1.0 INTRODUCTION
In this note, you shall be introduced to the various financial
institutions in Nigeria, which include the Central Bank, Commercial Banks,
Pension Funds, Development Banks, Cooperative Banks and
Merchant Banks. You
will also be introduced to the role of financial institutions and their benefits
to the economy.
2.0 OBJECTIVES By the end of this note, you should be able to:
·
discuss financial institutions
·
identifying the banking and non-banking financial institutions
·
state the economic benefit of financial institutions
·
state the roles of financial institutions.
3.0 MAIN CONTENT
3.1 Banking Financial Institutions
The banking financial institutions play a major role in the
financing business in an economy. This is a formal financial institution, which
comprises of Central Bank of Nigeria, Commercial Banks, and Development Banks.
Central Bank of Nigeria (CBN): The CBN constitutes the pivot of the country’s
money and capital market. It is the principal regulatory body. It executes
monetary policies on behalf of the Federal Government of Nigeria. As the apex
of the financial system, the CBN belongs to both the money and the capital
market as the key operator without which the markets can scarcely exist.
The CBN has a responsibility of establishing specialised
institutions in Nigeria such as the Development Institutions. It has also
played a major role in the establishment of the Securities and Exchange
Commission. The CBN acts as the issue and underwriter of all Federal Government
stocks.
Commercial Banks: They provide important financial services to industry and commerce.
It is, however, a normal banking principle (that prudence requires) that
they lend on short term that require a rapid repayment. The primary function of
the banking system is the extension of credit to worthy borrowers.
Generally, Commercial banks have a short term for most of the
funds they hold. They are consequently constrained in their lending and
investment policies. It is of course true that taken on aggregate, particularly
in the growth situation, commercial streak of excess of deposits over short
term loans, advances and withdrawals. They rely on funds, which they receive on
time or fixed deposits for making medium term loans while the liquidity and
safety reserves are traditionally placed on money market instruments such as Treasury
Bills and commercial paper.
In making credit available, commercial banks in particular render
a great social service, through their actions production is increased, capital investment
are expanded, and a higher standard of living is realized.
Development Banks: These are institutions established for providing long-term finance
for development. The genus usually referred to as development finance
institutions occupies a wide band in terms of their constitutional arrangement
and their specific areas of interest. One common feature of these institutions
however, is that they are usually promoted by government and sometimes by
international Organization.
Development Banks provide medium and long-term finance for the development
of the economy. The need for this kind of finance has become necessary because
commercial banks provide only short-term finance and this is not adequate for
development. Development institutions bridged the gap by providing medium and
long-term finance. Development institutions serve as catalyst to development
through the provision of various forms of venture capital and technical advice
on the setting up of an Industrial, Agricultural or other forms of business enterprise.
Examples of development institutions are the Nigerian Industrial Development
Bank (NIDB), Nigerian Bank for Commerce and Industry (NBCI) Nigerian
Agriculture and Co-operative Bank (NACB).
Co-operative Banks: Co-operative Banks is an institution established for the purpose
of providing greater access to saving and borrowing facilities for co-operative
societies and their members at relatively cheaper rates than those provided by
Commercial Banks, since they deal with small scattered savers and borrowers who
ordinarily will not qualify for financial assistance of Commercial Banks.
Finally, Cooperative Banks improves the well-being of their members.
Merchant Banks: This is also called investment bank. It is a wholesaler banker
whose deposits are usually in large amounts. With such large deposits, its
loans are equally large. Merchant Banks advise companies wishing to raise new
capital and help to advertise the shares to the public and to the underwriter,
unsold shares. They provide short and long-term finance to companies. The
Merchant Banks gives advice on mergers, acquisitions and capital structure of
companies as well as arrange for companies wishing to hire equipment. In
present day Nigeria, the universal bank performs the function of merchant
banks.
3.2 Non-Banking Financial Institutions
The non-banking financial institutions consist of insurance
companies, pension fund, mortgage houses, stock broking firms, daily
collectors, and bureau de change. They are also important in the financial
system of the Nigerian economy.
