Financial Markets, Financial Assets, and Market Participants t economy, the allocation of economic ‘Fesources is driven by the outcome of r decitons, Pace are the signals that direct economic resources to their best use. The types of markets an economy can be divided into (1) the market for products (manufactured Goods and services), or the product market; and (2) the market for the factors of production (labor and Capital), or the factor market, ‘An asset is any possession that has value in an exchange, As intangible. The value of a tangible asset depends on hee: Assets can be classified as tangible or 4 Particular physical properties buildings, land, or machinery. Tangible assets may be classified fu machinery, oF non-reproducible assets such as land, a mine, or y examples include ther into reproducible assets such as contrast, represent legal claims to some future benefit. Their value or otherwise, in which the claims are recorded, work of art, Intangible assets, by bears no relation to the form, physical Financial assets (also referred to as financial instruments or securities) are intangible assets, For these instruments, the typical future benefit comes in the form o . ity that agrees to make future cash payments is called the issuer ofthe financial asset; referred to as the investor, the owner of the financial asset is ‘The claims of the holder of a financial asset { may be either a fixed dollar amount ora varying, or residual, mount In the former case, the financial asset is refered to as a deb instrument, Bond wh bank loans Gre cxamples of debt instruments, An equity claim (also called a residual claim) obligates the issuer of the financial asset to pay the holder an amount based on earnings if any, after holde cr debt instruments have been paid. Common stock is an example of an equity claim. A partnership share in a business is another example. Some financial assets fll into both categories, Prefered stock, for example, represents an equity claim that entitle the investor to receive a fixed amount of money, This payment however, due only after payments to debt instrument holders are made, Another inctoment convertible bonds, which allow the investor to convert debt into equity under certain citeunstaneen Fon debt and preferred stock that pays a fixed dollar amount are called fixed income instruments: Financial assets serve two principal economic functions. First, financial assets transfer funds from those Parties who have surplus funds to invest to those who need funds to invest in tangible assets. As thelr » they transfer funds in such a way as to redistribute the unavoidable risk associated with assets among those seeking and those providing the funds. However, the claims held by the final wealth holders generally differ from the liabilities issued by the final demanders of funds because of the activity of entities operating in financial markets, called financial intermediaries, who seek to transfor contingent, rm the final liabilities into different financial assets preferred by the public. Financial assets possess the following properties that determine or influence their attractiveness to different classes of investors: a) Moneyness: Some financial assets act as a medium of exchange or in settlement of transactions. ‘These assets are called money. Other financial assets, although not money, closely approximate money in that they can be transformed into money at little cost, delay, or risk. Moneyness clearly offers a desirable property for investors. Divisibility and denomination divisibility relates to the ‘minimum size at which a financial asset can be liquidated and exchanged for money. The smaller the size, the more the financial asset is divisible, | b) Reversibility: also called round-trip cost, refers to the cost of investing in a financial asset and then getting out of it and back into cash again, For financial assets traded in organized markets or with “market makers,” the most relevant component of round-trip cost is the so called bid-ask spread, to which might be added commissions and the time and cost, if, any, of delivering the asset. The bid-ask spread consists of the difference between the price at which a market maker is Willing to sell a financial asset (i.., the price it is asking) and the price at which a market maker is willing to buy the financial asset (i., the price itis bidding) The spread charged by a market maker varies sharply from one financial asset to another, ‘reflecting primarily the amount of risk 1[Pace -the market maker assumes by “making” a market, This market-making risk can be related to two main forces. Divisibility and denor 'y_of the price as measured, ) i say, dispersion of the relative price over time. The greater apenas by some meas of pein 2 meger ewig om ces sa aed et Bene He protag and reselling the financial asset. The variability of prices difers widely across financial assets, The second determining factor of the bid-ask spread charged by a market m i financial Gommonly referred to as the thickness of the market, which is essentially the cova is what is which buying and selling orders reach the market maker (ie., the frequency Sr eaeeaneAs “hin market” sees few trades on a regular or continuing basis, Clear! Hons). A i tinuing ly, the greater the frequen: of orders coming into the market for the financial asset (referred to as the “order flow”), the Shorter the time thatthe financial asset must be held in the market maker's Inventory, ond hence the smaller the probability of an unfavorable price movement while held. “Thickness also varies from market to market. A low round-trip cost is clearly a desirable property of a financial asset, and as a result thickness itself is a valuable property. This attribute explains the potential advantage of large over smaller markets (economies of scale), and a market's endeavor to standardize the instruments offered to the public. 4) Maturity: is the length of the interval until the date when the instrument is scheduled to make its final payment or the owner is entitled to demand liquidation, Maturity is an important characteristic of financial assets such as debt instruments. Equities set no maturity and are thus a form of perpetual instrument, Liquidity serves an important and widely used function, although no uniformly accepted definition of liquidity is presently available. A useful way to think of liquidity and illiquidity, proposed by James Tobin, is in terms of how much sellers stand to lose if they wish to sell immediately against engaging in a costly and time consuming search. e) Liquidity: Liquidity may depend not only on the financial asset but also on the quantity one wishes to sell (or buy). Even though a small quantity may be quite liquid, a large lot may run into illiquidity problems. Note thet liquidity again closely relates to whether a market is thick or thin. Thinness always increases the round-trip cost, even of a liquid financial asset. But beyond some point it becomes an obstacle to the formation of a market, and direetly affects the illiqudity of the financial asset. 1) Convertibility: An important property of some financial assets is their convertibility into other financial assets. In some cases, the conversion takes place within one class of financial assets, as when a bond is converted into another bond. In other situations, the conversion spans classes. For example, with a corporate convertible bond the bondholder can change it into equity shares. Most financial assets are denominated in one currency, such as Dollars, Yen, Naira or Euros, and investors must choose them with that feature in mind. Some issuers have issued dual-currency Seeurities with certain cash flows paid in one currency and other cash flows in another currency. 