1.0. INTRODUCTION
The Non-bank Financial Institutions of any financial sector are as
important as the banking
financial institutions of such an economy. In this note, you shall
learn about what Non-bank
financial Institutions are; the differences between the bank and
the Non-bank Financial
Institutions; and their role in economic development of Nigeria.
2.0. OBJECTIVES
At the end of this note, you should be able to;
· Define and explain the concept of Non-bank
Financial Institution.
· Differentiate between bank and Non-bank
Financial Institution.
· Enumerate and explain the role of Non-bank
Financial Institutions in economic
development of a country.
3.0. NON-BANK FINANCIAL INSTITUTIONS
(NBFIs)
3.1. What are Non-Bank Financial
Institutions (NBFIs)?
These are institutions that act as intermediaries between the
ultimate lenders and
borrowers of funds. They are non-deposits taking institutions.
They include such institutions as
Insurance Companies, Stock-broking firms, Issuing Houses, Building
Societies, Venture capital
Companies, and specialized finance institutions like the
Securities and Exchange, the Nigerian
Deposit Insurance Corporation among many others.
The activities of these institutions are governed by various legal
enactments. A large
number of these institutions, particularly the privately owned
investment and finance companies
are engaged in such services as project finance, management
consultancy, feasibility studies,
issuing houses, leasing, investment advice, etc. Non-bank
financial institutions rely on the
banking system, individual deposits and insurance companies as
their source funds.
3.2. Distinction between Banks and NBFIs
Banks are different from non- bank financial institutions in the
following respects:
3.2.1. Credit creation
The creation of credit or deposit is one of the most important
functions of commercial banks.
On the other hand, the Non-bank financial institutions do not
create credit or money in the
economy.
3.2.2. Portfolio structure
Commercial banks differ from Non-bank financial institutions in
their portfolio structure. Bank
liabilities are very liquid. The liabilities of a bank are large
in relation to its assets, because it
holds a small proportion of its assets in cash. But its
liabilities are payable on demand at a short
notice. Many types of assets are available to a bank with ranging
degree of liquidity. The most
liquid assets are deposits with the central bank, treasuring bills
and other short-term bills issued
by the federal and state governments and large firms, and call
loans to other banks, firms, dealers
and brokers in government securities. The less liquid assets are
the various types of loans to
customers and investment in long-term bonds and mortgages. Thus
banks have a large and varied
portfolio on the basis of which they create liquidity.
Non-Bank Financial Institutions also create liquidity but in the
form of savings and time deposits
which are not used as a means of payment. They are limited in the
choice of their assets and are
also prohibited from holding certain assets. Thus the size of
their portfolio is very small as
compared with banks. They generally issue claims against
themselves that are fixed in money
terms and have maturities shorter than the direct securities they
hold. They borrow for short
period, and lend for long period. This is because of the small
size of their portfolio and they hold
less liquid assets than banks.
3.2.3. Risk
Banks have to follow certain norms at the time of advancing loans.
There are detailed appraisals
of projects and hence delays in sanctioning, loans. On the other
hand, Non-Bank Financial
Institution do not enter into detailed appraisals of projects,
they have to follows less stringent
rules for advances. There are no time delays in granting loans.
Thus non-bank financial
institutions are able to take greater risk and lesser supervision
as compared to banks.
3.3. The role of NBFIs in Economic
Development
Non-bank financial institutions have being playing an important role
in economic
development of Nigeria in the following directions.
3.3.1. Provision of liquidity
Non-bank financial institutions provide liquidity when they
convert an asset into cash easily
and quickly without loss of value in terms of money. NBFIs issue
claims against themselves and
supply funds. This they do by following two rules. First, they
make short-term loans and finance
them by issuing claims against themselves for longer periods, and
second, they diversify loans
among different types of borrowers.
3.3.2. Brokers of loadable funds
Non-bank financial institutions play an important role as brokers
of loanable funds in the
economy. They act as intermediaries between the ultimate savers
and the ultimate investors.
They sell indirect securities to savers and purchase primary
securities from investors. Indirect
securities are the short -term liabilities of financial
intermediaries. On the other hand, primary
securities are their earning assets but they are the debts of the
borrowers. Thus, NBFIs act as
brokers of loanable funds by changing debt into credit.
3.2.1. Reduce Risks
When the non-bank financial institutions convert debt into credit,
they reduce the risk to the
ultimate lenders. First, they create liabilities on themselves by
selling indirect securities to the
lenders then they buy primary securities from borrowers of funds.
So by acting as intermediaries
between the lenders and borrowers of funds, NBFIs take the risk on
themselves and reduce it on
the ultimate lenders. Moreover, by holding varied types of
financial assets, they decrease their
own risks. Low returns on some assets can be offset by high return
on others.
3.2.2. Savings mobilization
NBFIs raise funds in the capital market and supply credit to
investors. Expert financial services
provided by them have been attracting larger share of public
savings. Such services include easy
liquidity, safety of principal and ready divisibility of savings
into direct securities of different
values.
3.3.5. Stability in the capital market
NBFIs deal in a variety of assets and liabilities which are mostly
traded in the capital market. If
there are no NBFIs, there would be frequent changes in the demand
and supply of financial
assets and their relative yields, thereby bringing instability in
the capital market. As NBFIs
function within a legal framework and set rules, they provide
stability to the capital market and
benefit savers and firms through diversified financial services.
3.2.3. Economic growth
NBFIs help in the growth process of the economy. They intermediate
between ultimate lenders
who are savers and ultimate borrowers who are investors. By
performing this function, they
discourage hoarding by the people, mobilize their savings and lend
than to investors. Thus
NBFIs encourage savings and investment which are essential for
promoting economic growth.
3.2.4. They help the business sector, and
the three tiers of government
For the business sector, they help by financing it through loans,
mortgages, purchase of bonds,
shares etc. Thus they facilitate investment in plant, equipment
and inventories. They also help
the three tiers of government financially by purchasing and
selling of their securities.
4.0. CONCLUSION
This notes throws light on Non-bank financial institutions, its
functions and roles. It also
discusses the difference between bank and non-bank institutions.
5.0. SUMMARY
In this note, you have learned about;
i. What a Non-bank Financial Institution is,
ii. The differences between the banking and the Non-bank Financial
Institution.
iii. The critical role of the Non-bank Financial Institutions in
economic
development of a country,
0 comments:
Post a Comment