Functions Of Financial Institutions

 

In the last unit, we have been able to compose and specify what financial institutions are. This will help to

assemble the functions of the various financial institutions in this unit. Having defined what financial institutions are legally, the laws also establishes different types of financial institutions. The types of financial

institution depends on the law

establishing it and its functions. Depending on the stage of economic political

and technological developments in a nation, each nation has the authority to grant licences to various types

of financial institutions.

 

Banks Financial Institutions

Central Bank of Nigeria

The Central Bank of Nigeria stands as the apex of the banking system. It licenses, supervises and regulates

the banks within the banking system. It is owned by the Federal Government.

The CBN was established in 1959. It goes ahead to perform the following functions:

• Currency issue and circulation

• Promotion of monetary stability through the formation and implementation of government monetary policies.

• Acting as banker and financial adviser to the government.

• Encouragement of the growth and development of financial institutions.

• Supervision and regulation of banks and other financial institutions.

• Development of the money and capital markets through the creation of local government outlets.

• Helping in the clearing and collection of cheques by banks by providing the clearing house.

• Penalising of non-complying financial institutions to ensure compliance and help achieve government objectives.

• Undertake research and publications of a country

• Maintains close contact with other international financial institutions. The CBN safeguards the International value of the currency of the nation.

• The CBN mobilizes capital resources for economic development.

Commercial Banks

The Banks and other financial institutions Decree No 25 of 1991 defined a commercial bank as “any bank in

Nigeria whose business includes the acceptance of deposits withdrawable by cheques. This definition presents

the major distinguishing functions of commercial banks from other banks. According to Osumbor (1984) in

his book Business Finance and Banking in Nigeria, commercial banks are unique in their performance of

services and are distinguished from other forms of financial institutions or intermediaries because of the

following functions:

• Accept deposits from customers i.e. savings, current or demand deposit, fixed deposit or time deposit.

• Lend money to approved customers i.e. overdraft, loan.

• Allow the use of cheque

• Safe-keep valuable assets for customer.

• Provision of standing order facilities.

• Give business advice to their customers.

• Agents of government for monetary policy.

• Assists customers for acquisition and sales of shares.

• Issue of discount bills of exchange i.e. payment on behalf of customer.

• Commercial bank creates money, this is done through deposits.

  Money created =          Original Deposits.

                               Cash ratio or reserve requirements.

• They involve in agricultural financing.

• They offer employment opportunities.

• They act as guarantors to their customers.

• They solve problem of foreign exchange.

• They issue traveller’s cheques.

• Their activities accelerate the economic development of a nation since they act as intermediaries between large number of depositors and borrowers.

• These banks could assume the responsibility of carrying out the duties of attorney, executor and trustee.

 

Merchant Banks

According to the Nigerian Banking Amendment Decree (No. 88) of 1979, Merchant Bank means any person

in Nigeria who is engaged in wholesale banking, medium and long-term financing equipment leasing, debt

factoring, investment management issue and acceptance of bills and the management of unit trust. They are

also called Acceptance Houses or Discount Houses.

Functions or services of merchant banks are often divided into two classes – banking and corporate

finance services.

Banking Services / Functions:

- Acceptances of Merchant Banks (MB) accept bills of exchange from importers and exporters which

are easily rediscountable.

- Loans and Advances – MB provides loans and advances of short, medium and long term nature

- Deposits – MD accepts the following deposits- current account deposits for corporate clients, fixedterm

deposits accounts for both corporate and non-corporate clients and Negotiable Certificates of

Deposits.

- Equipment leasing – MDs lease equipment, machine, tools, motor vehicles to farmers and industrialists.

- Foreign Exchange Services: MBs as authorised dealers performing foreign exchange services: Corporate

Finance Services.

- Project Financing: MBs finance the construction of new projects or ventures.

- Issuing House Services or Public Issue – MBs provide services to clients who want to raise money

from the public through the offer for subscription of shares/ securities.

- Investment and financial advisory services.

- Portfolio management.

- Money Market Services.

- Help to finance international trade

- Debt factoring – Taking over the debts of a firm and thereafter provides her with the amount to finance

the businesses.

