Money Market Indicators, Pension Funds, and Real Estate Finance in Nigeria by Ayotunde Olawande oni

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Money Market Indicators, Pension Funds, and Real Estate Finance in Nigeria


Ayotunde Olawande ONI,

Department of Estate Management,

School of Environmental Sciences, College of Science & Technology,

Covenant University, Ota. Ogun State. Nigeria.

E-mail:; Tel.: +234-8023122014
This paper is kindly sponsored by IREBS Foundation for African Real Estate Research”


Macroeconomic indicators have been identified as having significant affect on a nation’s economy including the quantity of money available for real estate development; and arguably, pension funds have been identified as real estate finance option. Consequently, what are relationships between macroeconomic indicators and pension fund contributions? In resolving this question, secondary data were obtained from the websites of Central Bank of Nigeria and National Pension Commission covering 2006 to 2010. The Pearson’s product moment correlation analsis revealed the following variables pairing with pension fund contributions as having P-values < 0.05: AVNM and PFC (P-value = 0.0209; r2=0.93); CPS and PFC (0.0100; 0.96); BsM and PFC (0.0066; 0.97); CiC and PFC (0.0059; 0.97); BRs and PFC (0.0182; 0.94); CoB and PFC (0.0097; 0.96); DdD and PFC (0.0230; 0.93); QuM and PFC (0.0054; 0.97); AVBM and PFC (0.0095; 0.96). The study found that money supply in the economy (narrow and broad money), credit to private sector, base (or reserved) money, currency in circulation, bank reserves, currency outside bank, demand deposit, quasi money, all have high and positively correlated relationships amongst them. Similarly, trend analysis indicated continuous increase in pension fund contributions into the nearest future. It concluded that pension fund contributions would be a veritable source of financing real estate in Nigeria if properly harnessed.

Keywords: real estate, monetary policy, money supply, inflation, finance, property development, pension funds.

  1. Introduction

According to Oni (2011), the place of real estate development in national transformation cannot be over-emphasised; however, real estate development is capital intensive and requires huge cost outlay. The capital outlay is usually obtained from the conventional and contemporary sources, and the financing of the real estate development in African countries has become more problematic with the inter-play of high interest rate, stringent repayment requirements, failure of past housing policies, rising cost of building materials, inadequate access to finance, and general economic situation. The Central Bank of Nigeria (CBN) plays significant role in the general economic situation by regulating the money market indicators for economic and social well being of the country. According to the CBN, money market indicators comprise the Central Bank indicative rate, monetary policy rate (MPR), Treasury bill (NTB: 91-day), narrow and broad money, and other short term interest rates of the financial market which include inter-bank call rate, savings, net domestic credit, and other fixed deposit and lending rates. Narrow Money (known as M1) and Broad Money (M2) are measures of money supply and refer to the total value of money in the economy and consist of currency (notes and coins) and deposits within the banking system. The narrow money comprises currency-in-circulation with non-bank public and demand deposits while broad money comprises savings and time deposits, which are also called quasi money. In addition, the net domestic credit (NDC) is the banking system credit to the economy and consists of loans and advances given by the Central Bank as well as deposit money bonds to the economic agents, and credits to government and private sector. The regulatory role of the CBN in the money market is anchored on the use of monetary policy that is usually targeted at achieving rapid economic growth, price stability, and external balance. Major policies on inflation targeting and exchange rate have dominated CBN’s monetary focus based on assumption that these are essential tools of achieving macro-economic stability. The role of CBN to maintain price stability and healthy balance of payments position includes the use of direct monetary instruments such as credit ceilings, selective credit controls, administered interest and exchange rates, as well as the prescription of cash reserve requirements, special deposits and money stock. In this case, money stock is the total amount of money available in an economy, less liquid and longer term assets such as Certificates of Deposit. Quasi-money or near money includes cash and readily convertible instruments such as bank deposits and money market funds. According to the monetary economics, the more money there is in circulation, the higher the rate of inflation will be; and the supply side will investigate the money market indicators and impacts on finance from which funds are available for real estate development through empirical analysis. In economics, money supply or money stock is the total amount of money available in an economy at a specific time. There are several ways to define "money"; the standard measures usually include the currency in circulation and demand deposit. Money supply data are usually recorded and published by the Central Bank of each country. The quantity of money in an economy is said to have relationship with prices and there is strong empirical evidence of a direct relation between inflation and money-supply growth, at least for rapid increases in the amount of money in the economy (see Friedman, 1987; Brunner, 1987; Johnson, 2005; Deardoff, 2010). The availability of funds for financing real estate is affected by local, national, and international economic conditions. The economic conditions relate to geographical locations and results in little or no capital being available for mortgages and consequently, few loans are granted. From the viewpoint of the lenders, real estate is highly illiquid and often finds it difficult to readily convert loans into cash. With this background, the aim of the study is to determine the joint and individual impacts of the explanatory variables of money market indicators on pension fund contributions from which finance could be made available for real estate development in Nigeria, while propounding possible policy implications and offering appropriate recommendations. In this study the broad money M2 is used for analysis of the money supply in the economy since it includes currency and coinage in circulation, depositors’ balances in commercial banks, savings and loan, and community banks.