2) Cash flow and return predictability: The return that an investor will realize by holding a financial asset depends on the cash flow expected to be received, which includes dividend payments stock and interest payments on debt instruments, as well as the repayment of principal for a debt instrument and the expected sale price of a stock. Therefore, the predictability of the expected return depends on the predictability of the cash flow. Return predictability, a basic property of financial assets, provides the major determinant of their value. Assuming investors are risk averse, the riskiness of an asset can be equated with the uncertainty or unpredictability of its return. h) Tax status: An important feature of any financial asset is its tax status. Governmental bea er taxing the income from the ‘ownership or sale of financial assets vary widely if not wil y. Tax rates differ from year to year, country to country, and even among ‘municipalities oF provine thi iffer from financial asset to financial asset, depending within a country. Moreover, tax rates may differ from finan set dep on the type of issuer, the length of time the asset is held the nature of the owner, and so on. 2| PageFINANCIAL MARKETS Financial assets are traded in a financial market. Below we discuss how financial markets can be i 1d the functions of financial markets. al Classification of Financial Markets ‘There are five ways that one can classify financial markets: (1) nature of the claim, (9) maturity ofthe claims, () new versus seasoned claims, (A) cash versus derivative instruments, and (8) organivationel structure of the market. 8) Nature of the claim: The claims traded in a financial market may be either fora fixed amount or a residual amount and financial markets can be classified according to the nature of the claim. As explained earlier, the former financial assets are referred to as debt instruments, and the financial market in which such instruments are traded is referred to as the debt market, The latter financial assets are called equity instruments and the financial market where such instruments are traded is referred to as the equity market or stock market. Preferred stock represents an equity claim that entitles the investor to receive a fixed dollar amount. Consequently, preferred stock has in common characteristics of instruments classified as part of the debt market and the equity market, Generally, debt instruments and preferred stock are classified as part of the fixed income market. b) Maturity of the claims: A second way to classify financial markets is by the maturity of the claims. For example, a financial market for short-term financial assets is called the money market, and the one for longer maturity financial assets is called the capital market. The traditional cutoff between short term and long term is one year. That is, a financial asset with a maturity of one year or less is considered short term and therefore part of the money market. A financial asset with a maturity of more than one year is part of the capital market. Thus, the debt market can be divided into debt instruments that are part of the money market, and those that are part of the capital market, depending on the number of years to maturity. Because equity instruments are generally perpetual, a third way to classify financial markets is by whether the financial claims are newly issued. When an issuer sells a new financial asset to the public, it is said to “issue” the financial asset. ¢) New versus seasoned claims: The market for newly issued financial assets is called the primary market. After a certain period of time, the financial asset is bought and sold (i.e., exchanged or traded) among investors.,The market where this activity takes place is referred to as the secondary market. d) Cash versus derivative instruments: Some financial assets are contracts that either obligate the investor to buy or sell another financial asset or grant the investor the choice to buy or sell another financial asset. Such contracts derive their value from the price of the financial asset that may be bought or sold. These contracts are called derivative instruments and the markets in which they trade are referred to as derivative markets. The array of derivative instruments includes options contracts, futures contracts, forward contracts, swap agreements, and cap and floor agreements. . . ) organizational structure of the market: Although the existence of a financial market is nota necessary condition for the creation and exchange of a financial asset, in most economies financial assets are created and subsequently traded in some type of organized financial market structure. A financial market can be classified by its organizational structure. These organizational structures can be classified as auction markets and over-the-counter markets. Economic Functions of Financial Markets is The two primary economic functions of financial assets were already discussed. Financial markets provide three additional economic functions. First, the interactions of buyers and sellers in a finan equivalently, the required return on a financial asset is market determine the price of the traded asset; or, determined. The inducement for firms to acquire 3] Page, + investor's demand, and this feature of financial markets signals funds depends on the required return that Inve 0 Os sinancial assets. Itis called the price discovery in should "i * ae the esonomy ot rect isan issue that we discuss when we examine the question of process. Whether these A i arkets. ‘ ‘. i apse aes roar ela mechanism for an investor to sel financial aset. This feature offers Second, financial mar ; ‘ iictive characteristic when circumstances either force or motivate an ee wi Snancil mo iui, the owner must hold a debt instrument until it matures and an investor 10 ei are many either voluntarily or involuntarily liquidate. Although all financial iurkets provide ‘some form of liquidity, the degree of liquidity is one of the factors that differentiate various markets. : ; ; rer erttiomie function ofa financial market reduces the search and information costs of transacting. Search costs represent explicit costs, such as the money spent to advertise the desire to sell or purchase a Faancial asset, and implicit costs, such as the value of time spent in locating counterparty. The presence aetome form of organized financial market reduces search costs. Information costs are incurred in Sssessing the investment merits of a financial asset, that is, the amount and the likelihood of the cash flow expected to be generated. In an efficient market, prices reflect the aggregate information collected by all market participants. Role of Financial Intermediaries Financial intermediaries obtain funds by issuing financial claims against themselves to market participants and then investing those funds. The investments made by financial intermediaries—their assets—can be in loans and/or securities. These investments are referred to as direct investments. As just noted, financial intermediaries play the basic role of transforming financial assets that are less desirable for a large part of the public into other financial assets—their own liabilities—which are preferred more by the public. This transformation involves at least one of four economic functions: (1) providing maturity intermediation; (2) risk reduction via diversification; (3) reducing the costs of contracting and information processing; and (4) providing a payments mechanism. a) Providing maturity intermediation: Maturity intermediation involves a financial intermediary issuing liabilities against itself that have a maturity different from the assets it acquires with the fund raised. An example is a commercial bank that issues short-term liabilities (i.e., deposits) and invests in assets with a longer maturity than those liabilities. b) Risk reduction via diversification: Maturity intermediation has two implications for financial markets. First, investors have more choices concerning maturity for their investments; borrowers have more choices for the length of their debt obligations. Second, because investors are reluctant to commit funds for a long period of time, they will require that long-term borrowers pay a higher interest rate than on short-term borrowing. In contrast, a financial intermediary will be willing to make longer-term loans, and at a lower cost to the borrower than an individual investor would, by counting on successive deposits providing the funds until maturity. Thus, the second implication is that the cost of longer-term borrowing is likely to be reduced, ©) Reducing the costs of contracting and information processing: Investors purchasing financial assets should develop skills necessary to understand how to evaluate an investment. Once those skills are developed, investors should apply them to the analysis of specific financial assets that are candidates for purchase (or subsequent sale). Investors who want to make a loan to a consumer or business will need to write the loan contract (or hire an attorney to do so). While there are some people who enjoy devoting leisure time to this task, most of us find that leisure time is in short supply, so to sacrifice it, we have to