Outlines

 Definition of Credit Market

 Types of Credit Market

 Categories of Credit market

 Types of Credit Instrument in Credit Market

 Nigeria Credit Market

 Institution under credit market and their regulator in Nigeria

 Product offering by Nigeria credit market in Nigeria

 Challenges facing by Credit market in Nigeria

Definition of Credit market

It is a market place where money is borrowed and lent majorly in the form of bonds

and debts. When debts are issued to companies looking to raise funds, then the

market is known as a primary market, whereas when the securities are traded in the

market, then that market is coined secondary market. Trades occur generally in the

form of bonds, but notes and bills are also commonly found in the credit market. The

participants in the credit market are banks, government, corporate companies,

traders, institutional investors, and individuals.

The credit markets play a very crucial role in sustaining the growth of almost all the

countries. Their main function is to provide intermediation of funds between the

savers and investors and thus improve the efficiency of allocation of resources. They

also play an important part in the monetary transmission mechanism. Looking at the

interest rates and the investor demand for the type of bonds (risk free: e.g. -

government bonds, highly risky: e.g. – junk bonds) in the credit market, one can

assess the financial health of the financial community one is dealing in. Credit

market can be formal or informal

 Types of Credit Market

Informal Credit Market

The informal credit market is an important part of the financial system of the

developing countries. They play a decisive role in channeling credit to small and

poor borrowers in both urban and rural areas. They also constitute an important

source of working capital of all sizes and serve generally to ameliorate inefficiencies

in the allocation of formal sector credit.

It is heterogeneous, encompassing the wide range of activities of wholesale traders,

commission agents as well as those of local moneylenders, pawnbrokers, village

shopkeepers, agricultural input suppliers, itinerant peddlers, and even friends and

relatives. What all these lenders have in common is informality, adaptability, and

flexibility of operations, a characteristic that reduces "transactions costs" (i.e., the

cost of making, monitoring, and recovering loans) and confers on informal lenders

their comparative advantage over formal banks and credit associations.

A common thread that runs through all of them is their informality, adaptability and

flexibility of operations and features that reduce their transaction costs and confers

upon them their comparative advantage [Ghate, 1990].

Characteristics of informal credit market

The following aspects characterize the ICM:

 Scale of operations is small, because lending is primarily based on personal

knowledge of the borrower. Loans are small, repaid quickly, and are largely

unsecured.

 Individual lenders operate in a small place i.e. circumscribed area, or in a

specific niche of the market.

 Due to the small scale of operations, intra agency problems typical of large

organizations like banks are not seen in the ICM.

 Suppliers function outside the purview of regulations imposed in the formal

sector in respect of capital, reserve and liquidity requirements, ceilings on

lending and deposit rates, mandatory credit targets, audit and reporting

requirements and so on.

Formal Credit Market

Institutions provide intermediation between depositors (or the government) and

lenders and charge relatively low rates of interest that usually are government
subsidized. Formal credit market is not always available for small and poor borrower

in both rural and urban areas because of the following:

i. Absence of collateral and documentation is the main reason which

prevents rural poor from getting bank loans.

ii. The arrangements of informal sector loans are flexible in terms of timelines,

procedural requirements, interest rates

Areas of Comparative Advantage

Formal and informal credit market each have their comparative advantages. Formal

finance is more readily able to accommodate large and longer-term loans because of

its greater reliance on the pooling of deposits and maturity transformation (being

able to lend for longer terms than the average tenure of deposits, because deposits

are continually replaced). It is better suited to serving the needs of large- and

medium-scale industry, organized trade and commerce, large- and medium-scale

farmers who can offer the security of the land they own, and well-to-do urban

households. It has been less successful in serving the needs of the large unorganized

sector of small and micro-entrepreneurs, small traders, tenant farmers and

sharecroppers who do not have title to their land, and small and poor borrowers in

general.

