IMPACT OF TREASURY BILLS RETURNS ON FINANCIAL INTERMEDIATION IN NIGERIA

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IMPACT OF TREASURY BILLS RETURNS ON FINANCIAL INTERMEDIATION IN NIGERIA

Abstract

This study attempts 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 study estimated a model which suggests that supply of loans and advances by DMBs was a function of Total deposit, Treasury Bills, FGN Bonds, interbank rates, and the Yield spread between Loans and Treasury Bills. A Vector Error Correction (VEC) technique was used to estimate the model using quarterly data for the period of 2003-2013. The study finds that: (i) a negative relationship exists between loans to the private sector and treasury bills holding of DMBs (ii) the spread between credit to private sector and Treasury Bills returns determined their demand in the short run, and (iii) FGN Bonds had a more significant negative effect on financial intermediation than Treasury Bills. The study concludes that demand for government’s deficit financing instruments reduced financial intermediation in Nigeria but the effect runs more through FGN Bonds than through Treasury Bills. From these findings, the study recommends that policies which could stabilize the economy and stimulate high investment returns in the longer term could encourage banks to concentrate more on intermediation activities, and policies that would re-align the returns government debt instruments and private sector debt instrument could further deepen the market and encourage competition between government and private sector debt instruments.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

With regards to the rising government deficit in Nigeria, the Nigerian government, while having several other financing options such as running down its cash reserves, selling some of its assets like properties or printing more currency (ways and means advances), has heavily relied on short term borrowing from the banking system – more specifically by means of Treasury Bills.Deposit Money Banks (DMBs) are the most dominant players in the Nigerian financial system holding 68 percent of the total deposits of the financial sector in the year 2012 (CBN, 2013). However, some of the perennial policy challenges facing the banking sector in Nigeria, and indeed most developing countries, are the efficiency and effectiveness with which surplus funds are intermediated between surplus units and deficit units and how to improve it. These issues have been at the heart of various financial sector reforms in Nigeria. Most of the reforms have been focused on the liberalization of the financial system to ensure that the sector is proactively positioned to perform the role of intermediation and play a catalytic role in economic development (Ogege and Shiro, 2012). These policies have not yielded the desired result as the financial subsector has been periodically punctuated by several factors which have made it vulnerable to systemic distress, macro-economic volatility and policy fine tuning (Kama 2006).Credit to the private sector (as a % of total assets) from DMBs did not show any significant improvement between 2003 and 2013. It remained at an average of around 35.82% with the maximum being 42.28% in 2010. It rose from 31.70% in 2003 to 33.89% in 2004.

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