessive reliance on domestic borrowing by the government, particularly Deposit Money Banks (DMBs), to finance its deficit may drive the private sector away from the credit market (Solido, 2003; Gaber, 2009; Emran and Farazi, 2009; Onyewu, 2011, Fayed, 2012; Kirchner and Wijnbergen, 2012). This was also emphasized by Kuttner and Lown (1998) in their work, who pointed out that banks often take on new debt obligations in place of loans to the private sector, which decreased the amount of bank credit available to the latter.
Increased Treasury Bill accumulation by Nigerian deposit money banks could shift the structure of intermediation in favor of the public sector at the expense of the private sector. According to Sanusi (2012), a banking system that is in good working order should be able to effectively spread risk while yet being able to improve the flow of liquidity into the domestic economy. Therefore, it is crucial that commercial banks should not neglect their primary responsibility of making financial resources available to the private sector while looking for investment possibilities with reduced risk. This is due to the fact that the private sector’s inability to access sufficient financing would stifle investment and production growth, making it more difficult to achieve macroeconomic stability and sustained growth.
1.2 Statement of the Problem
Deposit Money Banks (DMBs) may be tempted by the risk-free high return motive and shift their portfolio away from risky private sector loans by reducing overall credit to the private sector of the economy in favor of holding more government debt-instruments in the face of unstable deficits. This behavior would restrict Deposit Money Banks’ exposure to the private sector, which would decrease private investment and negatively impact the Nigerian economy’s potential future growth. Additionally, although lending to the government increases bank profitability, it distorts banks’ incentives and the process of financial deepening because banks that receive comparatively risk-free returns from the government have little incentive to expand the banking industry. This could be fatal to the state of the economy because the private sector, which serves as the engine of growth, could be deprived of the funding necessary to address macroeconomic issues like growth, poverty, and unemployment, especially during a time when rapid economic growth is encouraged.
1.3 Objectives of the Study
The primary aim of the study is to examine the impact of Deposit money banks‟ investment on treasury Bills and the impact thereof on the amount of credit extended by these banks to the private sector in Nigeria. The following specific objectives shall be achieved in the study:
- To examine the composition of Deposit Money Banks‟ asset investment in
- To investigate if there are systematic shifts in the type of assets Deposit Money Banks invest in.
- To investigate if the shift in the relative yields of these assets explain the relative shifts in assets investment by Deposit Money Banks in Nigeria.
- To investigate if Treasury Bills returns affects financial intermediation in Nigeria.
USE THIS MATERIALS AS A GUIDE FOR YOUR PERSONAL RESEARCH WORK (IF PROPERLY CITED)
WE ASSIST OUR CLIENTS BY PROVIDING QUALITY RESEARCH MATERIALS FOR ACADEMIC PURPOSES.
THIS MATERIAL IS FOR RESEARCH PURPOSES ONLY AND SHOULD BE USED AS GUIDELINE.
DO NOT COPY THE ABOVE MATERIALS VERBATIM (WORD FOR WORD)