Money and Capital Markets & Financial Sector Regulation | Economics for JAMB PDF Download

Money and Capital Markets

1. Money Market:

• Refers to a market for short-term borrowing and lending of funds.
• Deals with financial instruments with maturities of one year or less.
• Instruments include Treasury bills, commercial papers, certificates of deposit, etc.
• Functions: Provides a platform for liquidity management, facilitates short-term borrowing and lending, and influences interest rates.

2. Capital Market:

• Refers to a market for long-term borrowing and lending of funds.
• Deals with financial instruments with maturities of more than one year.
• Instruments include stocks, bonds, debentures, etc.
• Functions: Facilitates long-term investment, mobilizes savings, and provides a platform for businesses to raise capital.

Financial Sector Regulations

1. Financial Sector Regulators:

• Central Bank of Nigeria (CBN):
  • Function: Maintains monetary stability, promotes a sound financial system, issues currency, and regulates financial institutions.
• Securities and Exchange Commission (SEC):
  • Function: Regulates and supervises the operations of the capital market, protects investors' interests, and ensures market integrity.
• National Insurance Commission (NAICOM):
  • Function: Regulates and supervises the operations of the insurance industry, ensures solvency of insurance companies, and protects policyholders.
• National Pension Commission (PenCom):
  • Function: Regulates and supervises the operations of the pension industry, ensures the security of pension funds, and protects retirees' interests.

Deposit Money Banks and the Creation of Money

1. Deposit Money Banks (DMBs):

• Refers to commercial banks and other financial institutions that accept deposits from the public.
  • Functions: Provides various banking services such as accepting deposits, granting loans, facilitating payments, and offering other financial services.

2. Money Creation Process:

• When DMBs receive deposits, they are able to create money through the process of fractional reserve banking.
• Banks are required to hold a fraction of deposits as reserves and can lend out the remaining amount.
• Through lending, new deposits are created, expanding the money supply in the economy.
• This process continues as loans are repaid and new loans are granted, allowing for further money creation.

3. Challenges of Money Creation:

• Inflation: Excessive money creation can lead to inflationary pressures in the economy.
• Financial Stability: If banks make risky loans, it can threaten the stability of the financial system.
• Asset Bubbles: Excessive money creation can contribute to the formation of speculative bubbles in asset markets.