CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The inter-bank market in foreign exchange is used for trading in foreign currencies – main vehicle for generating autonomous inflow of foreign exchange into the banking system. La licensed banks, development banks and the central bank are active traders the market. These banks intermediate for their corporate and individual customers that engage in international trade and investment. The are always prepared to buy form or sell foreign currencies to their customers in both the spot and forward markets.
In addition, authorized dealers open and maintain foreign currency domiciliary accounts for their customers, especially the exporting customers.Exchange rates ruling in the inter-bank market fluctuate in response to the forces of supply and demand for foreign currencies, subject to a maximum spread of one percent between the buying and selling rates. Al the authorized dealer banks are required by CBN to display their buying and selling rates for spot transactions, but are allowed to negotiate with customers in respect of forward transactions within the one per cent allowable spread or margin. Authorized dealers are expected to make delivery of transactions of foreign currency to customers within three days from the day payment is made. The overall supervision of the market falls to the Central Bank of Nigeria which may, with the approval of the minister of Finance, intervene in the market from time to time to prescribe guidelines and give new directives.
The Central Bank of Nigeria intervenes at a biding session in order to minimize any large fluctuations in the niara exchange rates.For example, in 1986, the Central Bank of Nigeria intervened at the 6th session and at the 12th session.In practice, the usual sources of foreign exchange to the market include the Central Bank of Nigeria auction, inflow to banks through autonomous sources, non-oil exports via dormiciliary foreign currency accounts, invisible trade items and other miscellaneous sources. For example in December 1986, the value of foreign exchange flowing in form these sources were: CBN auction $237.99 million, banks $28.99 and other miscellaneous sources $48.98million.
It is interesting to note that the introduction of the Second-tier Foreign Exchange Market (SFEM) in September 1986, coupled with the dismantling of exchange controls have increased the inflow of foreign exchange from autonomous sources. For exchange, the inflow of foreign exchange from private sources between October 1986 and May 1987 was put at $706 million (or about N2.6 billion).