Nigerian discount houses: performance, problems and re-positioning

Abstract

The paper sets out to assess the performance of discount houses in Nigeria and in particular to identify their achievements and problems with the aim of articulating measures to re-position the institutions for improved performance. As a background, the paper reviews the concept of discount houses, the origin of discount house system, their global spread and alternative systems as well as their variations over the years within and among economies. The British model was applied as the basis of the comparative analysis in the paper. This review offers good insight into the rationale and philosophy of adopting the discount house system in Nigeria. Thus, Nigeria's discount house system, which was patterned after the existing discount houses in other economies, commenced operations in 1993 but started in 1995 to experience serious liquidity and viability problems. These problems which followed a short boom between 1993 and 1994, were traced to a number of factors. First, the accelerated deregulation of the money market since 1995 removed direct control and resulting distortions on which the discount houses thrived. Second, the pursuit of tight monetary policy by the Monetary Authorities moderated liquidity whose management in the past provided substantial profit to the discount houses. Third, the improved distress resolution measures restored confidence to the banks which attracted some of the business hitherto done by the discount houses. Finally, the enhanced efficiency and stability in the foreign exchange market reduced the need to keep overnight funds with the discount houses in order to make purchases at the hitherto volatile foreign exchange market. The paper examines two options for resolving the observed problems. While the first option seeks a protected discount house system in which banks would be excluded, the second explores a situation in which discount houses and banks would participate jointly in both discount house and banking business. Finally, the paper considers the second option as more appropriate in Nigeria's deregulated financial setting in which distortions, inefficiencies, and excessive liquidity has been reduced, thereby making it difficult for the existing discount houses to survive under the resulting contraction in pure discount house business which focuses attention on managing liquidity in the money market.