be compensated. The form of compensation could be a higher return obtained from an investment. In addition to the opportunity cost of the time to process the information about the financial asset and its issuer, there is the cost of acquiring that information. All these costs are called information processing costs. The costs of writing loan contracts are referred to as contracting costs. Another dimension to contracting costs is the cost of enforcing the terms of the loan agreement. There are economies of scale in 4|Page4) ing and processing information about financial assets, because of the amount of fu Scanagad by financial intermediaries. The lower costs accrue to the benefit of the investor io Furchases a financial claim of the financial intermediary and to the issuers of financial asses, who benefit from a lower borrowing cost. Providing payments mechanism: While the previous three economic functions may not have been immediately obvious, this last function should be. Most transactions made today are not done with cash. Instead, payments are made using checks, credit cards, debit cards, and electronic transfers of funds. These methods for making payments are provided by certain financial intermediaries. The ability to make payments without the use of cash is critical for the functioning of a financial market. In short, depository institutions transform assets that cannot be used to make payments into other assets that offer that property.MONEY Money can be defined as any asset that can easily be used to purchase goods and services, ft ex lofined as anything that is accepted by law, custom or both as medium of exchange. Medium of exchange: an asset that individuals acquire for the purpose of trading for goods a! rather than for their own consumption. Traditional view or view of the currency school and keynes defined money as" currenes vt « ts"(M = C + D where M - Money supply, C - Currency and D - Demand deposits). 1 depo cmpirical definition of money means "iteraly the number of cash people are carrying Pockets. the number of cash they have to their credit at banks in the form of demand «ley commercial bank time deposits". Friedman's theoretical definition of money defines money capable of serving as a temporary abode of purchasing power", His broader definition of mi bank deposits, non'- bank deposits and any other type of assets through which the monesi:s influences the future level of income, prices, employment or any other important macro visi money is expressed as Mz = C+D + S$ +T. The Radcliffe committee defined money as " not: deposits". Gurley - Shaw definition regard a substantial volume’ of liquid assets held by intermediaries and the liabilities of non - bank intermediaries as close substitutes {i Intermediaries provide substitutes for money as a store of value, Money proper which is device to curreney plus demand deposits is only one liquid asset. ‘They have thus formulated a wider sie money based upon liquidity, which includes bonds, insurance reserves, pension funds, sav i: shares. From these definitions, we have two things to note. The first is that whatever serves 40 be generally acceptable in settling financial obligations. The second thing is that anythin. \. san serve as money provided it.is acceptable as moncy within a given community. The »pproach (o defining money brings to fore the point that the law can help a commodity to acic plability, Fypes of Money . i. Coins: They are metal Pyney with definite mount. ii, Paper Money: It is in fet of paper notes which originated from the receipts that t issued to people. \ Bank Money: It is deposith both Savings Account, Current Account and 0 Money: It is the oney of other countries and it'serves as money ixed Dep: the fore i iv. Forei market, v. Legal Tender: It is money asa medium of exchangk vi. Gold Backed Money: It is m authority that issues mone! vii, Commodity Money: It is'a cor manila ete. We viii. Token Money: This is money wligge intrinsic worth is less thar: its normal or face vil ix. Representative Money: It is a dosuiment or fieu of legal tender but not fully and frev's ¢.. cheques. postal and mone\ order bills, et, ry Note Issue: This is the t)pe of money that are not backed by either gold wy : currency, ‘ Standard money: is money whose valle as a commodity for non-monetary purposes is its value as money. 4h xii, Subsidiary Money: This :ype of monay is to a tender. a Credit money: Credit moaey or bank tiéney is money transferred by a commercis! form of'a cheque or def 5 Ni -Cptional tnoney or Non - Legal ‘Pender: Phis type of money does not possess ary ices of the state or the central bank. Sp H opticnial monies are time deposits, bon: icked by the force of law in a country which is generaily « ley that can easily be converted or changed into gold hy 1 hodity used as money in the olden days, e.g, eowrie x token money (coins) and are tiThe Business of Banking The term bank is ‘ank is derived from the Ita ancho (Meanit Pecaiert Italian, word bancho (Meaning benel the popula s¢ h) as the Jews in Italy ket lace. where they exchanged money and bills. When a banker failed hig bench f c: and we derived the term bankrupt from this circumstance. mn ‘The Concept of Banking me term bank means different things to different people in different economies. In order to're: divergent views on the meaning and characteristics of banks, the banking laws dpe i fil . a ry . each econont: tional definition and functional classification which governs banking practices in the cv Oa + =e esa eens tat te ere ning banking aw in an economy defines as a ae i \ ‘ hich accepts deposits from the public ix advances loans by creating credit. It is different from other financial institutions in that they car redit though they may be accepting deposits and making advances, 7 Lene ‘on their’ part have defined a bank in various capacities, some emphasis However, a bank has been defined broadly as ‘any financial institution that accepts, coll pays, exchaiiges, lends, invests; or safe-guards money for its customers, This broader definitic many other financial institutions.that are not usually thought of as banks but which nevertheies: ‘one or more of these broadly defined banking services. In summarising these definitions. v » bank is simply an institution which accepts deposits from the public and in turn advance ating credit, ‘ou should bear in mind that banks are divided into private and public. A private bi they attend personaily to it management?’A piiblic bark has maay x ikemselves a certain number who are entnisted ¢6 tana ninister the'bank iirtlie da: The business of banking is mainly. to receive deposits of mosey, With e ioreret xdvances of money, mainly in discounting bills and i transmission of money from one pisces Discounting of bills yields interest, cash credits and overdraft aééotints. Ete. The profits of sb ortion of its total receipts which include discouni, interest dividends, and commission whic! heing equal, exceeds the amount of the expenses. . . sank and Banking Business 3efore proceeding, Let us refer'to definitions of a bank and banking buisiness according to als oanking Decree: which States thus: A bank is ny person who carries’ ont banking busines ommmercial bank, “Acveptahce House, Discotint'House and Financial Institutions” * anking busines. is defined by the same section of the decree as: “business of receiving ide as deposits intespective Of the ‘payment "of tntelae of af fance credits ote.” From ihe stated definilid ue ature of their linbilities: and’ opératiog 38 ies and regulations are put in plied ig sysiem — hence controlling’ and regulation: fall of the’ CBN just to sisteiu th meaningful relationships. af he areas ‘of regulations’ inclide: Capital talutory Reserves, Bank Si distribution. Bank “Obligéilions Debtor/Creditor Relationship, Relatic: 2elationship benween Be Sevelopment of Mon Syohution of Mut: We understand “that Anyanwaokdre ( The Era-of-No-Spévialisat aM sy of the “bankin ¢ Distrib from ie Era of Tol ken Money shall exami Pee redit Money, and ly ‘lectronie Cashier Motley Era. ne the Monetary Evolution (origin) in the - igin) in the following stag, jhe Em or pherical Adventure (Noma) : mhowing sages: + the Era of Subsistence (At 8 of Subsi tarky or No Exchange} a ‘The Era of Barter System (Direct Exchange) 2 iV. The Era of Money Exchange-Commodity Money (Indirect E: change) V. The Era of Money Exchange-Full Bodied Money f Vl. The Bru of token or credit money 11 of c-Money (Electronic and Cashtess) i. The