Money Market

Money Market – Financial Market Definition And Agents

The money market is not a term defining a definite place of locality where money is traded, in essence bought and sold. However it may be described as a market in which short term funds are borrowed and lent. The market does not deal in cash (coins and paper currency) but include the rights to money and capital in the form of credit which includes trade bills, promissory note and government paper which is drawn at short periods. These short term bills or securities are regarded or referred to as near money.

Money market is different from the capital market even though some economists have tendency to use the two terms inter changeably. In its strict sense, the capital market is a market for long term funds. It may be divided into two markets for new issues, and the resale market or stock exchange for existing capital funds.

The money market or stock on other hand is a market for short term funds whose maturities do not exceed one year or a space of 360 days. The maturities of capital market normally exceed one year. Both markets clean however, together constitute the financial market.

Location Of The Money Market

Geographically the money market may be located or associated with a particular place or locality as we have in London money market, Tokyo money market, the New York money market etc. In African countries like Nigeria, it is easier to talk of say the Lagos money market. This is because the Nigerian money market has not developed so well as to acquire a distinct and separate image of its own. In fact it is till a function housed within the central bank of Nigeria for now.

The London money market is the center both for the British and international community on short term loan-able funds. It attracts short term funds from all over the world for redistribution among borrowers.

Dealers In The Money Market 

The sources of the demand for short term fund includes the government, business organisations and private individuals/ the government is probably the largest borrowers everywhere, requiring funds now and again to meet current deficits. Industrial and commercial organisations borrow to enable them carry additional stocks. Other important private borrowers include stock exchange brokers, dealers in government and other securities, merchants’ manufacturers, farmer etc.

The bank on their own may require additional funds and may borrow from the central bank of the country, other commercial banks and other financial companies. The central bank is usually the primary source of credit to banks who on their own constitute the most important source of short term credit both to individual and business houses. These various units mentioned above constitute the dealers in the money market.

The Financial Market And The Definition  

Definition – the financial market refers to institutions, agents brokers and intermediaries transacting purchases and sales of securities. Te persons and institutions operating in the financial market are linked by the law, contracts, friendship and communications networks, which form an external visible financial structure.

Investors and financial institutions are the principal actors in the financial markets institutions are more or less organizations acting as intermediaries, agents and brokers in the financial transactions. These financial intermediaries purchase securities for their own account only to sell their liabilities and ordinary shares etc to interested individuals or organization through their agents or brokers as the case may be, therefore brokers and agents contract on behalf of others.

Naturally, financial markets and financial institutions are inseparable in that financial markets are created and operated by financial institution most often. Financial market can be said to comprise money and capital markets. Financial market therefore facilitates the use of movement of funds from surplus unit (those who save money) to deficit unit (those who need money, those who invest money in capital money in capital assets).

Financial Market comprise the following;

  • Financial intermediaries
  • Investors borrowers
  • Agents and brokers

While financial intermediaries and agents and brokers make up financial institutions.

Actors In Financial Markets

The actors in financial markets can be grouped in the following categories;

  • The financial intermediaries, which comprise the central bank, commercial banks, savings banks, savings and loans, credit unions, finance companies, pension trust, investment companies and real estate investment trusts.
  • Agents and brokers comprise mortgage bankers, investment bankers and securities dealers and brokers.
  • Investors and borrowers are making up people who own stocks, bonds and other security. People who borrow money with mortgage, instalment loans and other instrument, business in essence non financial instrument and government. While the central bank is the apex bank acting a lender of last resort.

It is worthy of note the first two above make up the financial institutions while the number three are makeup of investors borrowers. According to J.C Anyanwu the figure below is an illustration of the actors and classification of financial markets. In Nigeria, the principal actors in the financial markets are the central bank of Nigeria (CBN), commercial bank, merchant banks, developmental banks, mutual funds, financial companies, loans associations, savings types institutions in essence companies and savings banks federal and state government institutions and individuals, in essence borrowers and investors.

Financial Intermediaries

Financial inter-mediation consist of the activities of institutions which hold money balances of or which borrow money from individuals and other institutions in order to make loans or other investments. The major functions of financial inter-mediation in channeling of funds from lenders to borrowers. Therefore financial inter-mediation includes the banking sector and non bank financial intermediaries.

However, the liabilities of banking financial intermediaries form part of the money supply while the liabilities of non bank financial intermediaries do not form part of the money supply because their liabilities are regarded as near money or Quasi-money example of financial intermediaries includes commercial banks, savings banks, savings loans, credit unions finance companies, life insurance companies pension trust investment companies and real estate investment trusts while non banks, financial intermediaries include building societies, hire purchase companies, insurance companies, saving banks, pension funds investment trust etc

Process Of Multiple Expansion (Money Market)

The process of multiple expression of credit is also true for the individual bank as it is for the commercial banking system as a whole. Thus whenever the bank excess cash reserve, it will lend or invest the same. This amount will come back to the bank in form of a new deposit, which will become the basis of yet another loan etc. The money, which goes out for loan, and the money which comes back as new depots are the same.

But the bank is not concerned as to how a depositor gets the cash which was with the bank a while ago. The ability of an individual bank to create deposits is not unlimited. That ability is constrained by reserve requirements and the volume of each banks reserve.

The reserve requirement is the legally fixed or required ratio of those cash assets defied by law as reserve to deposit liabilities. There are two kinds required reserve and excess reserves. Required (cash) reserves are those, which a bank must have to meet its reserve requirement. Excess reserves are the amount of reserves, which a bank has over and above its required amount. When required cash reserves exceed actual cash reserves, the bank is said to be deficient in reserves.

On the basis of its excessive-ness the limitations of credit creation can thus be side to be expected. In cash reserve, a bank may expand loans and investments and create money or credit. It is possible to expand beyond this amount of excess reserve, but that would be a very risky policy. From experience therefore, a bank expects to lose reserve in an amount equal to its loans and investment expansion unless it has favorable clearing balance.

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