How has the functions of the discount houses evolve overtime in Nigeria. And what are the institutional Dynamics at play. 2. How did the West African currency board perform this function of currency supply and were the native satisfied with their func....
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Discount houses generally are non-bank financial institutions established to intermediate funds between a central bank and the rest of the banking institutions with the primary aim of assisting the monetary authorities in monetary management. Specifically, discount houses perform a liquidity management function in the money market.
The major functions of the discount houses in the context of assisting the monetary authorities in liquidity management include:
1. Promotion of growth and efficiency of the money market and orderliness in money market transactions;
2. Intermediation of funds between the central bank and the deposit money banks;
3. Facilitation of the issuance and sale of short-term government securities, including serving as underwriters;
4. Provision of discount and rediscount facilities to banks thereby relieving the central bank of the burden of carrying out such tasks;
5. Acceptance of short-term deposits, especially overnight deposits from banks;
6. Provision of short-term accommodation to banks, which otherwise would have been provided by the central bank, among others
Prior to the establishment of discount houses in Nigeria, the Nigerian money market was characterised by a period of excess liquidity but low patronage of treasury bills even with fairly attractive yield for the 91-day tenor bills. The interbank market was endangered due to loss of confidence amongst participants in the market. The conduct of monetary policy was through the use of direct controls such as stabilisation securities, credit limit and reserve requirements. However, the authorities considered the aforementioned approach out of tune with modern day monetary policy management. Hence, when the Central Bank of Nigeria (CBN) finally opted for indirect monetary control (following deregulation of the financial system) using discount houses as principal dealers, the following were considered to be the rationale for the establishment of discount houses:-
1. Assist in the creation of a market driven liquidity management framework;
2. Deepen the money market by developing an active secondary market;
3. Act as intermediaries between CBN and banks;
4. Serve as underwriters of government securities; and
5. Promote active trading in private sector financial instruments Discount Houses were set up by the provisions of Section 28, of the Central Bank of Nigeria (CBN) Decree No.24 of 1991 and sections 61 of Banks and Other Financial Institutions (BOFID) Decree No. 25 of 1991 as amended.
The founding objectives and principal duties of discount houses were:
1. Promote rapid growth and efficiency of the money market in Nigeria;
2. Act as intermediaries between the Central Bank and the licenced banks in OMO transactions and other eligible securities of not more than three years maturity as defined under the CBN‟s expanded discount window guidelines;
3. Facilitate the issuance and sale of short-term government securities and other eligible short-term commercial bills;
4. Provide discount/re-discount facilities for treasury securities and other eligible financial instruments;
5. Provide fund/portfolio management and financial advisory services; and
6. Accept short-term investments on an intermediary basis; and
7. Other functions which may be prescribed by the CBN from time to time.
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Discount Houses in Nigeria
The West African Currency Board was established in October 1912 following the Report of a Departmental Committee set up by the Secretary of State to enquire into the currency in use in British West Africa. The Board was responsible for the production and distribution of currency in the Gold Coast (Ghana), Nigeria, Sierra Leone and Gambia.
In line with their gradual movement towards independence the four countries began to issue their own respective national currencies. The Board entered into detailed arrangements to facilitate the withdrawal and redemption of its currency and stationed representatives in the four capitals to superintend the destruction of notes and the shipment of coins to the UK. The Board was dissolved in 1965 and its assets and liabilities were handed over to the Crown Agents who became responsible for its residual functions.
BRITISH WEST AFRICAN CURRENCY BOARDS INTRODUCTION OF PAPER MONEY
The British West African Currency Board was constituted in 1912 to control the supply of currency to the British West African Colonies; these now constitute Nigeria, Ghana, Sierra Leone and Gambia. Whereas various silver and other metal coins had been in use in West Africa since the late eighteenth century; the coastline was unusual in the array of traditional forms of currency being used. These included cowrie shells, manillas, gold dust, bars iron) and cases of gin!
The criteria for an ideal currency is that it is hardy, long lasting, easy to count, difficult to counterfeit, it is portable, durable and easy to recognize. Consequently there were few rivals to precious metals except cowrie shells! They represented the shillings and pence of the West African culture, the pounds being represented by higher value merchandise such as gold. By the nineteen twenties cowries had virtually disappeared from main trade, the British silver coin was accepted together with 1/10 penny and penny. Manillas which are pieces of copper in horseshoe shaped form were probably introduced to West Africa by the Portuguese in the sixteenth century; they came to trade goods in exchange for slaves and ivory and found their bracelets or manillas well accepted. At that time 12-15 brass manillas purchased one slave. Gin might appear unusual as a currency but cases of gin were well accepted in East And Central Nigeria being a good investment since the government continued to increase excise taxes and thus the price of gin went up.
Based on the fact that by 1910 the amount of silver coinage in circulation in the West African Colonies Nigeria, Gold Coast (Ghana), Sierra Leone and Gambia was almost equivalent to that in circulation in the United Kingdom and given the fact that cash transactions had practically replaced barter the British Government requested a committee to look into the best currency policy for the West African Colonies. The Board recommended issuing paper money determined that the first paper issues bearing the name of the Currency Board would be a 2/- ,10/- and 20 shillings. One centre Lagos would initially be used for circulation.
The West African Currency Board was dogged during the initial years of currency circulation in maintaining adequate supplies. Besides the regular fluctuations in agricultural crops cocoa, groundnuts, palm oil and palm kernels the 1914 world war abruptly affected commodity exports. In 1918 the board could not meet the demand for silver coin based on the rapid turn around in the economy after the first world war. The Bank of England authorized the printing of 21 million salmon one shilling replacement notes as an alternative.
Three values were produced 1/-,10/- and 20/-. As soon as the salmon notes shown above arrived the Nigerian notes were withdrawn hence they are extremely scarce. As early as 1919 it was realized that at the present stage of development West Africa was not ready for paper currency. Although the one pound note was popular with Europeans and in the larger towns, the 1/- and 2/- designed for wider use met with dislike from the general public for which they were intended. In addition the 5 pound note with the date 1st March 1919 was issued for use by banks and wealthy people, again lack of use resulted in withdrawal in 1923.
The growing pressures for independence meant it was inevitable that the Currency Board would contract. Ghana which had become independent in 1957 entrusted the Bank of Ghana to issue notes in 1958. Nigeria followed soon after the Central Bank of Nigeria opened in July 1959. The currencies of Sierra Leone and Gambia took sometime to be issued. Sierra Leone adopted the Leone from the onset but Gambia (1965) and Nigeria and Ghana initially continued to use the pound.
(Africanbanknotes.com)