Era of Sph herical Adventure (Nomadic) - thi end of the earth to the other. At last, he discovered the had germinated sand: grown into new fruits producing Agriculture, The beginning of agriculture influenced! ownership, Possession and contral. Thi, end ofthis era and opened the door for the subsistence era, ‘Tie Era of subsistence (Autarky or No Exchange) - The era of subsistence was 1 Simple ownership, possession and control of the natural resources, However, man discovere ‘hat whatever he personally owned, possessed and controtled in the expanding family could ‘or him. ‘This development gave rise to the ‘emergence of direot exchange (the thought that i ould have what others had in exchange for his own) as we shall discuss below. ‘H. The Era of Barter system (irect-Exckange) - This era of barter sysiem (direct varked by the exchange of goods and services for goods and serv: ‘amilies, You should note that the system | changed the goods and se: cra was marked by the movement of mat nost of the fruit seeds he had drops: trees. This discovery marked the hn: 9 room for a ‘ces at'theit ‘disposal with wir “stanee, if you had a goat and you needed a bag of range,’you co:ld directly bag of oranue without recourse to any mediuii’of exchar : But 1 want you to tote that the barter systeriposed some problems ‘which include coincidence of wants. The problem of double cdinciclence of wants arises in a situa. example, Mr. Okeke who reeds to take oranize Sutidenly discovers that the ofange seller docs » cashew; the orange seller wants mango. There is double coinéidence of wants because Nie. reed t0 find somebody who needs his cashew; this will enable him to get ora The other problents of barter system are storage, transportation, lack of star’ia y. The Eva of Money Exchange-Comaiogity money (Indiveet © v4 actually came to. resolve of the probleiis acicrised by problems of dolible eoineidéseds ystem, the money exe s mediuin of exchange. ‘he items used in diff slaves, cloth, and sheep. In Rome, sheep was a med Some schoisrs argue that these commodities wer they were the inost-priced and sought after‘ 2 ‘designated comntodities spent less time to have them exchanged for uitier cesnmodities, the Era of Money Exchange - Full bodied Money _ i the era of moncy. exchange-full bodied pivided solution to some’of the pér problems, Money exchange-full bédied moitey' ert was when metils werd sutised fon was the fist sbial used, Bat with time “Gald, silv r OOpper Were latter was pias to fubt aia! very bulhy"IS cérivey Ini sleed £8 silver and soppet: A “3 t a ube tt hange yo ig2 Commodity aioney IS Stavelcvidence of the value struments that vi. The Era and item required the of Token or eredi : ke cl he Seventeenth Century Bree ony England ised i 5 Monetary aut ory England was characterised by sustained pressure on gold eso They aie wee ies then were compelled to mint cheaper metals such as silver, copper for. tts tle oF no gold Paper money (fiduciary issue) that were not fully backed by gold, These noi: said kold (commodity) backing are called token money, Culbertson in Anyanwokoro ‘tid that credit money falls into two classeé-those issued by the government (paper money) cated by banks (bank notes and demand deposits) vii. The Era of B- The tee 0 E-Money (leetronie and Cashless) . or credit. money era precedes the preseni cra of e-money, though we understand (4 Money era has:not-foreclosed the use of notes and coins, cheques and other credit instr ‘ransaction, it strictly de-emphasises the use of cash in making payments in both local anc ini transactions. E-money is simply the. application of electronic devices to electronic machine Payments arising from business, transactions without the use of cash. in Nigeria, the concept of e-money was intrcduced in 1996 when the Central Bank of Nize: approval to the then All States Trust Bank Ple to offer ESCA smart card product (Onyia anc 2004:11). Even the developing economies of the world are predominantly trapped in pove compels them to operate cash-based systems; thé emergence of a global system is a matter of ti Fypes‘of Money We shall now discuss the tpes of money. i. Commodity’ Money : Cominodity money ‘is'that money represente salt, cloth, slaves whose demand amongst other commodities are perfectly inelas: serve as a medium of exchange. 7 . Full - bodied money: Money is said. 16 be full-bodied if its face aid ixttinsic values Commodities such as grains, cloth, oil could not serve as full bodied money because we wwii. sem info another state without loss in value,'and also the fact that they retain niany shortc: narter system, However, commodities such as copper, silver and gold are very good exanip! bodied money, . Pure Money: By pure money, we refer to the. cutrency in-circulation (notes and coins) Jepesits. Bank deposits include the money kept in savings, derixind and time accounts. . Token Money: Token money is money that's acceptable to thé masz-s ‘on the'strength of 2 mprints on it. Generally. the intrinsic value of a token money is les Fiat Money: Fiat money is’simply irredeemaate and inconver circulate {rom gaveliment backing. We have’ si i inion" That'is 0 aci"9 esignates as money in 4 system automatically becomes the legal te piece of paper. ett. ae vi. Quasi or near money: Quasi or near inéniy are those’ money market convert into cash without loss i inchide treasury bills; treasury certificate, etc. Fiduciary Issnes: Fidugicry issues as money do not have conimodity or gold bachine cceptable as money on the belief that they are redeemable by the monetary authorities (gover ii. Convertibie Money: Monay is said to be convertible if it could! be ‘nocepiable | vorld: Convertible money is ar intematioiiaily acceptable cufieney that we' can use ns. Curroricies such as ili'Américan Dollar, Behish Poaad Sterting, Japsrs of convertible money, aia me " ies ¢f goad Money!" One*of the’ thie fotote, good moiiey ie to people as a medii held for them, The receipts issued by the Goldsmiths were me! latter to oblige the bear to the value of the receipt. by commodities suvi ic. These vs than the face vi eC. 1 could be a pic.size, and quality should b ‘Divi Ange of goods and or services cing divided into various arose reing 6 Aavious am sible by the minting and printing av exit oe 18 and printing an exis We 7 ise money evi exposes Money to condition af eontavooun omposition to be toot acceptable to the people at any vine of good money. It simply means that the mane. is flues without loss of value and time. Divisi iit g currency into various denominations, minute arid hour to effeet payments all over ths o Y . wer the » Condon of continuous wear an tet Ad money shoud he durable he to weather the storm of wear an tear ‘ is implies that a fiy naira note used in Lagos state should be ident cal bet a ara aa implies that money should be capable of being recognised at ans ne Deseret tilere For lnstnos; any denomination of a country’s currency should be 5 a Ran touch i worked fee earcity: Money should be relatively scarce. A thing that can vil Stable te Votae bject to pick as you wish phenomenon. ei ate i Vales, Despite te evey changing dynamics of the economy, money should be rable in value. Money is stable in value when its worth of note is ticd to the whims of inflavios ve as motte vil Rareability Money should be issued in convenient sizes and shapes {© casetransfer from smother. unetions of Money |The Classical writers posit that money is demanded becuse’ of its use as mein Of ther hand. the Keynesian schoo! argues that money is demanded because of its function: 0 value, Although thé two schools of thought differ ‘as to thie-reason why we demand money. 1 | identifying the two functions of money, The other funetions’ of money are 25 standar payment and unit oFaccount, Let us take them one at a time ; Medium of Exchange - The classical writers tell us that money primarily’ serves as “change, thus. eliminating the problems posed by the barter system. The fact that there is son ould be acceptahle as a inedium of exchange for goods and/or services created Foom for > His is because peaple are sure that whatever they produce would Be ‘bougl by others withers 1 ye and value. 