In the last unit, we
discussed exhaustively the supply of money and now we want to focus on the
Financial
Institutions that are
responsible for the supply of money. The Financial Institutions operate and
function in
an economic system.
In its ordinary usage, the word “System” can be used to refer to “a group of
related
parts working
together”. This is the sense in which it is used here – the financial
institutions working
together to provide
the financial services required in an economy.
The Nigerian Financial
System comprises
the banking system
(all the banks) the non-bank financial institutions, the regulatory bodies, and
other
financial market
participants, that play the role of financial intermediation in the Nigerian
economy.
The Central Bank of
Nigeria Briefs (1996) defined a financial system as “a conglomerate of various
institutions,
markets, instruments, and operators that interact within an economy to provide
financial
services. Such
services may include resource mobilization and allocation of financial
intermediation and
facilitation of
foreign exchange transactions to enhance international trade.
Financial Institutions
Financial
institutions are institutions which serve the purpose of channeling funds from
lenders to borrowers.
They hold money balance
of, or borrow from individuals and other institutions, in order to make loan or
other
investments. Finance
has to do with money. It is an organized system of managing money i.e. a system
of
lending and borrowing
money.
A Financial
Institution acts as an intermediary between those individuals or firms who wish
to lend and
those who wish to
borrow. The existence of financial intermediaries reduces the risks by allowing
specialist
institutions to
evaluate the credit worthiness of borrowers. The risk reduction may encourage
lending and
thus reduces the
interest rate of most individuals and risk averters.
Institutionally, it
is common to distinguish between banks and non-bank financial institutions. The
importance
of the former is that
their liabilities enter the common definitions of the money supply. The
liabilities of
non-bank financial
institution may enter some money supply definitions or they may be classed as
“near
money” depending on
their liquidity.
Examples of non-bank
intermediaries/ institutions listed in terms of
decreasing liquidity
are: Building societies, Savings banks, Hire purchase, Insurance companies,
Pension
funds and Investment
trusts
Types of Financial Institutions
Financial
Institutions can be broadly classified into two: banks or bank financial
institutions in the banking
sector and non-bank
financial institutions.
Commercial, Central,
Merchant and Development banks are in the banking sector while Building
Societies,
Hire Purchase
Companies, Insurance Companies, Pension Funds and Investment Trust are non-bank
financial
institutions.
While liabilities of
banks form part of the money supply, the liabilities of non-bank financial
institutions do
not for they are
referred to as “near money”.
In Nigeria, the
following types of financial institutions can be identified.
- Traditional
Financial Institutions
- Commercial Banks
- Central Banks
- Development Banks
- Insurance Companies
- The Federal Savings
Banks
- The People’s Bank
- Community Banks
- Savings and Loan
Associations
- Investment and Unit
Trusts
- Credit and
Cooperative Societies
- Pension Scheme
(NPF), (NSITF)
- Financial Companies
Bank Financial Institutions
Structurally, the
bank-financial institution is made up of:
(a)
The Supervisory and Regulatory Authorities: They comprise the
Central Bank of Nigeria which is
the Principal
regulatory body, Federal Ministry of Finance. The Securities and Exchange
Commission,
Nigerian Deposit
Insurance Corporation, Nigerian Insurance Supervisory Board (Now renamed
National
Insurance Commission)
and to a lower extent the Federal Mortgage Bank and National Board for
Community Banks.
These Supervisory bodies are also referred to as monetary authorities.
(b)
The Banking System (Banks): The banking system comprises
all the banks that operate within the
economy. This
includes commercial banks, merchants banks, development banks and other specialized
banks, such as the
Community Banks and People’s Bank of Nigeria. Apart from few development
banks, all these
banks collect deposits, and give out loans. They are key actors in performing
the role of
financial
intermediation.
Non-Bank Financial Institutions
Apart from banks,
there are other institutions that perform the role of financial intermediation.
These other
institutions are
called non-bank financial institutions. At times, they are simply referred to
as other financial
institutions. These
institutions include finance house, savings and loan institutions, insurance
companies, the
discount houses,
Bureau de Change, Pension and other trust funds. There are also informal
savings and loan
associations like
cooperative societies, ESUSU or Isusu groups known as “Ajo” and Alashie in
Hausa language.
An Isusu group is an
association of like-minded individuals who contribute a pre-determined amount
of money which is
given to each member of the group one after the other after each collection.
The amount
may be contributed on
weekly or monthly basis.
Conclusion
Financial
Institutions are establishments that issue financial obligations such as demand
deposits in order to
acquire funds from
the public. The institutions then pool these funds and provide them in larger
amounts to
businesses,
governments or individuals. Examples are commercial banks, insurance companies,
savings and
loan associations. In
some countries, financial institutions are also known as “Financial
Intermediaries”.
Financial
Institutions can be classified into bank and non-bank Financial institutions.
Bank Financial Institutions include the central banks, the commercial banks and
the development banks. Non-bank financial
institutions include
discount houses, issuing houses, insurance companies, building societies and
the stock
exchange. These
institutions operate in markets with instruments to acquire funds from the
public for investment.
Summary
What you have learned
in this unit concerns the definitions/meanings of financial institutions and
the various
types of Financial
Institutions grouped into bank and non-bank financial institutions. It has
served to
introduce the
functions and control of financial institutions. The two units that follow
shall build upon this
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