 

Development Banks

Development banks are financial institutions which are set up to provide banking services that will help in the

development of a particular sector or aspect of the economy. They are normally government owned institutions

set up for the sole purpose of enhancing economic development rather than for profit motives. The

major reason for the introduction of development banks is to bridge the gap in the provision of long-term

finance for individuals. The existing Commercial and Merchant banks specialise in the provision of short term

and medium-term finance because of their deposit structure. They could provide the much needed long-term

finance. Another reason is the exigency of providing credit facilities to the priority sector of the economy.

Other banks are reluctant to give such credit facilities because of the high-risk involved. Instances of such

sectors are Agriculture, Commerce, Cooperatives, and small scale industries. This is what Professor G. O.

Nwankwo (1980) called the “gap thesis” and “exigency thesis”.

Currently, there are six development banks operating in Nigeria. Each is set up to perform specific developmental

role as discussed below.

(1) The Nigerian Industrial Development Bank Limited (NIDB)

The bank which was established in 1964 has the main function of encouraging the establishment and

growth of medium and large-scale industries in Nigeria. This is done through the provision of medium

and long-term finance for the private and public sectors, promoting and development of projects and

provision of financial, technical and managerial assistance to indigenous enterprises among other functions.

It provides finance mainly for large scale industries but recently some small scale industries have

benefited from NIDB loans.

 

(2) The Nigerian Bank for Commerce and Industry (NBCI)

The need to encourage the establishment and ownership of small scale industries and other business

ventures by indigenous Nigerian Investors after the promulgation of the Nigerian Enterprises Promulgation

Decree of 1972 (also known as indigenisation Decree) led to the establishment of this bank in

1973. Its main functions were to assist indigenous business through share underwriting, identification of

viable projects, preparation of feasibility studies, offering of managerial and technical advice. It was

therefore set up to provide the much needed capital for the implementation of the objectives of the

Nigerian enterprises promotion. Thus, Nigerians were given ready sums of capital for the purchase of

foreign business as provided for by the act.

 

(3) Nigerian Agricultural and Cooperative Bank (NACB)

As a step towards encouraging agricultural production, the NACB was established in 1973 mainly to

provide the needed finance for agricultural development projects and allied industries including poultry,

farming, pig-breeding, fisheries, forestry and timber production, animal husbandry and any other type of

Farming, as well as storage, and marketing of such production in Nigeria.

Its principal function is to promote agricultural assistance to interested individuals, Cooperative societies,

companies and government agencies throughout Nigeria. It also offers technical assistance including

advice and preparation of feasibility studies.

 

(4) Federal Mortgage Bank (FMB)

The Nigerian Building Society (NBS) was established in 1957 with the main aim of providing loanable

funds to Nigerians who were keen on investing in real estate. The NBS later in 1977, under Decree No.

7 of the Federal Military Government of Nigeria, metamorphosed into what is today known as the

Federal Mortgage Bank of Nigeria (FMBN). The Decree establishing FMBN assigned to it the responsibility

of performing the following functions:

(i) The provision of long-term credit facilities to mortgage institutions in Nigerian at such rates and

upon such terms as they may be determined by the Federal Government being rates and terms

designed to enable the mortgage institutions to grant comparable credit facilities to Nigerian individuals

desiring to acquire houses of their own.

(ii) The encouragement and promotion of mortgage institutional development at State and National

levels.

(iii) The supervision and control of the activities of mortgage institutions in Nigeria in accordance with

the policy directed by the Federal Government.

(iv) The provision of long-term credit facilities directly to Nigerian individuals at such rates and upon

such terms as may be determined by the Board in accordance with the policy directed by the

Federal Government.

(v) The provision of credit facilities with the approval of the Government, at competitive commercial

rates of interest to commercial property developers, estate developers and developers of officers

and other specialized types of buildings.

(vi) The Decree also allowed the banks to accept term deposits and savings from mortgage institutions

trust funds, the post-office and private individuals as the board may determine and to promote

the mobilization  of savings from the public.

 

(5) Urban Development Bank (UDB)

The Urban Development Bank was established by Decree 51 on 1992 mainly to take care of the

problems of inadequate housing, transportation, electricity and water supply that have posed serious

concern in most Nigerian Urban areas. The bank’s main function is to provide financial resources to

both the public and private sectors of the economy for the development of urban dwellings, mass

transportation and public utilities.