4) Unit of Account - The use ‘of money to measuife'the worth oF value Uf iteia 1s'dhother primi ctmoney. As uit of account, money is a commen numeri¢ deno nator fo ascertain vali: vovth ofan item, say a house. The monetary equivalent of the house is simply the value of ts othe basis of such established value that we nay Eomipare'the Hose 16 anollier itein or thin iii) As a standard for deterred payment- Anythiig that serves ‘as both medium of exchar ecount can easily be taken as a standard for deferred payment The use of Money a at ind an item throtigh whieh the values of other items could be ccertained his given re contracts, bids, and agreentets, This is because wo ate very hopeful that: 2) what you will receive in money will be aceeptable as a medium of exchange | py the value of the contiaet, Lid, and agreement could determine iin the present 1) Store of Vac - Imagine what cou'd happen t9 @ farmer who has just li Sps ancl would svants t0 invest half of the valefe of the oatpts on farm init Sarimer will be in for trouble if Fe must store these hiarvests now se, £0 exob: ome months” tiine, The harvests will obv' sid) perish ible for suclt a farmer fo dispose his output sie in money and not iit rer stores his 12)Establishment of Commercial Banks With an increase in the intensity of international trade between Nigeria and Britain, the establishment of a bank to assist and facilitate trade transactions was imperative, This was because Nigeria had a major trade relationship with a country which had already known the importance and usefulness of banking for many years. I want you to note that banking in Nigeria started in 1892 with the establishment of a branch of ‘African Banking Corporation in Lagos. We understand that the main function of the bank was that of importing and distributing silver coins from Royal Mint and implicitly regulating their circulation. The activities of the bank with respect to import of 13|Pagecoins was monopolistic in nature, this was because other institutions had to Pay a premium of | percent for any importation. : . In 1893, barely a year from its establishment, the African Banking Corporation (ABC) was folded up and its interests therein transferred to Elder Detester and Company. The vacuum in banking activities left by African Banking Corporation was filled in 1894 when an office of the British Bag he West Africa (now First Bank) was established in Lagos. It is important for you to note that the functions of BBWA were the same as the defunct African Banking Corporation but it recorded greater successes than its predecessor. The bank helped a lot in providing the needed banking services t " r © both the colonial government and the agricultural producers who were the major exporters. Through the imporvenpor ween offered by the bank, the tempo of trade transactions was increased, The establishment of this bank also helped in sending to Nigeria operations which was already in an advanced stage in Britain, conditions then inherent in the economy for a take-off of a near complete monetary type of economy. This was because, when the West African Currency Board (WACB) was established, the BBWA its main currency agent which took charge of the WACB eurency, Teceiving, storing and issuing of wins tendered in, exchange for drafts in London, Another commercial bank of British origin was established in 1925. The Barclays Bank D.C.O. (Dominic, Colonial and Overseas) as it was then called, helped in developing the banking base of the economy, We may be tempted to ask whether these banks had interest and confidence in both the Nigerian economy and the indigenous business affairs, The first of these banks - ABC - did not have much confidence in the Nigerian economy as it had in the South African economy. This was because of a combination of many factors - weather, mosquitoes, social Unrest due to resistance by the Nigerian ruling kings, Obas and Chiefs, to the penetration of Europeans into their kingdoms and the seasonal nature of the export crops. Moreover, we understand that he Nigerian indigenous businessmen up to recent periods suffered from lack of financial assistance from the expatriate banks. There was therefore, the need to establish indigenous banks to stimulate and facilitate indigenous participation in the process of economic my Which was mainly the wealth of experience in banking and at the same time improve the development in terms of the diversification of the productive pattern of the econo agricultural, The export-based agricultural production was dominated b: scale basis - the plantation system. The scale export oriented productions were mainly restricted to export crops, palm oil, palm kernel and rubber. It is on record that as far back as 1917 the BBWA had granted loans to the export crop farmers; 11 which might have been these foreign companies. The bank however, faced stiff competition with the major trading companies in respect of credit operations to producers since they had a more extensive network of branches than the BBWA. ‘You should note that the first indigenous bank to be established as an attempt to bring indigenous businessmen into the helm of economic activities in Nigeria was the Industrial and Continental Bank (ICB) established in 1929. The bank however failed in 1930 because of inadequate capital base, poor management and stiff competition with the well-established and experienced expatriate banks and trading corporations which diversified into financing business. In 1930, a group of other enterprising Nigerians founded the Mercantile Bank which went into liquidation in 1936 barely five years front its establishment because of the same factors that caused the failure of the first indigenous bank. In 1933, a third indigenous bank was established, by name the National Bank of Nigeria, In 1945 and 1947, the Agbonmagbe (now Wema Bank) and the African Continental Bank were established, respectively. You should note that these last group of banks were able to sustain themselves irrespective of competition with the well-managed expatriate banks. It could be that they learnt from and overcame the difficulties that befell the earlier indigenous commercial banks, You will observe that the same banks are in existence today although some exist with other names and some attendant problems. We may not entirely attribute the survival of indigenous banks to their management efficiency but also a Patronage by the different regional governments and quasi-government agencies. The popular client/patrons of the y large foreign panics which operated on large 14|PageAfrican Continental Bank were, for example, the Eastern Region Finance Co, Board; that of the National Bank of Nigeria was the Nigerian Marketing Board board in September 1950), and that of the Agbomagbe Bank was th Other Financial Institutions poration and Marketing (appointed bankers to the Western Region Marketing Board, shed in order to promote economic Sais é ¢ the purpose of financit ns is Alit Wei’ African Cocoa Control board (Wace) set up in Is 9 be utero was converted into West African Produce Control Board it 1942. The main faction ofthe ree of promoting economic security in the Cocoa producing areas through the maintenence of stan prices Central Bank of Nigeria And The Nigerian Banking Structure Genesis of the Central Bank of Nigeria The establishment of the West African Currency Board (' created the need for establishing a Central Bank The Board was not also in a position to devel responsibility of a Central Bank and which mobilisation and allocation of scarce financial In the absence of financial markets, we understan Institutions (Federal, Regional and Local) were free flow of funds from Nigeria to the London fi been used in developing the local, facilitate ec in Nigeria, lop indigenous financial markets which is normally the also constitutes very important forum in the process of resources. \d that savings that accrued to financial and government always invested in London. This meant that there was a inancial markets. These were scarce funds that could have onomic and social infrastructures. Again, the function of controlling the flow of funds between Nigeria and other countries was not performed by an appropriate institution like the Central Bank and hence a necessity for such a bank. In spite of the clear need for a Central, Bank, propositions and reports for the establishment of such a bank in Nigeria met with a not so straight-forward approval by the opposition. The reports in favour of the establishment of a Central Bank in Nigeria came from Dr. Mar during the Second World War. It is important for you to note that Dr, Mar's research into the Nigerian monetary system resulted in his recommending the establishment of a Central Bank of Nigeria with the following functions: a, Variation of liquid ratios of the commercial