Discount Houses in Nigeria: Meaning, History and Functions of Discount Houses

Discount Houses are financial institutions established to act as financial intemediaries between the Central Bank of Nigeria, Licensed Banks and other financial institutions.

The Central Bank of Nigeria 2004 guideline defines a discount house as “any person who transacts a discount house business consisting of trading in and holding of treasury bills, commercial bills and other securities and operations which in the opinion of the Central Bank of Nigeria are those of discount house”.

Discount houses may also be defined as non-bank financial institutions which specialize in intermediating funds between the Central Bank and the banking institutions with the primary purpose of assisting the monetary authorities in monetary management.

They are involved in discounting, trading, and negotiating bills. They significantly contribute to the growth of the Nigerian economy through the money market.

Most discount houses in Nigeria are wholly owned by consortiums of banks and other financial institutions.

However, the maximum allowable equity holding for any investor in a discount house is 40%.

History of Discount Houses in Nigeria

Before the emergence of discount houses in Nigeria, commercial banks, merchant banks and the Central Bank of Nigeria(CBN) performed the roles of discount houses.

However, in 1991, drawing from the need to tackle the problem of excess liquidity but low patronage of treasury bills by money market participants, decisions were taken to establish discount houses in Nigeria.

Between December 1991 and September 1992, efforts were made to determine the mission and limits of discount houses.

On 7 September 1992, the CBN issued guidelines which gave discount houses the objectives of:

  1. Promoting rapid growth and efficiency of the money market in Nigeria.
  2. Acting as an intermediary between the Central Bank of Nigeria and the licensed banks
  3. Facilitate the issue and sale of short-term government securities by tender
  4. Provide discount/rediscount facilities for treasury bills and other eligible financial instruments as required by banks
  5. Accept short-term deposits from banks
  6. Perform other functions which may be prescribed by the CBN from time to time.

In September 1992, three discount houses obtained approvals in principle to
commence operations in Nigeria, and by 1993, they were all in operation.

These discount houses were set up by the provisions of Section 28 of the Central Bank of Nigeria (CBN) Decree No.24 of 1991 and Section 61 of Banks and Other Financial Institutions (BOFID) Decree No. 25 of 1991 as amended.

In 1996, the number of discount houses increased from 3 to 5 and has remained unchanged till date.

The five discount houses in Nigeria are Associated Discount House Limited (ADHL), Consolidated Discount Limited (CDL), Express Discount House Limited (EDL), First Securities Discount House Limited (FSDH), and Kakawa Discount House Limited (KDHL).

Discount houses fall under a common umbrella referred to as the Nigerian Discount Market Association.

Objectives of Discount Houses in Nigeria

The 2008 revised guidelines for discount houses in Nigeria as given by the CBN state that the objectives and principal duties of a discount house shall be to:

  1. Promote rapid growth and efficiency of the financial markets in Nigeria;
  2. Act as primary dealers in treasury bills, Federal Government Bonds and other eligible securities.
  3. Facilitate the issuance and sale of financial securities;
  4. Provide discount/re-discount facilities for treasury securities and other eligible financial instruments.
  5. Provide fund/portfolio management and financial advisory services;
  6. Accept investments on an intermediary basis.
  7. Engage in securities trading, including equities, corporate bonds and government securities.
  8. Trade in foreign exchange.

Regulations of Discount Houses in Nigeria

The activities of discount houses in Nigeria are monitored, controlled and regulated by the Central Bank of Nigeria and the Securities and Exchange Commission.

They are required to submit daily, weekly, quarterly, semi-annual, and annual reports to the CBN.

Apart from the above, discount houses are also required to:

  1. transfer to the statutory reserve a minimum of 15% of profit after tax if the reserve fund is less than the paid-up capital and a minimum of 10% if the reserve fund is equal to or more than the paid-up capital
  2. maintain proper books of accounts.
  3. maintain capital funds to risk assets ratio of 1:13 and cash asset ratio (CAR) of 10% or as may be prescribed by the CBN from time to time.
  4. all repurchase transactions (Repos) by discount houses shall be reported on the balance sheet if the securities used are owned by the discount houses with the affected assets remaining in the books of the sellers (discounting houses), while the cash received by them shall be recognized as a liability.
  5. not exceed a maximum ratio of 50:1 between its total borrowing and capital plus reserves without the prior approval of the Central Bank of Nigeria.
  6. not grant to any bank, a facility of more than 75% of its shareholders’ funds unimpaired by losses without the prior approval of the Central Bank of Nigeria.

Services Provided by Discount Houses

1. Discounting and Re-discounting of Eligible Securities: Discount houses act as intermediaries between the Central Bank of Nigeria (CBN) and licensed banks by providing discounting and re-discounting services for eligible short-term securities such as treasury bills, certificates, and commercial bills.

2. Provision of short-term Investment Opportunities: They offer safe and secured short-term investment opportunities within the banking system, primarily in government securities.

3. Open Market Operations (OMO) Transactions: Discount houses facilitate OMO transactions between the CBN and licensed banks.

They help in the buying and selling of government securities in the open market to regulate the money supply and manage liquidity in the economy.

4. Financial Accommodation to Banks: Discount houses provide short-term financial accommodation to banks.

They offer liquidity support to banks when needed, thereby ensuring the stability and smooth functioning of the banking system.

5. Intermediary for Short-term Investments: Discount houses accept short-term investments on an intermediary basis from banks and wholesale investors.

They provide a platform for banks to invest their excess funds and manage their liquidity effectively.

6. Portfolio management: Discount houses also manage investments on behalf of their clients, which can be discretionary (managed without the client’s input) or non-discretionary (managed with the client’s input).