 

(6) Nigerian Export-Import Bank

The sharp decline in the prices of petroleum products in the international market during the late 1970s

brought to fore the need to encourage non-oil export so as to ensure that Nigeria does not remain a

mono-cultural economy. This and the need for financial import and exports generally led to the establishment of NEXIM in 1991. The bank is charged with the responsibility of helping the nation to attain

increased export growth as well as a structured balance and diversification on the product composition

and destination of Nigerian products. Its functions include the provision of export credit guarantee and

export credit insurance functions, provisions of credit in support of support establishment and management

of export funds and other related services.

 

Other Non-Banks Financial Institutions

Insurance Companies

Primarily, insurance companies provide against the various risks that often arise within the economy. They do

these by spreading the losses to the unfortunate few over many people. In performing these functions, they

collect premiums from several insured. This role is similar to the mobilization  of savings by banks in the sense

that a large amount of money is pooled together as premium. The amount so collected by the government

securities, public sector enterprises, and shares of private companies. By doing this, they have performed the

role of financial intermediation, Insurance companies in turn insure the Nigerian reinsurance corporation

which was established in 1977, and supervised by the Nigerian Insurance Supervisory Board (Okonkwo,

1998).

Functions/Roles of Insurance Companies

* Insurance companies provide the most effective method of handling many of the pure risks encountered

by individuals and firms.

* Insurance companies facilitates risk transfer.

* They accumulate substantial funds which are used for long-term investment.

* Through their life and pension businesses they help to develop the financial markets

* They help to mobilize national resource by encouraging individuals to save.

* They operate pension scheme on behalf of companies.

* They grant loans to mortgages.

* They act as underwriters in the capital market.

* Insurance policies are used as collateral securities for bank loans.

* They help to improve the balance of payments position of the country by insuring imports and exports

and through reinsurance, Marine Insurance facilities international trade.

* It promotes bilateral and multilateral trade.

* Insurance gives the entrepreneur the confidence and provides him the security needed to venture into

uncertain areas. It reduces the burden of losses of the entrepreneur.

* Information released by insurers on incidence of certain risks enable people to take more measures to

avoid such loss.

* It provides employment opportunities to people.

 

Finance Companies

Finance Houses mobilize funds from the public mainly through the issuance of money market instruments

like certificates of deposits, and other commercial papers. They provide these funds to investors in the

form of short-term and medium-term finance such as local purchase order (LPO) financing, leasing, hire purchase, debt factorising and investment in securities. These assets being financed by them often act as a security for their lending.

These are sometimes referred to as Hire Purchase Companies.

 

Primary Mortgage Institutions

These are institutions involved in mortgage financing apart from the Federal Mortgage Bank. They are

referred to as primary because they deal directly with individuals and firms, while the Federal Mortgage

Bank serves as a supervisory body. These institutions are also involved in the financial intermediation process.

They mobilize savings from savers and borrow from other institutions to finance the development of the

housing sector.

A mortgage bank is a financial institution established for the acceptance of fixed deposits from members

of the public with the aim of encouraging them to build their own house by offering them long-term loans.

They are also known as building societies.

Functions of Mortgage Banks

* They accept fixed deposits from members of the public.

* They encourage members of the public to save money.

* The construct and provide houses to low group.

 

National Economic Reconstruction Fund (NERFUND)

As part of the economic reconstruction under the Structural Adjustment Programme, the NERFUND was

established by Decree No. 25 of 1988. The primary aim of this fund is to provide soft Medium and Long-term

finance to small and medium scale enterprises that are 100 per cent owned by Nigerians. As a financial

intermediary, NERFUND sources its funds through the Federal Government, the Central Bank of Nigeria

and Foreign Government, The Central Bank of Nigeria and Foreign Government and International Development

Finance Institutions like the African Development Bank. The fund so mobilized both from local and

foreign sources are made available to small and medium scale industries provided they are 100% Nigerian

owned.

 

Traditional Financial Institutions

Traditional financial institutions are traditional credit groups such as “Esusu” which were originally the

institutional agencies for credit supply to members and Esusu or Nsusu or Asuu. It is a kind of cooperative

which consists of people who agree to contribute a certain sum of money and hand it over to a member of the

group. They take the form of associations of people in the same place of work who matually agree to come

together in order to encourage one another to save, lend and manage money.