hank b. Lender of last resort ¢. Control of rates of interest d. Open market operations e. Advising the government on pound sterling exchange rate. Dr. Mar however, concluded that establishing a Central Bank in Nigeria presupposed the presence of a stock exchange market which was not in existence. Thus, the possibility of establishing such an institution within a short time period was remote. From 1951 to 1955, there were three other reports namely: a. Newlyn and Rowan report; b. Fisher report and c. IBRD report; _ ee You shoul note that all these reports covered the possibility of establishing a Central Bank in Nigaia. The Newlyn and Rowan report published in 1953 recommended among other things, a Se eee the West Aftican Currency Board to create the possibility for it to make fiduciary issues, a dopt measures aimed at reducing transfer costs charged by banks, and the Africanisation of the Board CS es ee however tacitly against the establishment of a Central Bank in Nigeria. This era Lak Sa Central Bank in Nigeria was not in a postion to promote economic stability Hroveh noe management since such stability according to them, was highly influenced Dee arise fom this juncture be tempted to ask whether there is any sovereign state tl a A ae Rowan report external influences. The answer is no, a priori, without any analysis. The Newly! 15|Pagehowever came to a conclusion that a Central Bank was needed i i of tidepienidenes’ in Nigeria before the possible attainment Indigenous contributions in favour of the establishment of a Ce ; i Ne momentum when Dr. K.O. Mbadiwe, a parliamentarian, moved marie anti Niger stated to gather to that effect on 21st March, 1952. in the House of Representatives A debate on the motion took place on 9th April, 1952 b , bate I, ut i contribution offered by the Secretary of finance, Honourable tL foe cbate came fom the government had the following three points of objection to the estalishnnt or Pcomice ae ventral Bank in & The WACB was functioning well A Central Bank in Nigeria could have in inflation i Such bunk could nes coor erased infltioninsead of contain it Inrespectve of this opinion, we understand that there wasn cegeeee ns ney and capital). Cee aaa Nien, we understand tha there was a consensus on the pest of eablishing a Fi Fisher an dvs tote earn Wes passed wth some amendments. In November 1932, the establishment of a Central Bank. The last ant Et oa iar a ceva eens are a tet repens etal Bank. The ls report (excluding Loyness report nd recommendations tha International Bank for Reconstruction and Develonmeet ‘BRD ee oe mae This report, although upheld sor oa ; s report me of th i for immediate posible establishment of Cental Beak on he Sell one ieaeeaon ordering Poeibe establishment of Central Bank onthe Political development and IBRD" report seine aided withthe fat that: Nigeria and oer Brtsh West African colonies, wee heading tovads controlled by One Cental monetary author WACB. Ta th fal anaes and coclsion, IBRD = }. In th i ic Ys Teport proposed a tats bank for Nigeria wih somewhat inited fie ae few year after IBRD‘ i % ert study with the main objective of determini i sed afaiea y Onyones Gua atiyht oar ee within the framework of pre-stated guidelines and came up with a report in 1957. The report supported the establishment of a Central Bank in Nigeria but without limited finetions, This was beeause Loyness thought that a Central Bank was to be for all times and therefore its functions could not be limited because the initial conditions favoured such limited functions. Loyness' report however culminated tothe passing of a bill in the Parliament establishing the Central Bank of Nigeria, [want you to note that the Central Bank with limited functions didnot cause any concern to the Nigerian authorities because according to the Minister for Finance, the basic objectives of all monetary and financial authorities must be directed to facilitate at any time, the desired economic development. The statute of the Central Bank of Nigeria was passed in 1958 but the actual operations of Central Bank started on Ist July, 1959, On that day, and for subsequent periods (determined and fixed by the CBN), the Bank successfully exchanged the then WACB currency in circulation with the legal tender currency of the Bank in the denomination of pounds (t), shillings and pennies. Since 1959, the Central Bank of Nigeria has progressively (through different forms of legislation) assumed the full responsibilities of monetary management in Nigeria. Functions Of The Central Bank Of Nigeria (CBN) CBN Ordinance of 1958 subsequent amendments base the functions of the CBN as follows: ‘a. Issuance of legal tender currency notes and coins in b. Maintenance of Nigeria's external reserves to safeguard the international value of the nation"s currency , ; c. Promotion and maintenance of monetary stability and a sound and efficient financial system in Nigeria - 4. Itacts as banker and financial adviser to the Federal Government of Nigeria last resort to banks Acting as a banker and lender of last res . ‘Acting as the apex regulator and supervisor of all financial act pe 16|PageThe Nigeria Banking Structure is a. Commercial banks are very bivalent in any economy because they working capital loans to the deficit sectors of economy. They hardly te long-term basis because of the character of their liabilities, b. Merchant banking occupies a very important position in the bankin of the world. It is a bridge between the traditional financial services banks and the development banks. You should note that the merchan to provide mainly medium-term funds and if need be, long-term fund ¢. A development Bank is a financial institution prim term credits to the economy. Generally, development are structured to provide nd money on medium and iB system of many economies rendered by the commercial t banking system is designed ng-term funds to the economy. arily designed to provide medium to long- t banks do not operate chequering accounts the short/medium projects and long-term projects. {vant yi {0 note that Development Banks serve too as specialised banks which arc established or specified purposes in the economy. Their functions are therefore aimed at developing those sectors which they are established for. However, they perform two broad functions which include the banking functions and the development functions: They raise bilateral and multilateral loans from intemational aid agencies like the United States Agencies for International Development (USAID), from international donor agencies like the World Bank and from their own governments. 4. Specialised Banks Specialised banks are established in Nigeria to carter for the financial needs of some segments of the society. On the whole we can say that the Nigerian Banking System is dynamic and it evolves as the socio-economic sphere of the Nigeria develops. E- Banking Introduction In previous study session, we discussed the topic Central Bank OF Nigeria and the Nigeria Banking structure,Let me welcome you to yet another study session where you will learn of the modern ICT based banking; the E- Banking, which is now used to fasten the flow and administration of banking. This system involves banking without physical appearance at the branch/ cashless banking, wired and wireless banking. E-Banking E-Banking refers to the effective deployment of ICT by banks. The fact that a bank uses computers does not qualify it as an E-bank, E-banking is the use of isifrastructure of the digital period to create opportunities — locally or globally. Ebanking assists in lowering of transaction costs and create new types of banking opportunities that address barriers of timé and distance. You will agree that banking opportunities are local, global and immediate in E-banking. We can also define it as the automated delivery of new and traditional banking product and Aervices directly to customers through electronic interactive communication channels and other Aechnology infrastructure, with the following nomenclatures thus: a. banking without physical appearance at th b. cashless banking c. wired and wireless banking E-banking Tools/Channels are: a. Plastic cards b. Personal computers ¢. Telephone ranch W|Paged. Mobile phones fe. Internet Automated Teller sean (ATM) ‘An Automated Teller Machine is a computerised telecomipunication des; of financial transactions in a publie space without the need/for a rang yee tt Features of ATM Services a. Cash withdrawal b. Balance inquiry c. Mini