Insurance Companies: These are institutions established to spread the risks and losses
of business. They cover all kinds of risks, ranging from life to property. They
assume responsibility for all kinds of risk, which a single individual cannot
afford. By the nature of their activity, insurance companies are in a position
to accumulate funds, which could be conveniently applied in the financial
markets. They pool financial resources from individuals and institutions
throughout the country and make them available for whosoever suffers loss.
Pension Funds: They collect contributions from employees and/or employers to make
periodic payment upon employer retirement. Large sum of money become regularly
available to pension funds. Members make regular payments over a long period in
order to obtain benefit either in lump sum or as an annuity upon the arrival of
a specified date. The management of the fund invest these payments as they are
received so that they ultimate benefit shall be maximized.
The Stock Exchange: The stock exchange is an Organization, which provides a market for
companies’ shares and debentures and other securities. A stock exchange is a
place where securities (bonds, stocks and shares) of varying types are traded
openly and where one can purchase or sell any of such securities easily. The
stock exchange thus, provides the essential facilities for companies and
government to raise money for business expansion and development projects for
the ultimate economic benefit of the society. The stock exchange is an
institution, which sees to the efficient allocation of available capital funds
to the diverse uses in the economy.
Through its extremely sensitive primary mechanism, the stock
exchange ensures that much of the total available capital resource is allocated
to each firm within each industry as that firm and that industry deserves to have
based on their relative contribution to the total societal wealth. To the
individual investor, the stock exchange is also a place to make a lose money
quickly.
It presents an ideal setting for the smart and daring speculator
to make a fortune but also a remarkably easy means for the unwary to lose a
fortune through false judgment. Specialized institutions involved in the stock
exchange include the Central Bank, Development Finance Institutions, issuing
houses, stock broking firms, share registers, Commercial Banks, Insurance
Companies and Pension Funds.
3.3 Banking Financial Institutions and Their Functions
Banking financial institutions play a major function in financing business
of an economy. These comprise of Commercial Banks, Central Bank, Nigerian
Agricultural Co-operation and Rural Development Banks, etc. Their functions
include the following:
1. Intermediating Function: They receive funds from surplus spender
to deficit spender.
2. Saving Function: They help conduct public saving such as bonds, stock, and ensure
savings flow from the financial market to goods and services for increased the
standard of living.
3. Internal Function: They provide us with excellent store of wealth that generate
income; do not wear out in time and having low risk. These wealth are usually
profitable and non-perishable.
4. Liquidity Function: Money being the ultimate liquidity earns little or no interest
when not invested. Investing cash (money) in the instrument of wealth brings
interest, which can be converted, immediately into cash.
5. Credit Function: They provide us with credit to finance our consumption and
investment especially in form of loans.
6. Payment Function: They serve as mechanism for making payment for goods and services
with other facilities such as credit cards, electronic fund transfer.
7. Risk Function: These institutions also offer protection against life, health,
property and income risk through the sales of insurance premium to businesses,
consumers and government.
8. Policy Function: They
serve as the channel through which the government carries out its policies to
establish the economy and avoid inflation. Government does this by manipulating
interest rates and prices.
3.4 Roles of the Non-Banking Financial Institutions The non-banking
financial institutions consist of insurance companies, pension fund, mortgage
houses and co-operative bodies. They are important in the financial system of
an economy because they perform the following functions: 1. They make use of
household surplus fund, provide credit, loan and mortgage loan for consumers. 2.
They help reduce hoarding. They encourage saving and loan through
co-operatives. The insurance companies also reduce hoarding. 3. They promote
saving and interest service among ordinary people. 4. They finance business by
offering loan, mortgage, bond purchases, shares and thereby facilitating
investment. 5. They distribute loans among different types of borrowers.
4.0 CONCLUSION
This note has highlighted the financial institutions in Nigeria.
Banking and non-banking financial institutions and their functions were also discussed.
5.0 SUMMARY
This note has discussed the financial institutions in Nigeria. It
also explained the various activities of the banking and non-banking financial institutions.
The benefit of these institutions to the economy were also highlighted
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