Discount Houses in Nigeria

Discount Houses in Nigeria

Discount Houses in Nigeria

Discount houses play a pivotal role in facilitating the smooth flow of funds and ensuring the efficient functioning of the money market. Established as non-bank financial institutions, designed to bridge the gap between the central bank and other banking institutions. This article delves into the functions and significance of discount houses in Nigeria, shedding light on their role in monetary management and the promotion of a vibrant money market.

Understanding Discount Houses

Think of discount houses as financial middlemen. Their job is to off-take securities from the federal government and distribute them to commercial banks and the broader market. In other words, their primary function is to facilitate the efficient management of liquidity and financial instruments between the central bank and other commercial banks.

More intricately, here are key aspects to understand about discount houses:

Promotion of Growth and Efficiency in the Money Market

Discount houses play a crucial role in fostering the growth and efficiency of the money market. By smoothing out surpluses and shortfalls in the supply and demand for liquidity, they contribute to the orderly development of the market.

Intermediation of Funds between the Central Bank and Deposit Money Banks

Acting as intermediaries, discount houses facilitate the flow of funds between the central bank and deposit money banks. This intermediary function ensures a seamless transfer of funds and supports liquidity management efforts.

Facilitation of Short-term Government Securities

Discount houses are instrumental in the issuance and sale of short-term government securities. Serving as underwriters, they contribute to the stability of the financial sector by actively participating in the open market operations of the central bank.

Why Discount Houses?

Challenges in the Pre-Discount House Era

Before the inception of discount houses, Nigeria faced a scenario of excess liquidity in the money market. Surprisingly, despite attractive yields on the 91-day treasury bills, there was a lack of patronage. Confidence in the interbank market dwindled, leading to a need for a fresh approach to monetary policy. The conventional methods of direct controls, such as stabilization securities and credit limits, were deemed outdated for the evolving financial environment.

Functions of Discount Houses in Nigeria

In response to the changing financial landscape, the Central Bank of Nigeria (CBN) embraced indirect monetary control through discount houses as principal dealers. The rationale for their establishment included:

Establishing a Market-Friendly Liquidity System

Discount houses were designed to be crucial players in creating a system where liquidity (the flow of money) is managed based on market dynamics, making it more responsive to real-time needs.

Boosting the Money Market

To make the money market livelier and more dynamic, discount houses were given the responsibility of building a vibrant secondary market. This involves encouraging more people and businesses to actively participate in buying and selling financial instruments

Intermediaries Between CBN and Banks

Discount houses were to serve as intermediaries, facilitating transactions between the Central Bank and commercial banks, and streamlining the flow of funds.

Underwriters of Government Securities

A crucial role assigned to discount houses was underwriting government securities (i.e., pledging to buy all government securities and reselling), ensuring the stability and reliability of short-term government instruments.

Promoting Active Trading in Private Sector Instruments

Beyond government securities, discount houses were encouraged to stimulate active trading in private-sector financial instruments, diversifying the market.

How many discount houses do we have in Nigeria?

There are 5 approved discount houses in Nigeria they include:

  1. ASSOCIATED DISCOUNT HOUSE LTD.
  2. CONSOLIDATED DISCOUNT LIMITED
  3. EXPRESS DISCOUNT LIMITED
  4. FIRST SECURITIES DISCOUNT HOUSE LTD
  5. KAKAWA DISCOUNT HOUSE LTD

Discount Houses Versus Other Financial Institutions

The main difference between discount houses and other financial institutions is in who they serve.

Customer Base

Discount houses Primarily interact with other financial institutions, such as commercial banks and the central bank. They are not typically retail-facing and do not serve individual customers.

Other financial institutions

Directly serve individual consumers and businesses, providing services like checking and savings accounts, loans, and mortgages.

The Bottom line

In conclusion, discount houses play a pivotal role as intermediaries, facilitating the seamless flow of funds between the central and commercial banks. Operating as financial architects, they focus on managing short-term financial instruments and contribute significantly to the equilibrium of the money market.

FAQs

1. What is a discount house?

A discount house is a non-bank financial institution that acts as an intermediary between the central bank and commercial banks, facilitating the trading of short-term financial instruments and contributing to liquidity management in the money market.

2. What is the primary function of a discount house?

The primary function of a discount house is to promote the efficient flow of funds between the central bank and commercial banks. They play a crucial role in managing liquidity and trading short-term government securities.

3. How do discount houses differ from commercial banks?

Discount houses specialize in short-term financial instruments and primarily interact with other financial institutions. They do not serve retail customers. In contrast, commercial banks offer a wider range of services to individual and corporate customers.

4. What services do discount houses provide?

Discount houses provide services such as trading short-term government securities, facilitating open market operations, managing liquidity, and acting as intermediaries between the central bank and commercial banks.

5. How do discount houses contribute to the money market’s development?

Discount houses contribute to the growth and efficiency of the money market by promoting a balanced supply and demand for liquidity. They facilitate the issuance and trading of short-term securities, fostering an active secondary market.

6. Are discount houses regulated?

Yes, discount houses are regulated by financial authorities, such as the central bank in the case of Nigeria

7. Can individuals access services from discount houses?

Generally, discount houses primarily interact with other financial institutions and do not offer services directly to individual customers. Their focus is on facilitating transactions and managing liquidity in the interbank market.

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