- By Chukwudi Odili
Money market refers to the vehicle for transactions involving the borrowing and investment (placement) of short-term funds (i.e., funds whose tenor does not exceed one year). The financial channels through which these transactions in funds are carried out are referred to as Money Market instruments.
The main instruments include:
- Inter-bank or fed funds: involving trading between banks, of their excess reserves held with the Central Bank. Here, cash-risk banks lend their excess reserves at the Central Bank to other banks with shortfalls. This is similar to the London Inter-bank Offered Rate, known as LIBOR, the interest rate at which the best banks – notably in Europe and America lend to one another.
- Certificates of deposits: evidence of large time deposits placed by individuals, corporations, etc., with a bank. Major feature is that such large deposits are evidenced by a CERTIFICATE issued by the receiving bank to the depositor.
- Bankers acceptances: forms of Bills of Exchange, whereby a Bank customer wishing to borrow from the public or investors may get his bank to stamp ‘accepted’ on a draft, which is then sold to investors. Here the investors advance fund to the borrower, their confidence being enhanced by the ‘acceptance’ stamp of the bank. Such acceptance stamp serves as a form of guarantee against any default by the customer/borrower.
- Commercial Papers: promissory notes issued by corporate entities wishing to raise funds directly from the public. Here the bank, if involved, would play the role of an issuing house or a broker. Issuers of commercial papers are usually industrial, financial and insurance companies.
- Treasury Bills: short-term obligations of the government’s treasury issued primarily to fund the government. It is also used by the Central bank to implement monetary policy such that when the Treasury bills are issued, the government is trying to reduce money supply by taking reserves from the system. When they buy back Treasury bills, they are putting back reserves into the system thereby increasing money supply. Banks, individuals and companies usually buy treasury bills for investment purposes.
- Repurchase Agreements: these are instruments used to raise funds in the Money Market by ensuring the provision of a security to the lender. Here the issuer of the repurchase agreement is the borrower wishing to raise funds. He offers his securities as collateral by selling them in return for the needed funds but simultaneously committing to repurchase the securities by the end of the transaction. During the period of the transaction, legal ownership of the securities moves to the lender and reverts to the borrower /original owner after the transaction. It is used a lot by security dealers abroad to raise cheaper funds for their security portfolios. In general, it is a major instrument in use, which protects the investor against the credit risk or prospect of non-repayment by the borrower.
- Secured inter-bank fed Fund: these are ways of raising funds similar to repurchase agreements except that in this case, the securities are offered only as collateral, with legal ownership remaining with the borrower during the period of transaction.
Leaving one’s Savings in the Bank; is it also a form of Investment?
Savings are not really investments but they form the basis or pool. All investments occur after savings have been accumulated. To invest is to put one’s savings into an activity that will generate dividends (income) in multiples; two fold, three fold, ten-fold, and so on. The amount accrued depends on the size of one’s initial deposits. It is usually the norm to accumulate savings and start up a venture that can be nurtured to growth.
Savings accounts are called time deposits if the saver contracts to leave his money with the banker for a specific period; in return he receives a specified fee (interest) for his risk and inconvenience. The banker, secure in the knowledge that there is always a relative amount of cash proportional to deposit at any given time reserved in the bank, is then able to lend to a businessman for an equivalent period of time but at a rate large enough to cover incidental expenses and make a profit.
It is not advisable to leave your savings in the bank for too long a time. If savings accumulate, you should invest it, either in Money Market Instruments (discussed here above) or in the Capital Market or in the Real Sector (Real Estate, Construction, Agro-industrial business organizations) or in the Service Sector. Money that is left in the bank vault for long is prone to being inflated out of existence, especially when the inflation is severe. For instance, in the ninety nineties (precisely between 1990 and 1995), the annual inflation rate soared up to between 21 and 57 percent. Then the annual deposit rate on savings accounts ranged between 14 and 30 percent. Of what economic sense could there then be to get maximum return of 30 percent against a run-away inflation rate of about 57 percent?
To cut the story short, the interest you get if you save is generally less than the profit (or capital gain) you get if you invest. This is the reason why we strive to use this series of write-ups and this medium to encourage and guide the prospective investors on how best to invest and where to invest in.
Should anyone need clarification on any of the issues discussed here, the person should please feel free to contact me for further conversation via: chukwudiodili902@yahoo.com