The lower transactions costs of the informal sector make it particularly well suited

to making transactions that are cost intensive, small, and of short duration. Its
flexibility regarding collateral enables it to finance a large number of service

activities, where fixed assets are not created as security for the loan. The tying of

credit with marketing transactions gives informal lenders a comparative advantage

in supplying working capital loans for agriculture, as crop production loans, as well

as in small industries, such as those using hand looms or making footwear, where

the lender is often also a supplier of raw material or a buyer of the final products.

 Credit markets can be segregated into five Categories:

a. Corporate Bonds

b. Government Bonds

c. Municipal Bonds

d. Mortgage backed

e. Funding

A. Corporate Bonds

corporate bond is an investment in debt that is issued by a company and sold to an

investor. The company gets the cash it needs and in return the investor is paid a pre-

established number of interest payments. When the bond expires, or "reaches

maturity," the payments cease and the original investment is returned.

The backing for the bond is generally the payment ability of the company, which

depends on its future revenues. In some cases, the company's physical assets may be

used as collateral. The investor receives regular interest payments from the issuer
until the bond matures. At that point, the investor reclaims the face value of the bond.

The bonds may have a fixed interest rate or a rate that floats according to the

movements of a particular economic indicator.

B. Government Bonds

A government bond or sovereign bond is a bond issued by a national government,

generally with a promise to pay periodic interest payments called coupon payments

and to repay the face value on the maturity date. The aim of a government bond is

to support government spending. Government bonds are usually denominated in the

country's own currency. Government bonds are considered low-risk investments

since the issuing government backs them.

Government bonds assist in funding deficits in the federal budget and are used to

raise capital for various projects such as infrastructure spending. However,

government bonds are also used by the Central Bank to control the nation's money

supply.

When the Central Bank repurchases Nigeria government bonds, the money

supply increases throughout the economy as sellers receive funds to spend or invest

in the market. Any funds deposited into banks are, in turn, used by those financial

institutions to loan to companies and individuals, further boosting economic activity,

and vice versa when government bonds are sold.

 C. Municipal Bonds

A municipal bond, commonly known as a Muni Bond, is a bond issued by a local

government or territory, or one of their agencies. It is generally used to

finance public projects such as roads, schools, airports and seaports, and

infrastructure-related repairs. The term municipal bond is commonly used in the

United States, which has the largest market of such trade-able securities in the world.

D. Mortgage Backed

A mortgage-backed is an 'instrument' which is secured by a mortgage or collection

of mortgages. The mortgages are aggregated and sold to a group of individuals (a

government agency or investment bank) that securitizes, or packages, the loans

together into a security that investors can buy. It is an investment similar to a bond

that is made up of a bundle of home loans bought from the banks that issued them.

Investors in MBS receive periodic payments similar to bond coupon payments.

Essentially, the mortgage-backed security turns the bank into a middleman between

the homebuyer and the investment industry. A bank can grant mortgages to its

customers and then sell them on at a discount for inclusion in an MBS. The bank

records the sale as a plus on its balance sheet and loses nothing if the homebuyer

defaults sometime down the road.

  Four Types of Credit Instrument

Simple Loan

This is credit instrument in which the lender provides the borrower with an amount

of funds, which must be repaid to the lender at the maturity date along with an

additional payment for the interest. Many money market instruments are of this

type—for example, commercial loans to businesses.

Fixed Payment Loan

Fixed Payment Loan is also called a fully amortized loan, it is a credit instrument in

which the lender provides the borrower with an amount of funds, which must be

repaid by making the same payment every period (such as a month), consisting of

part of the principal and interest for a set number of years. For example, if you

borrowed N10,000, a fixed-payment loan might require you to pay N100 every

month for 2 years. Installment loans (such as auto loans) and mortgages are

frequently of the fixed payment type.

A coupon bond

A coupon bond pays the owner of the bond a fixed interest payment (coupon

payment) every year until the maturity date, when a specified final amount (face

value or par value) is repaid. (The coupon payment is so named because the

bondholder used to obtain payment by clipping a coupon off the bond and sending
it to the bond issuer, who then sent the payment to the holder. Today, it is no longer

necessary to send in coupons to receive these payments.) A coupon bond with

N1,000 face value, for example, might pay you a coupon payment of N100 per year

for ten years, and at the maturity date repay you the face value amount of N1,000.