statement request d. Fund transfer Provides the customers in clerk or bank teller, n banking, etc.) is a term used f i checks, account transactions, payments ete. via a/mobile device as asa mobile io ma foreign firms in West Africa and to issue a West African currency convertible to Britch pounds sterling. Fut colonial policies barred local investment of reserves, discouraged deposit expansion, precluded discretion for monetary management, and did nothing to train Afticans in developing indigenous financial institutions. In 1952 several Nigerian members of the Federal House of Assembly. called for the Gauablishment of a central bank to facilitate economic development. Although the motion was defeated, the colonial administration appointed a Bank of England official to study the issue, He advised against a central bank, questioning such a bank's effectiveness in an undeveloped capital market. In 1987 the Colonial Office sponsored another study that resulted in the establishment of a Nigerian central bank and the introduction of a Nigerian curreney. The Nigerian pound was on a par with the pound sterling until the British curreney’s devaluation in 1967, was converted in 1973 to a decimal currency, the naira (N), equivalent to two old Nigerian pounds. Commercial Bank and its Functions An institution which accepts deposits, makes business loans, and offersrelatedservices. Commercial banks also allow for a variety of depositaccounts, such as checking, savings, and time deposit. These institutions are run to make a profit and owned by a group of individuals, yet some may be members of the Federal Reserve System. While commercial banks offer seve 10 individuals, they are primarily concemed with receiving deposits and lending to businesses banking company is one which tansacts the business of banking forthe purpose of lending a investments deposits of money from the public, repayable on demand or otherwise and withdraw able by cheque, 18|Pageis re are two essential functions that a financial pheok i aredeposit and lending to the public. These function a Ttaccepts deposits from the public. These deposits can be withdrawn by cheque and are repayable ondemand.A’ commercial bank uses the deposited money for lending wad ioe qe nsecuritis. =) b, [tis @ commercial insttution;whose aim is to ean profit, ©. It is.a unique financial institution that ereates demand de; ofexchange. 4. Money created by commercial banks is known as dey Funetions of Commercial Banks Various functions of com groups: i. PrimaryFunetions. ii Agency Functions, Posits which serves as the medium posit money. mercial banks can be divided into three main General Utility Functions. Primary Functions There are two main primary functions of the commercial banks which are discussed 1. Accepting (Mobalization of) deposits The primary function of commercial bank is to accept deposits from every class and from every source. To attract savings, the bank accepts mainly three types of deposits. They are namely demanding deposits, saving deposits, fixed deposit, Demand deposit Demand deposit is also known as current deposit and those deposits which can be withdrawn by the depositor at any time by means of cheque. No interest is paid on such deposits. Rather, the depositor has to pay something to the bank for the services rendered by the businessmen and industrialists, It is also called current account. b. Saving deposits These are those deposits on the withdrawal of which bank places certain restrictions. Cheque facility is provided to the depositors. Saving deposits accounts are generally held by households who have idle or surplus money for short period. ©. Fixed deposits These are those deposits which can be withdrawn only after the expiry of the certain fixed time period. These deposits carry high rate of interest. The longer the period, higher will be the rate of interest. Differences between demand deposit and fixed deposit 1) Demand deposit can be withdrawn by the depositor at any time without notice while fixed deposits can be withdrawn only after the expiry of the certain fixed time period. ii) They are chequable ie, demand deposits are withdrawing through cheques while fixed deposits are not chequable, No interest is paid on demand deposits. Rather depositors have to pay something to the bank for its services while fixed deposits carry high rate of interest, ancial Intermediation (Advancing of loans): Commercial banks give loans and advances to businessmen, farmers, consumers and employers against approved securities. Approved securities refer to gold, silver, bullion, government securities, easily saveable stock and shares and marketable goods. The bank advances types of loans are as follows: a) Cash credit — Under this the borrower is allowed to withdraw up to a certain amount on a given security which comprise mainly stocks of goods, but interest is charged on the amount actually withdrawn, b) Overdraft — It is a most common way of lending. Under it, the borrower is allowed to overdraw his current account balance. Overdraft is a temporary facility. ¢) Short term loans — Under it,loans of a fixed amount are sanctioned. The sanctioned amount is credited to the debtors account, Bank charges interest on the whole amount from the day it was sanctioned, ‘The difference between a loan and an overdraft is that, while in case of loan, the borrower pays us interest on the amount outstanding against his account. But in the case of an overdraft, the customer pays interest on the deal balance standing against his account further. Loans are given against a security, while overdraft made without securities. From the borrowers" point of view, overdraft is preferable to a loan because,in case of loan, he will have to pay interest on the full amount of the loan sanctioned whether heuses it fully or not. But in the case of overdraf, he has the fasilty of borrowing only as much as here tires. as: Discounting of the bill of exchange This is another popular type of len banks. Through this method, the holder of the bills of exchange (writen can get it discounted by the banks. The banks after demar the bills to the holder. When the bills of exchange mat party which had accepted the bill, 4. Money at call Such loans are very short ding by the commercial n luring trade transactions) nding the commission pays the value or ure, the bank gets its payment from the Period loans and short notice of say one day (1) to fourteen (14) d an be called back by the bank at a very lays. The: to another bank or financial institutions, Ve thes loans ae generally made by one bank The Growth and Development of Commercial Bank in been since independence undergone radical changes 19 four phases of banking licensing, a, Eunnt generatica banks: These were banks that were licensed before Nigeria's independence in1960, b. Second generation banks: These were banks licensed between 1960 and 980. &. Third generation banks: These were banks licensed between 1980 and 1991. d. Fourth generation banks: These were banks licensed from 1998 to the present time, Merchant Banks Merchant banks are set up primarily to cater for the needs of corporate and institutional customers. They collect large amounts as deposits from their customers, hence they are referred to as wholecale banker. The first merchant banks in Nigeria are Phillip Hill (Nigeria) Limited and the Nigeria Acceptances Limited (NAL) in 1960. They however, merged in 1969, It becomes the sole merchant bank tal 1973 before other banks came. Their role principally in the economy is to provide medium to long term finance, therefore, engage in activities such as loan syndication, equipment leasing, debt factoring, project financing,ete, The merchant banks perform the major role of financial intermediation in the economy and facilitate the Payment system of the modern exchange economy. They were governed under the 1952 Banking Ordinances, Banking Act 1969 (as amended) and now under the Banks and Other Financial Institution Decree (BOFID) No. 25 of 1991. Functions of Merchant Banks a. Portfolio Management: They provide medium and long term finance to corporate bodies and institutions b. Corporate Finance Services: They advise companies on new shares and place these firms, shares for subscription. The corporate services include acting as issuing house to issuers, assisting in private placement, stockbrokerage services, investment and advisory services. c. They float government loan stocks: The merchant banks do invest in money market insrumens such as