International money and capital markets are markets for lending and borrowing and in the case of Nigeria for buying dollars and other currencies outside their countries origin.
These international money and capital markets are worldwide. By far the most important of the international money markets is located in Europe and is usually referred to as the Europe currency market. As majority of business transactions take place in dollars the market is usually described as the Europe dollar market even though other major currencies are traded. It is this tradition that is followed in Nigeria as the naira is matched against the dollar.
Te emergence of a single foreign exchange market in Nigeria is supposed to take after such other international money markets. As currency operated there is a great divergence from the normal operation of a Foreign Exchange Market (FEM).
Over the last nine months this market first and second-tier now FEM has become the primary means of transmitting short term funds across the nation‚Äôs boundaries and there is scope for medium and longer term funds.
The Nigerian foreign exchange market like any other, is entirely of whose sale nature and transactions are typically of a minimum size of millions although sometimes smaller.
The whole sale is confined presently of 47 banks with plans to extend it to some other institutions.
The market as it is being presently run lacks of elaborate international framework. Presently it has no network of international banking connections that are linked by phased out telephone and telex.
The market is officially funded by the Central Bank of Nigeria and there is little autonomous funding. The Nigeria foreign exchange market has some limitations as it is highly regulated by the monetary authority.
Ideally, the market ought to operate freely on line with government avowed deregulation of the economy while bidding sessions are not supposed to feature. Demand and supply are supposed to determine the ruling exchange rate.
As a result by monetary authority in the country bidding sessions take place as a means of injecting official funds into the market. The Central Bank has promised the nation that as autonomous sources of funding the market increases and begin to play a significant role on even replace the official source in the main supplier of funds to the market, the bidding sessions will pale into insignificance and be affirmed before the merger of the first and second tier market . The Central Bank would deal like any other bank selling and buying foreign exchange over the telephone or telex to and from participants in the inter-bank market.
By this admission, the Central Bank recognise the role and importance of inter-bank dealings in a foreign exchange market. This recognition of the role of inter-bank dealings was bank dealing? Who in the financial circle is afraid of inter-bank dealings?
As it stands out now, there seems to be behind the dealings which the Nigerian public is unaware of. For an efficient foreign market to evolve the mechanics of its full operation has to be complete from onset.
The increasing demand for external funds in Nigeria has meant that banks deposits in the market because chequing account do not exist as in a domestic banking system. Interest rates are supposed to be high enough to attract lodgement of foreign currencies. What should have done is to encourage banks in the country to attract foreign exchange deposit by offering high interest rates.
In terms of number of transactions the vast majority is supposed to be accounted for by movements of funds among the banks themselves. This very essential part of the market is what the CBN dispensed with recently when it outlawed interbank dealings. Banks are supposed to use the market as a means of adjusting their foreign exchange liquidity position, going into the market when their balance sheets become illiquid and putting out their deposits when the liquidity structure of their books become excessive.
The banks are supposed to buy or sell foreign exchange depending on their view of their future of interest rates. The main purpose of banks buying foreign exchange is to sell to commercial users.
These users may be companies financing export or import, or simply buying for working capital purposes in of country.
Whenever a bank runs short of foreign exchange such bank is suppose to meet a fellow bank and buy some from it rather than wait till next bidding session. Having to wait might not be in the overall interest of the economy.
The Nigerian experience has shown that so far the essential ingredient for operating an efficient foreign exchange market are lacking in the present arrangement. The situation as it is now is being stage managed with policies dictate by monetary authorities.
There is now a growing suspicions of the actual intentions of the authorities in the frequent regulations. Such acts gives some credible to beliefs that whenever some top shots want to transfer funds, the market is manipulated to suit them.
If Nigeria must operate a foreign exchange market in line with government policy of deregulation such market must be seen by all as being free from manipulation.