2.0 Literature Review

In this section, earlier studies on the theme of this paper have been reviewed population and housing challenges, real estate finance, real estate finance and investment options, pension funds, macroeconomic indicators in Nigeria and elsewhere.

2.1 Population and Housing Challenges in Nigeria According to Oni (2010), Nigerian cities like Lagos, Abuja, and Port Harcourt face challenges of increasing population with consequence of over-utilization of available infrastructures, which have not experienced expansion to cater for increasing demand associated with population growth. The rate of urbanization in Nigeria has witnessed tremendous increase in the last two decades. Census in the early Fifties showed that there were about 56 cities in the country and about 10.6% of the total population lived in the cities; this rose dramatically to 19.1% in 1963 and 24.5% in 1985. Today, the national population is now estimated to be about 150 million with the urban population constituting about 30%. The rapid growth of urban population in Nigeria is probably due to concentration of the gains from the oil sector in the urban areas. Given the expected increases in urban population, the number of people having access to available infrastructure in the country is enormous. The Lagos metropolis, for instance, has grown in terms of population. According to the 1991 national census, Lagos State had a population of 5,725,116 out of a national total of 88,992,220. Although the 2006 National Census credited the metropolitan area with a population figure of 7,937,932 the more reliable population figure given by the Lagos State Government is 17,553,924 based on enumeration that was conducted for social planning. Since the inhabitants of the metropolitan area of Lagos constitute 88% of the population, the population of metropolitan Lagos is about 15.5 million, which will increase to 24.5 million population mark by the year 2015, and be among the ten most populous cities in the world. The rate of population growth in the city is at about 600,000 persons per annum with population density of about 4,193 persons per sq. km. and average density of 20,000 persons per square kilometer in the built-up areas. According to the World Bank (1996), current demographic trend analysis revealed that the Lagos State population growth rate of 8% resulted in its capturing 36.8% of Nigeria’s urban population. This is one of the problems of effective housing delivery in Nigeria. The problems are enormous and include availability of housing units in both qualitative and qualitative terms, and availability of adequate funds. The urban areas witness housing problems in terms of the number that are available to cater for increasing drift into the cities and in qualitative term with regards to the availability of portable water, electricity, adequate waste management, efficient transportation amongst others. In the rural areas, the problem is not in quantitative but in qualitative terms with respect to availability of infrastructure, and portable water and electricity. It has been estimated that 12-14 million housing units would be needed to meet the shortages; while the source of financing the short fall has been a major concern to which solutions are desired. 2.2 Real Estate Finance and Investment Options Bruegeman and Fisher (2002), and Ajibola et al (2009) classified sources of real estate finance into conventional and contemporary types. The conventional approach is divided into formal and informal sources; the former being debt-financing through loanable funds, pension funds, insurance companies, and primary mortgage institutions. The informal sources include local money-lenders and “Ajo” which is local Nigerian parlance and system of raising finance involving group of people that voluntarily contribute equal amount of money on regular basis and given in turns to members of the group. Cost of real estate development is high with small percentage of the cost normally provided from the savings of the purchaser and external sources. The more common financial sources could be divided into primary sources, financial middlemen, and the secondary mortgage market. Basically, the primary sources of financing real estate development include savings and loan associations, commercial banks, and life insurance companies. Others are savings and loans banks, mortgage bankers, pension funds, finance companies, real estate investment trusts (REITS), credit unions, individual investors, foreign funds, housing corporations. On the other hand, the contemporary sources of finance include securitization, unitization, and REIT. Securitization is the process of converting real estate into tradable instrument with the underlying asset as security. It is the creation of tradable paper interests in real estate as alternative to direct ownership of the assets, and involves the collection of large number of illiquid loans or receivables into pools that are used to collateralize securities for eventual sales to the investors. Securitization may be equity or debt securitization; the former involves single or multiple properties being turned into notes or securities that are traded based on their values while the latter arises where mortgages as a form of debt and traded for the purpose of discharging debts. Unitization is a variant of securitization and involves the creation of multiple shares in the ownership of a single property; the shares provide ample opportunity for low-income earners to become co-owners of prime properties through the purchase of shares. It is a good source of raising finance for real estate development and simply the process of converting assets into financial instruments (Sirota, 2004; Kolbe et al, 2008). Other source of real estate finance is pension funds, which are option for financing real estate. Historically, the funds were invested in stocks and bonds but recent development in the stocks markets across the world and increasing growth of pension funds have meant new outlets had to be found for their investments. This growth, plus the favorable yield available through real estate investments, has resulted in active participation in financing real estate projects. Pension funds make mortgage loans in addition to owning real estate with majority of their real estate activity done through mortgage bankers and mortgage brokers (Oni, 2012).