Functions of Traditional Financial Institutions

* They encourage their members to form the habit of saving money.

* They encourage their members to invest the money they have saved.

* They lend money to their members.

* They save their members the pains of going to banks to borrow.

* They inculcate the principles of democracy in their members.

* They discourage their members from being extravagant.

 

Discount Houses

Discount houses are institutions that specialise in the provision of discounting and discounting facilities, buying

and selling of securities, especially government securities. They act as financial intermediaries. They also

issue their own securities to banks as a mean of raising funds.

There are four Discount houses in Nigeria operating presently. Banks in need of funds approach them

instead of going to discount their bills with the CBN.

 

Nigerian Social Insurance Trust Fund

The Nigeria Social Insurance Trust Fund (NSITF) was established in 1993 by Decree No 7. It replaced the

National Provident Fund which was established in 1961. Its main function is to provide a more comprehensive

social security scheme for Nigerian private sector employees. It raises funds through a compulsory

contribution to the fund by private and public sector employees and employers. The funds so mobilized are

used to provide pension benefits to contributors. But, before it is time to pay the contributions, these funds are

invested by the fund managers or given out as loans. These investments, apart from serving as a source of

credit to investors earn some dividends or interests which help to ensure that the contributor are paid more

than their contributions.

Pensions are often the only form of savings for retirement which a person will make. They are a part of

the remuneration of the employee, deferred until he has finished active work, to which he has right. Thus

pension fund constitute another reliable source of funds for investment in commerce and industry and for

financing the economy.

 

Thrift and Credit and Co-operative Societies

The main functions of Thrift, Credit and loans Cooperative societies is to raise investment finance. Members

pays an agreed sum of money every month into a common fund. The members borrow at a certain interest

rate. This type of Co-operative society is a savings club and is popular amongst traders, artisans and peasant

farmers.

Functions

- It is a valuable means of mobilizing some capital for investment.

- Members obtain loans easily from their society and there is no requirement for a collateral. The only

condition required is an approved project plant for which the loan is required.

- Members form the habit of saving a little of their income, especially in the rural areas, where banking

facilities are scarce.

- Exposure of monthly meetings and regular co-operative education means greater enlightment for members.

 

Investment and Unit Trusts

Many investment companies were established in Nigeria to complement the rapid industrial development

efforts of both the Federal Government and the State/Regional Government. Most investment companies

have common objectives bordering on developmental functions.

These companies mainly finance and complement Government efforts in developing industrial and commercial

ventures in those states.

The function of investment and unit trusts is to raise collective capital from the public and to direct such

funds into profitable investment channels. The two different types of organization  enable the small investors

with limited capital to spread his risks over a wide range of securities under full time specialist management.

A unit trust on the other hand, is a method of investment whereby money subscribed by many people is

pooled in a fund, the investment and management of which is subject to the legal provisions of a trust deed.

 

Savings and Loans Associations

These are said to be the best known non-bank intermediaries. These associations were originally organize

to make mortgage loans to their own members, but they have increasingly emphasized theirs as savings

institutions, catering to small investors and local governments and even state government.

The principal asset of these associations is conventional mortgage loans for family dwellers while their

liabilities consist of depositors funds, principally from the government and share accounts savers. The associations

normally in good time pay interest which is usually higher than that paid by commercial banks on their

savings deposits. They are also allowed to issue large denomination of certificates of deposits.

 

Specialized Bank (Non-Conventional Banks)

People’s Bank of Nigeria (PBN)

The People’s Bank of Nigeria (PBN) was established in October, 1989 but was given Legal Status by

Decree No. 22 of 1990. The Decree specified its functions as

(i) the provision of basic credit requirements of under-privileged who are involved in legitimate economic

activities in both urban and rural areas and who cannot normally benefit from the service of the orthodox

banking system due to their inability to provide collateral security.

(ii) the acceptance of savings from the same group of customers and making repayments of such saving

together with any interest thereon after placing the money in bulk sums on short-term deposits with

commercial and merchant banks.

People’s Bank of Nigeria (PBN) is a non-conventional bank established to provide specialized services

and grant credit facilities to the urban and rural poor masses who cannot satisfy the stringent collateral

requirements normally demanded by conventional banks. Those served by the bank include the poor roadside

hawkers, mechanics, vulcanizers, plumbers, electrician, food seller, truck pusher, hair dressers, dress makers,

etc.