(The face value of a bond is usually in N1,000 increments.) A coupon bond is

identified by four pieces of information. First, the bond's face value. Second is the

corporation or government agency that issues the bond. Third is the maturity date of

the bond. Fourth is the bond's coupon rate, the naira amount of the yearly coupon

payment expressed as a percentage of the face value of the bond.

In our example, the coupon bond has a yearly coupon payment of N100 and a face

value of N1,000. The coupon rate is then N100/N1,000 = 0.10, or 10%. Federal

government bonds, state government bonds, corporate bonds and sukuk bonds are

example of coupon bonds in Nigeria

Discount Bond

A discount bond (also called a zero-coupon bond) is bought at a price below its

face value (at a discount), and the face value is repaid at the maturity date. Unlike a

coupon bond, a discount bond does not make any interest payments; it just pays off

the face value. For example, a one-year discount bond with a face value of N1,000

might be bought for N900; in a year's time the owner would be repaid the face value

of N1,000.
  Nigeria Credit Market

The Nigerian credit market is regulated primarily by the Central Bank of Nigeria

(CBN), which is the apex regulatory authority in the banking system and thus has

responsibility for the DMBs. There are of course, credit lenders that are outside the

regulation or supervision of the CBN.

Institution under credit market and their regulator in Nigeria

Institutions Regulators

CBN FMBN ELAN SEC/NSE NCC None

Deposit Money Banks 

Finance Companies 

Micro Finance Banks 

Discount Houses 

Primary Mortgage Institutions 

Development Finance Institutions 

Leasing Companies 

Capital Market Dealers 

Telecom Providers 

Community Based Organizations 

  CBN- Central Bank of Nigeria

 FMBN- Federal Mortgage Bank of Nigeria

 ELAN- Equipment Leasing Association of Nigeria

 SEC/NSE- Security and Exchange Commission/ Nigeria Security and Exchange

 NCC – Nigeria Communication Commission

Products offering by Nigeria Credit Market

 Overdrafts

 Short Term Loans (0-12 months)

 Medium Term Loans (2 -5 years)

 Long term loans (5 years and above)

 Advances

 Consumer Loans

 Commercial Bills

 Real Estate & Mortgage Loans

 Agricultural Loans

The major challenges of the market are:

 Difficulty in accessing credit, especially by the disadvantaged Micro Small

and Medium Scale Enterprises (MSMEs) and the active poor;

 High cost of credit, which historically had gone as high as 72% p.a. in the

deposit money banks in the early 1990s and currently ranges between 19%

and 25% p.a.

  Inconvenience that requires direct physical meetings by lenders and

borrowers.

 Inadequate credit infrastructure

 Ineffective legal framework for lending and loan recovery

 Poor credit culture

 Lack of long term funds

 Credit skill gaps

 Large Informal Sector Fiscal and macroeconomic instability

References

https://www.encyclopedia.com/international/encyclopedias-almanacs-transcripts-and-

maps/informal-credit-markets
https://www.cbn.gov.ng/fss/tue/BSP/Mortgage%20&%20Credit/FSS%202020%20-

%20Credit%20Market%20Presentation.pdf

https://quizlet.com/24420662/four-types-of-credit-market-instruments-flash-cards/

Ghate, 1990, “Imperfect Information, Screening and the Costs of Informal Lending: Study

of a Rural Credit Market in Pakistan.” in Hoff, Braverman and Stiglitz (ed.) (1990), 131–

153

Mahmoud S. Mohieldin and Peter W. Wright Economic Development and Cultural Change

Vol. 48, No. 3 (April 2000), pp. 657-670

Sanjay Jain (1999). Symbiosis vs. crowding-out: the interaction of formal and informal

credit markets in developing countries. Journal of Development Economics Vol. 59 1999

419–444