In terms of investment options, Kolbe et al (2008) classified the investors into passive and active categories. The passive investors put money at risk without exerting control over operations, unable to influence the course of events but hope for the best return; while active investors take essential decisions that significantly influence the investment fortune. The study identified variety of real estate investment opportunties and the features of passive and active investors as shown in Table 1.

As shown in Table 1, there are four quandrants that encompass the variety of real estate investment opportunities; these are active-debt, active-equity, passive-debt, and passive-equity. The passive-debt quadrant illustrates some of the alternatives available to investors who take passive position in real estate related credit instruments. The investors buy securities that represent a participatory interest in a package of mortgage-secured promissory notes or that represent an ownership interest in a company that makes loans or acquires promissory notes in the secondary mortgage market. The specific assets pass through securities, real estate investment trust shares, and real estate mortgage investment conduits. The active-debt investment in real estate equities is shown in the upper right quadrant with investors either originating mortgage-secured loans or buying mortgage-secured notes in the secondary mortgage market. On the other hand, the active-equity quadrant depicts active investment in real estate equities and implies direct ownership of different types of real property with operational control either directly or through hired management. Yields depend not only on how much is paid for assets but also on cost of capital and the mix of equity and borrowed funds. In this case, the investment yields are affected by efficiency in management of the property, the market, and the amount of competition. The passive-equity quadrant shows the positions in real estate equities without management control; the investment vehicles include limited partnership shares in real estate syndicates and ownership shares in corporations or real estate investment trust that own real estate equities. Although, the investors are not usually confined within each quadrant but constantly interact; like credit instruments are favoured by investors who want predictable, regular cash dividends while at the same time pursue the goal of direct ownership of real estate rented under a long-term net lease by which tenant pays operating expenses. Similarly, the contemporary mortgage lenders often receive debt service payments that vary with index of general interest rates, such as Treasury bill rate or interbank offered rate (Kolbe et al, 2008). A number of studies (notably, Kolbe, et al 2008; Chandra, 2008; Ajibola et al, 2009; and Kolbe and Greer, 2009) focused on the importance of real estate investment trust (REIT) as a vehicle for real estate development finance. According to Kolbe et al (2008), Chandra (2008), Kolbe and Greer (2009), REIT is a vehicle for real estate finance, especially in developed nations, operating like closed-end mutual funds and raising funds through the issuance of shares, bonds, commercial paper, and by borrowing from other financial institutions while also investing in real estate debt and equity; in addition, Ajibola et al (2009) identified Ajo, Esusu, and age-group contributions as other sources of finance real estate development in Nigeria. Relying on the definition by the US Securities and Exchange Commission 2010, REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. It may be equity REIT, mortgage REIT, or hybrid. By Equity REIT, the REITs invest in and own properties and become responsible for the equity or value of their real estate assets with revenues derived principally from the rental incomes generated by the properties. On the other hand, mortgage REITs deal in investment and ownership of property mortgages and loan for mortgages to owners of real estate or purchase existing mortgages or mortgage-backed securities, and derive revenues primarily by earning on the mortgage loans; while Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs through investment in both properties and mortgages with individuals either by purchasing their shares directly on an open exchange or by investing in a mutual fund that specializes in public real estate. In Nigeria, the Investments and Securities Act 2007 describes the real estate investment companies or trust as a body corporate incorporated for the sole purpose of acquiring intermediate or long term interests in real estate or property development. They are empowered to raise funds from the capital market through the issuance of securities with the following characteristics: an income certificate giving the investor a right to a share of the income of any property or property development; and an ordinary share in the body corporate giving the investor voting rights in the management of that body corporate. The Act provides that a trust may be constituted for the sole purpose of acquiring a property on a ''trust for sale" for the investors. The trust, in this context, is expected to have the following characteristics: the investors is empowered to acquire units in the trust through which they would be entitled to receive periodic distribution of income and participate in any capital appreciation of the property concerned; while they are also entitled to retain control over their investments by investing directly in a particular property rather than in a portfolio of investments. In similar vein, pension funds are plans, funds, or schemes which provide retirement income and are important shareholders of listed and private companies; they are especially important to the stock market where large institutional investors dominate. They may be classified into private and public which could either be open and closed pension funds. Closed pension funds are further sub-divided into: single-employer pension funds, multi-employer pension funds, related-member pension funds, and individual pension funds. A public pension fund is one that is regulated under public sector law while a private pension fund is regulated under private sector law.