Therefore, from the foregoing, People’s Bank of Nigeria has the following aims:

(a) Increasing investment and savings;

(b) Raising per capital income and PNG;

(c) Halting rural urban migration;

(d) Bridging the gap between the rich and the poor;

(e) Increase productivity, and

(f) Providing credit facilities to the disadvantaged classes who could not have ordinarily benefited from

credit facilities in conventional banks.

 

 Community Bank

The Bank and other Financial Institutions Decree 1991 defined a community bank as “a bank whose

business is restricted to a specified geographical area in Nigeria. Operationally, it is also defined as a self

sustaining bank owned and managed by a community or a group of communities to provide financial

services to that community or communities. A community bank may be owned by Community

Development Associations (CDAS), Cooperative Societies, farmers groups, clubs, trade groups and their

similar groups or by indigenous businessmen or individuals within a community. Community Banks operate

basically like commercial banks, except that they are prohibited from engaging in “sophisticated banking

services” like foreign exchange transactions and export financing. Again, their operations are restricted to

a specified geographical area like a unit bank. Thirdly, they are not members of the cleaning house. As such, their cheques are cleared through commercial banks.

Functions of Community Banks

* Accept various types of deposits including savings, time and target deposits from individuals, groups and

other organization s.

* Issue redeemable debentures to interested parties to raise funds from members of the public.

* Receive money or collect proceeds of banking instruments on behalf of its customers.

* Provide ancillary banking services to its customers such as remittance of funds.

* Maintain and operate various types of accounts with or for other banks in Nigeria.

* Invest surplus funds of the bank in suitable instruments including placing such funds with other banks.

* Pay and receive interests as may be agreed between Community Banks and their clients in accordance

with public policy.

* Provide credit to its customers, especially small and medium scale enterprises based in its area of

operation.

* Operate equipment leasing facilities.

 

Federal Savings Bank

The Post Office Savings Bank established in 1889 was later rebaptised in 1974 to be known as the Federal

Savings Bank (FSB). The FSB even though carries out certain commercial banking functions still has as its

objectives, as was stipulated in its parent bank act – the Post-Office Savings Act, 1958, has the following:

(i) to provide a ready means for the deposit of savings, especially in the rural areas, and

(ii) to encourage thrift and the mobilization  of savings, also, especially in the rural areas.

These special savings scheme were at that time designed to mobilize funds for national development,

especially at rural levels.

 

Conclusion

The banks Financial Institutions is the most important component of the Nigerian Financial System. The same

applies to other countries of the World. It is the heart of the Financial System. This is because apart from

being the key operators in the Financial markets, monetary policies of the government are implemented

through the banking system. Moreover, the banks Financial Institutions creates money, and by doing this,

influences the economy of a country in no small measure. These are in addition to the traditional roles of

savings mobilization , and financial intermediation, and provision of settlement mechanism. Banks constitute

the major source of credit to the economy.

The Bank Financial Institutions comprises all Banks that operate within the boundaries of Nigeria by

whatever name they are called and their branches. These include the Central Bank of Nigeria, which stands

at the apex of the system, commercial banks, merchants banks, development banks, community banks and

the People’s Bank of Nigeria.

The non-bank financial institutions also known as other financial institutions are those institutions, apart

from banks, that help to perform the role of financial intermediation. They collect funds from the surplus unit

under various titles, and go ahead to make the funds available to the investors who have need for such funds.

Development banks are specialized in lending to different sectors of the economy depending on government

priorities.

Insurance and Pension Schemes aim to return the money borrowed to the policy

holder. Investment and Unit trusts buy shares and keep them for the benefit of the

members.

For credit and co-operatives societies, they on-lend the money they get from their members to

various other members for various purposes.

Finance companies use the money they get to lend to people wanting to buy capital goods over a period.

 

Summary

In this unit, we have been able to compose all the functions of financial institutions of various types.

There- fore, the institutions in the world has made possible, and of course, efficiently and effectively, a

situation where the surplus money of savers could be mobilized to finance the worthy needs of reliable

borrowers through these Financial Institutions discussed thus far.

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