Money market can be defined as a market for short-term loan. The market consists of institutions or individuals who either have money to lend or wish to borrow on a short-term basis.
Instruments used in the money market
- Treasury bills: Treasury bill is normally issued by the central bank of a country, which assists the government to borrow money from the money market on short-term basis.
- Bill of exchange: Bill of exchange refers to a promisory note which shows the acknowledgement of indebtedness by a debtor to his creditor and his intention to pay the debt on demand or at an agreed time in future, normally ninety (90) days.
- Call money funds: The call money fund or market is a special arrangement in which the participating institutions invest surplus money for their immediate requirement on an overnight basis with the interest and withdrawal on demand. The call money has an advantage of early return and at the same time are withdrawable on demand. It provides solution to the immediate stock of liquidity pressures in the money market.
Institutions involved in the money market
Institutions involved in the money market include:
- Central bank.
- Commercial banks.
- Acceptance houses Finance houses.
- Discount houses.
- Insurance companies.
Advantages of money market
- Provision of finance: Money market enables entrepreneurs and investors to raise enough finance through borrowing to run their businesses.
- Creation of extra income: The money invested in money market is capable of yielding extra income in form of interest.
- Promotion of economic development: Economic growth and development is enhanced through borrowing from money market.
- Ability to recall invested funds: Funds invested in the money market are very easy to recall.
- It enhances savings: Money market provides opportunity for those having surplus fund to invest thereby enhancing savings.