Nigerian Financial System

Back to: FINANCIAL ACCOUNTING SS2

 

Welcome to class! 

In today’s class, we will be talking about the Nigerian financial system. Enjoy the class!

Nigerian Financial System

What is the Financial System?

A financial system is a conglomerate of various markets, instruments, operators, and institutions that interact within an economy to provide financial services such as resource mobilization and allocation, financial intermediation and facilitation of foreign exchange transactions to exchange foreign trade. Financial system in a market economy is comprised of both monetary and non-monetary claims (i.e., served debt and equity). Places, institutions or communication systems that provide a market where financial claims can be bought and sold. Specialists such as brokers and underwriters who aid in the direct transfer of funds from surplus to deficit units.

The Components of the Nigerian Financial System and its Operations

The Nigerian financial system comprises of the regulatory/supervisory authorities, banks and non-banking financial institutions. The regulatory bodies are the Central Bank of Nigeria (CBN) which is at the apex, the Nigerian Deposit Insurance Corporation (NDIC), Security and Exchange Commission (SEC), the Federal Ministry of Finance (FMF), the Nigerian Supervisory Board (NISB), and the Federal Mortgage Bank of Nigeria (FMBN).

The CBN is a major regulator and supervisor in the money market, with the NDIC playing a complementary role. The CBN exclusively regulates the activities of finance companies and promotes the establishment of development banks. The National Board for Community banks, while the final granting of a license is the CBN’s responsibility. The SEC is the Apex regulator/ supervisor in the capital market, with NSE as a self-regulatory institution. The FMF and the CBN share control over Bureaux de change while the NISB is the regulatory authority in the insurance sector. The FMBN regulates mortgage financial business in Nigeria (CBN, 1990). Developmentally, the Nigeria financial system has witnessed rapid growth in the last two decades. This could be seen from the widespread establishment of many financial institutions. The growth can be claimed due to the oil boom and the awareness of the importance of money by Nigerians.

Features of the Nigerian Financial System

The major feature of the Nigerian financial system is the dominant role the Federal and State Government play in the financial intermediation; either directly or indirectly. There are a number of government parastatals which the government often lend money to. The state and federal governments also borrow money from the financial system. The governments are also involved in the financial intermediation indirectly through ownership of banks or financial institutions. Other functions of the Nigerian Financial System can be seen below-

1. A high level of confidence must be in place in the system.
2. An efficient financial system must be able to sustain the intermediation process.
3. An efficient financial system must have in place a large number of intermediaries and participants who must stand ready to engage in healthy competition amongst themselves and within confines and boundaries specified by law and the various professional standards in place for the participants.
4. There should be a high degree of flexibility in the market. Also, the instruments (financial assets) employed and the methods of operation should be market-based, so that the market can respond and adapt to changes in the economic and financial structure, no matter how small the change may be.
5. An efficient financial system must allow for balance in operations of the market. It requires that there should be an optimal mix of various types of financial institutions with respect to both the transfer of current savings and the stock the past savings.

Functions of the Money Market and Capital Market in the Nigerian Financial System

Money Market: A well-developed money market is essential for a modern economy. Though historically, money market has developed as a result of industrial and commercial progress, it also has an important role to play in the process of industrialization and economic development of a country. Importance of a developed money market and its various functions are discussed below-

1. Financing Trade: Money Market plays a crucial role in financing both internal as well as international trade. Commercial finance is made available to the traders through bills of exchange, which are discounted by the bill market. The acceptance houses and discount markets help in financing foreign trade.
2. Financing Industry: Money market contributes to the growth of industries in two ways:

• Money market helps the industries in securing short-term loans to meet their working capital requirements through the system of finance bills, commercial papers, etc.
• Industries generally need long-term loans, which are provided in the capital market. However, the capital market depends upon the nature of and the conditions in the money market. The short-term interest rates of the money market influence the long-term interest rates of the capital market. Thus, money market indirectly helps the industries through its link with and influence on the long-term capital market.

3. Profitable Investment: Money market enables commercial banks to use their excess reserves in profitable investment. The main objective of the commercial banks is to earn income from its reserves as well as maintain liquidity to meet the uncertain cash demand of the depositors. In the money market, the excess reserves of the commercial banks are invested in near-money assets (e.g. short-term bills of exchange) which are highly liquid and can be easily converted into cash. Thus, commercial banks earn profits without losing liquidity.
4. Self-Sufficiency of Commercial Bank: Developed money market helps the commercial banks to become self-sufficient. In the situation of emergency, when the commercial banks have a scarcity of funds, they need not approach the central bank and borrow at a higher interest rate. On the other hand, they can meet their requirements by recalling their old short-run loans from the money market.
5. Help to Central Bank: Though the central bank can function and influence the banking system in the absence of a money market, the existence of a developed money market smoothens the functioning and increases the efficiency of the central bank.

Evaluation

1. What is Financial system?
2. List 5 features of the Financial system?
3.  List the functions of the money market and the capital market in the Nigerian financial system.

 

In our next class, we will be talking about Types of Shares.  We hope you enjoyed the class.

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