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.
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.
TABLE OF CONTENTS
Title page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Abstract vi
Table of Contents vii
List of Tables x
List of Figures xi
CHAPTER ONE: INTRODUCTION
Background to the Study 1
Statement of the Problem 4
Research Questions 4
Objectives of the Study 5
Research Hypotheses 5
Significance of the Study 5
Scope of the Study 6
Organization of the Study 6
CHAPTER TWO: LITERATURE REVIEW AND THEORETICAL FRAMEWORK
Introduction 7
Conceptual Literature Review 7
Concept of Financial Intermediation 7
Overview of financial intermediation in Nigeria—– 8
Treasury Bills 10
The Nigerian Treasury Bills 10 2.2.2 The market for Treasury Bills in Nigeria 10
2.2.3 The Demand for Treasury Bills in Nigeria– 12
Theoretical Literature 14
Intermediation Model 14
Information Asymmetry: Adverse selection and moral hazard—— 15
Risk diversification Hypothesis 17
Lazy Bank Model 18
Portfolio Management Theory 18
Shiftability Theory 20
Commercial Loan Theory 21
Empirical Literature 23
Theoretical Framework 28
Analysis of Deposit Money Banks Consolidated Assets——— 28
CHAPTER THREE: RESEARCH METHODOLOGY
Analytical Framework 31
Model Specification 32
Estimation techniques 32
Types and Sources of Data 33
CHAPTER FOUR: DATA ANALYSIS AND DISCUSSION OF RESULTS
4.1 Trend Analysis 35
4.2. Unit Root Test 38
Co-integration Test 39
VAR Stability Test 41
Vector Error Correction Estimates 43
Impulse Response Function 45
Variance Decomposition 48
Summary of Findings 50
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
Summary 52
Conclusion 53
Recommendations 54
References—– 55
Appendices 60
INTRODUCTION
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).
REFERENCES
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Adrian, T. and Shin, H. S. (2009). Financial Intermediaries and Monetary Economics. Federal Reserve Bank of New York Staff Report, No. 398.
Agiobenebo, T.J. and Agiobenebo, A.T. (1997). Assets Portfolio Selection: The Rationality of Empirical Choice-Decisions of Commercial Banks. Journal of Industrial, Business and Economic Research, Vol. 1, No. 2, pp. 129-150
Akerlof, G.A. (1970). The market for lemons: quality uncertainty and the market mechanism.Quarterly Journal of Economics, Vol. 84, pp. 488-500
Akpakpan, E.B. and Ezirim, C.B. (1999). Modeling the Relationship between Economic Growth and Financial Intermediation in Nigeria: A Synoptic Approach. Journal of Industrial, Business & Economic Research, Vol. 3, No.1.
Akpansung, A.O and Babalola, S.J (2010). Banking Sector Credit and Economic Growth in Nigeria: An Empirical Investigation. Central Bank of Nigeria (CBN) Journal of Applied Statistics, Vol. 2 No.2 51-62
StudentsandScholarship Team.
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