The study examines the impact of money market on economic growth in Nigeria using data for the period 1981-2013. Econometrics technique, Ordinary Least Squares Method was used to evaluate the relationship.  In the model specified Gross Domestic Product is used as the constant (Dependent variable) while money market interest rate, ratio of loan to deposit, commercial bank deposit, credit to private sector are the independent variable. The study suggest that though a  relationship exists between money market and economic growth, but the present state of the Nigerian money market is significantly and negatively related to economic growth. The connection between the money market and the real sector of the economy is very weak. This implies that the market has not grown to produce the needed growth that will push the Nigerian economy because of several challenges. It was therefore recommended that government should make the appropriate macroeconomic policies, legal framework and sustain the present reforms with a view to developing the market so as to promote productive activities, investments, and finally economic growth.

Keyword: money market, Economic Growth















The money market is a market for short term funds and as the name suggest. It is a market in which money is bought and sold. The market is used by business enterprise to raise fund for the purchase of inventories by banks to finance temporary reserve loss by companies to finance consumer credit and by government to bridge gap between its recipient and expenditure.

Unlike the market for textiles, for example there is no place that one can call a money market. Although  activities in the money market can be concentrated in a particular street for example all street of new York, Lombard street in London and broad street in Lagos. Transactions are impersonal taking place mostly by telephone Ajayi and Ojo (1981). The money market also refers to a collection of group of financial institution up for the granting of short term loans and dealing in short term securities, gold and foreign exchange Anyanwu(1993).

Furthermore, the money market is a key component of the financial system as it is the fulcrum of monetary operations conducted by the central bank in the pursuit of monetary policy objective. It is a market for short term funds with maturity from overnight to one year and includes financial instrument that are deemed to be close substitutes of money. The money market performs three broad functions:

  • It provides an equilibrating mechanism for demand and supply of short term funds.
  • It enables borrowing and investment requirement at an efficient market clearing price
  • It provides an avenue for central bank intervention in influencing both quantum and cost of liquidity in the financial system thereby transmitting monetary policy impulses to the real economy.

In other to meet these basic functions efficiently, money market have evolved over time spawning news instruments and participants with varying risk profiles in line with changes in the operating procedures of monetary policy changes in financial market structures, macroeconomics objectives and economic environment have called for shift in monetary regimes which in turn have necessitated refinement and procedures and institutional arrangement of central banks.

The money market is also a subsection of the fixed income market.  We generally think of the term fixed income as being synonymous to bonds. In reality a bond is just one type of fixed income security.  The difference  between the money market and the bond market is that the money market specialized in very short term debt securities (debt that mature in less than one year) money market investment are also called cash investment because of their short maturities period.

Money market securities are essentially IOU’s issued by government, financial institution and large corporations these instruments are very liquid and considered extra ordinary safe because they are conservative. Money market securities offer significantly lower returns than most other securities. One main difference between money market and the stock market is that most money market securities trade in very high denominations. This limits access for the individual investor.

The money market is a dealer market which means that firms buy and sell securities in their own account at their own risk. Another characteristic of a money market is the lack of a central trading floor or exchange.  Deals are transacted over the phone or through electronic media. The easiest way for us to gain access into the money market is with money market mutual funds or sometimes through a money market bank account. These account and funds pool together the assets of thousands of investors in order to buy the money market securities on their behalf. However, some money market instrument can be purchased directly like treasury bills failing that, they can be acquired through other large financial institution with direct access to these market.



The role of financial market in the development of the real sector and the economy at large cannot be over emphasized (Kehinde and Adekuwon, 2011).A critical characteristic of the money market is that it should be deep and broad so as to absorb large volume of transaction without significant effect on security price and interest. The characteristics require that they exist many active market participants such that the transaction of an individual investor will have just infinitesimal effect on the security price and interest rates. The characteristics also require that there are many varieties of securities so as to ensure that there is always alternative investment available to satisfy the respective return-risk desires of investors in the market. Money market that has depth and breadth will be informational as well as operationally efficient and will contribute significantly to the growth of the economy.

