A developed money market is open to changes in demand for and supply of finance in any of its submarkets and which have a developed commercial banking system.

Generally speaking, a developed money market has six features or characteristics, namely; the existence of a central bank, the existence of a developed commercial banking system, sufficient supply of financial assets, the existence of a well-developed sub-markets, integration of an interest rate structure and Presence of contributory legal and economic provision.

Let's look at each one in detail.

1. Existence of a Central Bank: The Central bank is the apex banking institution and implements the monetary policy of the government. 

The money market is one way through which the central bank can effectively carry out the government monetary policy.

Therefore, developed money markets must have a central bank that has the power to make, initiate and implement banking and monetary policy.

The Central bank should act as a regulator, guardian as well as lender of last resort to all the players in the money market.

2. Existence of a developed commercial banking system: Commercial banks are such participants in the money market. 

They supply short-term loans and discount bills of exchange required in the money market. As such, a developed market should have a developed commercial banking system.

However, for the money market to develop, a developed commercial banking system must be complemented by the proper banking habits among the general public.

3. Sufficient supply of financial assets: A developed money market should have a sufficient supply of short-term financial assets or instruments such as bills of exchange and treasury bills, etc.

Generally speaking, the more financial assets there are, the more developed the money market is, the fewer financial assets there are, and the less developed the money market is.

4. Existence of well-developed sub-markets: The presence of well-developed submarkets as well as their adequate reaction to small changes in interest rate is a necessity for a developed money market.

A developed market system should be made up of several submarkets that deal in various types of financial instruments and other near monies.

For example, there should be a sub-market for treasury bills, foreign exchange, and collateral loans market.

If these submarkets do not exist or are not properly integrated, it is unlikely that the money market will be developed.

5. Integrated interest rate structure: A developed money market should also have an integrated interest rate structure.

By integrating the interest rate structure, we mean the interest rate that prevailed in one submarket should be intertwined with that of another sub-market.

6. Presence of contributory legal and economic provision: Aside from the previously explained characteristics, a developed money market usually has to contribute to legal provisions and economic pressures. 

Legal provisions such as those that reduce transaction costs, and protect against default risk can all contribute to the development of the money market.

Furthermore, economic forces such as rapid economic development, a large volume of international trade, low inflation, and inexpensive find remittance can also contribute to the development of the money market.

Help us grow our readership by sharing this post

Related Posts

Post a Comment

Subscribe Our Newsletter