Financial Derivatives And The Development Of Nigerian Banks

Financial derivatives have grown rapidly in recent years in developed economy due to improvements in computer technology, innovations in financial theory, and the need to manage risks arising from volatility in the interest and currency exchange rates. Derivatives are increasingly being used to manage various kinds of risk exposure, to obtain desirable financing, and to enhance investment and speculative opportunities. This paper examines the role offinancial derivatives in the development of Nigerian banks. It successively sketches the main features of financial derivatives and the related regulatory issues. We find that development of financial derivatives is justified in Nigeria by volatility in output, prices, currency, exchange rates, interest rates and inflation. The use of derivatives by Nigeria banks would provide avenue to new products and thus reduce tension, unhealthy competition and inefficiency in pricing as is currently the case with the sourcing of deposits. In addition, the sooner the Nigerian banks understand and trade derivatives, the sooner Nigeria will emerge as an international financial centre representing the African region. The complexities of the derivatives markets are increasing every day, and it is important for the policy makers and regulators to understand these markets before embarking on it. The paper recommends for use by supervisory authorities and banks the set of guidelines formulated by Basle Committee on Banking Supervision on the sound risk management of derivatives activities '. In addition, the paper recommends that derivates should be accounted for in accordance with International Financial and Reporting Standard (IFRS).