Iyiegbuniwe (2008) opinion that although the Nigeria money market has experience significant growth, both in the breadth securities as well as the volume of trading since the liberalization of the financial system in 1986. It still needs to be deepened further to achieve the required vibrancy that is expected of a money market. Edo and Ikelegbe (2014) noted that the tremendous growth recorded in the Nigerian financial sector especially in terms of the number of banks and other financial institution due to the liberalization policy initiated in 1986 was associated with weak regulatory system and characterized by a money market with low capital base and operational inefficiency. They reveal that the money market was more active in granting short-term loans /overdraft as well as trading in foreign exchange, with marginal effect on the real sector of the economy. Also Ochei and Osabuohien (2012) stated that unlike in advance economics where the money market is adequate and constrained by the absence of sub-market and availability of adequate credit instrument required for the smooth operations of the market. This is not to say that the Nigeria money market is ineffective. Much have been said and written about the Nigeria capital market but the reverse is the case for the money market in the country. Therefore there is the need to examine this crucial market and evaluate its performance in terms of its contribution to economic development.


The research question, which would guide this study are as follows:

  1. Is there any significant relationship between money market and economic growth?
  2. Is there any significant relationship between money market instrument and the development of the Nigeria financial system?




The objectives of this study are:

  1. To establish the relationship that exists between the money market and economic growth.
  2. To ascertain the relevance of money market for business expansion in Nigeria.



Ho: There is no significant relationship between money market and economic growth in Nigeria.

H1: There is a significant relationship between money market and economic growth in Nigeria.


Erb (1991) observe that the role of money market in economic development of any nation is to ensure the mobilization of idle funds from the surplus unit to the deficit sector which accordingly appropriate surplus fund which are left in bank or channeled into the system to create room for new innovations. This study will be very useful in various forms for example, it will explore the effectiveness and usefulness of the money market to the economy, the study will be a reference material for further study on the market and the economic development in Nigeria. The bank and other financial sectors of the economy will be guided in the effect of the money market to the development of the Nigeria economy, the result of the study will contribute to practical knowledge, the existing body knowledge advancement and stability of the Nigeria economy. It will provide various policy recommendations to policy makers on way to use money market instrument more effective in the developing Nigeria’s economy.


First, the Nigeria money market when compared to markets of developed economies is still infantile and lack depth in terms of product diversification and technological infrastructure. The market lacks the appropriate legal framework required for the introduction and operation of new financial products.

Second, the primary money market is also virtually dominated by government activity on the demand side via government’s borrowing during deficit budget financing. The market is typically stressed with large issues of government instruments.  Government issues also from the bulk of instruments in the secondary market, as they further sever as collateral for short term interbank transactions. Corresponding, the dearth of private sector instruments limits the supply of money market products available to possible investor wishing to diversify their portfolios

Furthermore, the banking sector is still plagued with large margins between lending and deposit rates. This has a significant impact on saving and investment. Low deposit rate hinder savings, while high lending rates make borrowing expensive, which restricts private sector investment and growth.

Third, the global financial crisis of 2008 put significant pressure on the money market of many economics due to the limited restriction of capital movement across many market exchanges. The contagion effect of the crisis had significant consequences for the Nigerian money market, which culminated in the Nigerian banking crisis of 2009. Subsequently, there has been some uncertainties and lack of confidence in the market coupled with foreign exchange rate volatility. This has prompted significant interest rate movements in the banking system, a negative indication for investors.

In addition, the Nigeria financial system following the banking crisis of 2009 has witnessed sustained excess liquidity, following the mitigating intervention policies of the CBN. The liquidity surfeit has inadvertently blunted the impact of monetary policy in influencing money market rates, credit condition bank lending to priority sectors. This has serious implications for sustaining price and monetary stability, necessary for promoting economic development.

Finally, the high return offered in the money market on government securities when compared to other developing nations has led to significant capital inflows of a short-term nature. The fear of capital repatriation is ever present, with negative consequences for the nation’s foreign reserves and currency valuation. Retention of short-term portfolio investment poses a serious concern for the monetary authorities, due to its knock on effect on price and monetary stability.


This research work is organized in to five chapters.

Chapter one includes introduction which comprises background of the study, statement of the problem, research questions, objectives of the study, hypothesis of the study,  significant of the study, scope and limitation of the study, organization of the study.

Chapter two present literature reviews, empirical literature, theoretical literature.

The research methodology, which includes the model specification, data collection, analytical techniques estimation techniques etc are stated in chapter three while data presentation and analysis were made in chapter four. Concluding in chapter five reflects on the conclusion recommendation.