Functions of Discount Houses in Nigeria.

Functions of discount houses in Nigeria cannot be undermined as far as developing the country’s economic value is concerned. This is more reason why this article presents an overview of the money market and discount houses in Nigeria in terms of raising finance to assist companies and government on short-term basis.

A very important role of the discount houses is to act as intermediaries between the originators of bills who want cash immediately to carry on their business and the commercial banks which have cash to spare for short periods. Discount houses, which is a segment of the financial system in any country, started with the Bank of England which brokered the operation of the discount market. A discount house is a firm that specializes in trading, discounting, and negotiating bills of exchange or promissory notes. Its transactions are generally performed on a large scale with transactions that also include government bonds and Treasury bills.

When there is a shortage of money in the money market, the discount houses can borrow from the Bank of England as “lender of last resort”. The objective of the Bank of England is to supply or withdraw enough cash from the banking system to offset the daily flows between the central bank and the commercial banks. The Nigerian discount houses took a cue from the English discount system.

As a result of the inability of the direct monetary management control to find solutions to endemic problems in the financial sector between 1970s and far 1992 when oil boom induced excess liquidity without visible solution in the economy, discount houses were seen as a veritable and supportive institutions and avenues for an efficient an effective adoption and practice of indirect monetary control whose arrow-head is the Open Market Operation (OMO).

Discount Houses were set up by the provisions of Section 28, of the Central Bank of Nigeria (CBN) Decree No. 24 of 1991 of Banks and other Financial Institutions (BOFIA) Decree No. 25 of 1991 as amended. CBN (2004) provided the guidelines on which discount houses should function.

Reason for the Establishment of the Discount Houses

Discount Houses were primarily created in Nigeria to carry out the following functions:

  • Promotion of rapid growth and efficiency in the money market
  • Acting as an intermediary between the CBN and licensed banks in Open Market Operations (OMO) transactions and other eligible transactions
  • Facilitating the issuance and sale of short term government securities
  • Providing discount/re-discount facilities for Treasury Bills (TBs), Government Securities and other
    eligible financial instruments
  • Accepting short-term financial accommodation to banks

Functions of Discount Houses in Nigeria.

The Nigerian Stock Exchange was very vibrant until early March, 2008 when the all share index peaked 66,371 points, with capitalization value of N12,640 trillion on March 5, 2008. between March 2008 and 1st half of 2009, the market depreciated as much as 56.5 % and the end is not yet in view given the current global economic melt-down. As a result of this failure, foreign countries like USA, Brazil, and Japan tried to intervene by arranging a bail-out for this economic problem in the stock market, but all to no avail. All these intervention measures are pointer that the alternative to stock market is the money market, which embodies the discount houses. Therefore some of the functions of discount houses in Nigeria which are majorly targeted at reducing the effects of the global economic melt-down in Nigeria’s financial system will be focused on.

It is no doubt that the discount houses in Nigeria are saddled with some functions as enshrined in the CBN 1991 guidelines and these include:

  • Discount Houses act as an intermediary between the CBN and licensed banks.
  • Discount Houses facilitate the issue and sale of short-term government securities by tender.
  • Discount Houses promote the rapid growth and efficiency of money market in Nigeria.
  • Discount Houses accept short-term deposits from banks.
  • Discount Houses provide discount or rediscount facilities for treasury bills, government securities and other eligible
    financial instruments acquired by banks.
  • Discount Houses play very important roles in stimulating investments in the economy
    and in boosting the general operations of the money market.
  • Discount Houses do not only serve as catalyst in the market, they also act as investors in the money market.

Nonetheless, discount houses also perform any other functions as they are specified by CBN from time to time. Their role in facilitating profitable open market operations is worth stressing.

List of Discount Houses in Nigeria

Here are the five discount houses in Nigeria as they are owned by consortiums of banks and other financial institutions:

Challenges that Face the Money Market and the Discount Houses

Challenges which confront the country’s money markets or even the discount houses are the following:

  • Over reliance on the government
  • Wide Gap in the information structure
  • The oligopolistic structure of the markets
  • Low market size and intensity
  • Lack of the financial equipment

Note: The money market is the market where securities of short term nature of not more than one year are bought and sold. It has no central location; businesses are usually transacted on telephone, fax, telex, and so on. Prices of securities dealt with are usually determined by the influence of the Federal Government of Nigeria’s monetary policies being issued annually and monitored by the Central Bank. This has been one of the original businesses of the discount market and no other institution is adequately suited to perform this function like the discount houses.

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