Characteristics Of Develop Money Market And Underdeveloped Market. The conditions given below describe the characteristics of a developed money market. The absence of one or more of these conditions will make a particular money market underdeveloped.
The Evolution And Characteristics Of Develop Money Market
The basic for the evolution of development money market includes the following;
- Highly Organized commercial banking system – The commercial banks form the nucleus of the whole money market. They supply most of the short term funds in the market. They supply most of the short term funds in the money market, thus any policy most of the short term funds in the market, thus any policy they follow regarding loans and advances and investments will have repercussion on the entire money market. Because of their intimate relations with the central bank of the country, they serve as the connecting link between the various segments of the money market and the central bank. A fully developed money market is characterized by the presence of a highly organized commercial banking system. This feature is lacking in an underdeveloped money market.
- Presence of a Central Bank – In a developed and organized money market a central bank is essential. In such an environment it should be both legally and practically the monetary and banking authority of the country or the government. The money market cannot function adequately without a central bank. The central bank keeps the cash reserves of all commercial banks and comes to the house rescue of the commercial and the money market as a whole in the time of difficulties by re-discounting eligible bills and securities. It is also useful to the system through its open market operation when it absorbs surplus cash during off seasons and provides additional liquidity in times of financial stringency. Hence, we described it as both the lender and controller and guide of the money market. Without an efficient central bank, a developed money market cannot exist.
- Availability of proper credit instruments – An effective money market requires the continues supply of highly acceptable and thus negotiable securities such as treasury bills, bills of exchange, short term government bonds etc. Again there should also exist a number of dealers in the money market who should buy and sell these securities. These dealers are responsible for borrowing funds from the banks and using them to buy and hold short term assets. Without their presence there cannot be life in the money market hence the two availability of credit instruments and presence dealers and brokers to deal in them create essential conditions for the emergence of an organized and developed money market.
- Existence of a number of sub market – one of the Characteristics Of Develop Money Market is the sub market, a developed and organized money market should possess a number sub markets, each specializing in a particular type of short term assets. Each type of assets depending on its nature and period of maturity is dealt with in a separate market. The larger the number of sub, the broader and more develop will be the measure of the money market.
- Availability of Ample Resources – The availability of ample resources to finance dealings in the various sub markets enhances the developments of the money market. These resources usually come from within and without. It comes from without the country. If foreign exchange is attracted such as many be found with London and New York money market, which may attract funds from all over the world. Underdeveloped money market are unable to attract foreign funds mainly because of political instability and the absence of stable exchange rates.
- Other contributory factor in addition to the above will include a large volume of internal trade leading to a system of bills of exchange, great industrial development leading to the emergence of a stock exchange where these brokers and dealers who require short term funds for their dealings operate, stable political condition for attracting investment and absence of discrimination against foreign interest… etc.
The Importance Of A Developed Money Market
Having considered the Characteristics of develop money market, the next is how the money market is important to the economy in several respects, below are few listed importance;
- It helps in financing industry and commerce. Industries usually finance their working capital requirements. Through a system of finance bills, commercial paper etc. Conditions in the money market and the short term rates of interest, which prevail therein, influence the long term capital market as well as the long term rates of interest. The existence of a capital market is thus dependent on the existence of a capital market is thus dependent on a the existence on a well organized money market and both market together play a very vital role in financing economic development of the country. In financing of trade and commerce at both the domestic and the international fronts through a system of bills of exchange, which are discounted by the bill market, the money market plays a prominent role.
- The money market helps in the investments of short term funds of commercial banks. Since the latter works with their depositors funds, they require to be highly liquid often, hence they search for short term highly negotiable and secure assets as investment outlets for the temporary excess cash reserves. Such assets are found in the cell money market as well in the bills market. Thus a part from offering avenues for investments of short terms funds the money market constitute a reservoir from funds is obtained when special demands arise.
- The different sub market of a developed money market help in the proper functioning of the central bank because through the short term rates of interest prevailing in such markets, and which serves as a good barometer for measuring monetary and banking conditions in the country, the central is provided with a good and valuable guide to determining its banking policy.
- The money market helps the government in two ways by helping it raise short term funds through treasury bills without necessarily resorting to the issue of flat money or borrowing from the central bank both of which are inflationary in character.
- From the discussion above, explain the money market?
- What are the Characteristics of develop money market?
- What are the importance of a discount market? Is it necessary for an effective monetary policy to have such a market?
- Describe the structure of a money market in an underdeveloped economy and highlight it inadequacies
- Write short note on the follow (i) Features of a developing money market (ii) Usefulness of a developed money market to the central bank of a country.