2.3 Monetary Policy and Market Indicators Monetary policy refers to a combination of measures designed to regulate the value, supply and cost of money in an economy in consonance with the expected level of economic activity. For most economies, the objectives of monetary policy include price stability, maintenance of balance of payments equilibrium, promotion of employment and output growth, and sustainable development. The economy can be divided into two broad groups, namely, oil and non-oil sectors; the non-oil sector include agriculture, wholesale/retail trade, telecommunications, hotel/restaurants and business/other services sectors including real estate. The real estate sector has two major group ends namely the “high end area” and the “low end area”. The high end area comprises of investments of very high value and development predominantly driven by well established corporate bodies, while the low end area is the reverse which are driven by investments from individuals and few corporate bodies. The sector usually witnesses contraction in activities attributable to low level of investments driven by low level of resources within the operators in this sector. Plethora of studies focused on monetary policies and effects on stock prices. For instance, Chong and Goh (2003) examined the effect of macroeconomic variables such as money supply and interest rate on stock prices, premised on the hypothesis that competition among profit-maximizing investors in an efficient market ensures that relevant information currently known about changes in macroeconomic variables were fully reflected in prevailing stock prices. Many other studies indicated strong influence of macroeconomic variables on stock markets in industrialized nations (for example, Hondroyiannis and Papapetrou, 2001; Muradoglu, et al. 2001; Fifield, et al. 2000; Lovatt and Parikh, 2000; and Nasseh and Strauss, 2000). Similar studies carried out in developing countries, particularly those in Asia include Maysami and Sim (2002); Maysami and Koh (2000). Specifically, Maysami and Sim (2001a, 2001b, and 2002) employed the Error-Correction Modelling technique to examine the relationship between macroeconomic variables and stock returns in Hong Kong, Singapore, Malaysia, Thailand, Japan and Korea. The studies found the influence of macroeconomic variables on the stock market indices in each of the countries, though the type and magnitude of impacts differ in terms of the financial structures. In Islam (2003), the short-run dynamic adjustment and the long-run equilibrium relationships between four macroeconomic variables; namely, interest rate, inflation rate, exchange rate, and industrial productivity were examined in Kuala Lumpur. The study found statistically significant relationship between short-run (dynamic) and long-run (equilibrium) macroeconomic variables and the Kuala Lumpur Stock Exchange (KLSE) returns. Chong and Koh (2003)’s study on Malaysia, identified stock prices, economic activities, real interest rates and real money balances as having strong relationship both in the pre- and post- capital control sub-periods in the long run; while Mukherjee and Naka (1995) considered exchange rate, inflation, money supply, real economic activity, long-term government bond rate, and call money rate to determine the relationship between the Japanese Stock Market and the variables. It concluded that co-integrating relation existed between the variables and that stock prices contributed to such relationship. This study was replicated in Singapore by Maysami and Koh (2000) and found that inflation, money supply growth, changes in short- and long-term interest rate and variations in exchange rate formed a cointegrating relationships with changes in Singapore’s stock market levels. Further studies (for example, Sun and Brannman, 1994; Maghyereh, 2002; Islam and Watanapalachaikul, 2003; Hassan, 2003; Gunasekarage et al 2004; Vuyyuri, 2005) on the relationships between share prices and macroeconomic factors in Thailand, Persian Gulf region, Egypt, Jordan, and Sri Lanka found strongly significant long-run relationship and high correlations between stock prices and interest rate, bonds price, foreign exchange rate, price-earning ratio, market capitalization, and consumer price index. However; Jaffe and Mandelker (1976), Fama and Schwert (1977), Nelson (1976), Geske and Roll (1983), Chen et al (1986), and Mukherjee and Naka (1995) found negative relationship between inflation and stock prices; while Firth (1979) concluded that stock holdings are effective hedge against inflation. Furthermore, Fama and Gibbons (1982), and Marshall (1992) argued that inflation caused by money-shock lowers the rate of interest and consequently causes investor to shift from holding cash to stocks and bonds to maximize potential capital gains while increase in demand would in turn raise stock prices. Short- and long- term interest rates respectively have significant positive and negative relationships. For instance, Mukherjee and Naka (1995)’s study in Japan; Maysami and Koh (2000) and Maysami et al (2004)’s in Singapore found positive relationships between stock market price and short-term interest rates, while the long-term rate was negative. The studies identified that interest rate serves as better proxy for nominal risk-free component used in the discount rate in the stock valuation models and serve as surrogate for the expected inflation in the discount rate. Similarly; Fama (1981), Mukherjee and Naka (1995), Yip (1996), Maysami and Koh (2000), and Panetta (2002) studied the correlation between money supply and stocks prices and found positive correlation attributed to rise in discount rate to the expansionary effect of increase in money supply in the Singapore stock market. Explaining the relationship between money supply and stock return, earlier theorists Friedman and Schwartz (1963) hypothesized that the growth rate of money supply would affect the aggregate economy and the expected stock returns. It argued that increase in M2 growth would indicate excess liquidity available for buying securities, resulting in higher security prices. Further studies (for example, Hamburger and Kochin, 1972; and Kraft and Kraft, 1977) found strong relationship between the M2 growth and price of security; while Cooper (1974), and Nozar and Taylor (1988) found no relation between the variables. However, Fama (1981), Mukherjee and Naka (1995), and Maysami and Koh (2000) argued that the effect of money supply would lead to inflation, and may increase discount rate and reduce stock prices. From the foregoing, the common denominator of the studies is the focus on money supply, stocks and shares, inflation, discount rate, bank lending rate, and relationships amongst them with no consideration given to the impact and implications that such variables have on pension fund contributions from which finance could be made available for real estate development in Nigeria. The present study therefore examined the relationship between pension fund contributions and money market indicators in Nigeria. The questions that have agitated the mind of this researcher to guide towards the attainment of the aim of the study are: What is the impact of money market indicators on pension fund contributions in Nigeria? Is there significant relationship between pension fund contributions and each of the explanatory variables of macroeconomic indicators over a five study period (2006 to 2010)? What is the place of pension fund contributions in solving the housing problem and real estate financing in Nigeria? In resolving the first two questions, one hypothesis was set in the null as follows: “there is no statistically significant relationship between pension fund contributions and money market indicators”; and tested with alpha level set at 0.05

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