Treasury Bills, Treasury Certificates, etc. They also issue short-term instruments such as cetifiates of deposits commercial papers ete. i n: The Banking function include: 4 is ae pei of seas iam both the private and public sectors of the economy.Granting of loans/advanees to individuals, corporate bodies and the government. Equipment leasing: this involves the purchasing and leasing of equipment for rental fees to the bank. (Consortium lending): Li i jv. Loan Syndication (Consortium lending): Loan syndication involves the comi of banks or group of banks to provide credit to a customer. nuance aad ve Syndication arises i the Project to be funded is risky fora single bank, amount involved is enormous, there is need for loan portfolio diversification : i exceeds the legal lending limit of one bank. othe] emnount Reqused €. Operation's Services: This includes the remittance and receipt of funds for thei both local and international levels. Merchant banks also open letters of credit: and accept bilson behalf of their customers in favour of foreign creditors and issued by the esedi i Sources of Funds to Merchant Banks the creditors respectively. The main sources of funds to merchant banks include: i, Share Capital: Funds are raised through the issuance of shares subscribed to by the _____ individuals, bodies corporate and governments, ii, Statutory Reserve: The funds statutorily required to be transferred from profit to reserve account is available for use by the banks. iii, Interest arising from credit facilities and other charges: The cost of funds provided to peace as well as various charges for services rendered form part of merchant banks' junds, iv. Retained Profit: This is the percentage of net profit retained for future expansion. Retained profit remains part of shareholders equity. ~ Debentures: Merchant banks raise money through the issuance of debentures. vi. Mobilise Deposits: The huge deposits mobilised from the economy forms part of merchant banks funds. vii. Borrowing:Merchant banks may borrow money from lending institutions including the Central Bank of Nigeria, # DEVELOPMENT BANK Meaning and Definition of a Development Bank You should bear in mind that a development Bank is a financial institution primarily designed to provide medium to long-term credits to the economy. Generally, development banks do not operate chequering accounts of commercial banks nor engage in wholesale activities of the merchant banks. The development Banks are well-structured to offer financial assistance and advice on projects whose gestation period are characteriscally long-term in nature. In fact, development banks cover the gap between the short/medium projects and long-term projects. Histology of Development Banking at the Global and Domestic Levels We understand that the global financial system experienced deep depression in the 1930s especially in Europe and America. This situation did not improve up to early 1940s. Although some countries already had commercial and merchant banks as at that time, these banks especially the commercial, could not provide any solution to the fledging world economy.The reason was that these banks could only provide credits on short-term basis because of the character of their liabilities. Commercial banks" liability is purely for the provision of working capital loans hence, could not have been part of any strategic solution to tackle the world's economic problem as at that time. The precarious situation compelled the British and Americans and other parts of the world to think of an institution or institutions that could provide long-term funds for the reconstruction of Europe destroyed by the World War II. This type of institution or institutions was or was also needed to bring the world ‘economies together to reduce the possibility of making the mistakes that prompted the depression of 1930s. You should note that the institutions that then emerged after series of discussions and consultations were the International Bank for Reconstruction and Development (kwon as world bank), the International Development Association, International Finance Association, Multilateral Investment 21] PageGuaranty Agency ete. The Intemational Monetary Fund was established the same year (1944) asthe World Bank. The wind of Develepment banking blew across Nigeria and indeed post independent African countries tainly in the 1960s. The African Development Bank (ADB) was established in 1963, ln Nicers gee, development bank. was established in 1964 being replacement to some other sina, dere re institutions that existed before the 1960s. This was called the Nigerian Industial Develones eee (NIDB). 1n1973, the Nigerian Agricultural and cooperative Bank (NACB) was established. The other development banks are the Federal Mortgage bank, Urban Development bank, ete th seed, acest Industry (BOD) was established. The BOI is a Merger of the Nigerian Indust Developer: Dace (NIDB), ‘the Nigerian Bank for Commerce and Industry (NBCI and the Netionst Goon Reconstruction Fund (NERFUND). The BOI was officially launched by the federal govermmentng Nia 17, 2002 with an initial authorised share capital of NSObillion, Evolutionary Theories of Development Banking (Reasons for Development Banking at Local and Global Levels) { want you to note that the development banking system emerged in the financial system on the basis of the following reasons: i; Gap Thesis: At both national and international levels, the need for development banking institutions could then be placed on the yawning gap that both the existing commercial and merchant banks were unable to fill. These institutions, especially the commercial banks could not provide credits on medium to long-term basis due to the character of their liabilities, The development banks were designed to fill these gaps ii, Exigency Thesis: The development banks were also established to assume a pivotal role in the handling of the situation at hand in the late 1930s to 1940s. The global economy then was tom into shreds, the domestic economies were also affected by the spillover effects of the World War Il. iii, Catalyst Thesis: Th pace of economic acti velopment banks were the only institutions that could quicken the es for sustainable development at both local and international levels. The Nigerian Development Banks Bank of Industry (BOI) Like we rightly said before,the bank of Industry is merger of the Nigerian Industrial Development Bank (NIDB), Nigerian Bank for Commerce and Industry (NBCI) and the National Economic Reconstruction Fund (NERFUND). Bank of Industry capital of NSObillion. The bank was primarily established to provide long-term funds to the small, medium and large scale enterprises in the economy. The Funetions of Bank of Industry (See Ajibola, 2005 pp. 100-1) are as follows: a. provision of medium and long-Man credit facilities to the industrialists b. provision of overdraft c. rendering of business advisory services d._acting as Executors and Trustees €. provision of foreign exchange services f 8 h. raising equity and debt finance consortium lending provision of teasing facilities i, _ buying and selling of shares . Basic Tenets of Bank of Industry The basic tenets guiding its operations are (cf: Ajibola, 2005, 100-101) the bank will only tendon projects having the following characteristics a. the cost of production must be very low so as to guarantee profitb. the profit must be the type in which Nigeria has a high comparative advantage over other countries . the project must involve transformation of local raw materials to finished goods the finished goods must be marketable locally and internationally the business venture must contribute positively to development ofthe country the project must be technically feasible, commercially viable and economically desirable Peae i, Prospective beneficiaries from the bank must fulfill the following conditions a. Itmust bean industrial concer of any size (small, medium ot large) The company must be able to make at least 25% contribution The beneficiary must have proven record and ability to mm gat The beneficiary must be able to satisfy lending rine ipo The beneficiary must provide collateral security The beneficiary must have good track record from bankers rg,company must be labor intensive with high employment generation bility Both new and existing companies can approach the bank for assistance Sources of Funds : i. Equity capital in the following proportion: a, Ministry of Finance 59.54% b. Central Bank of Nigeria 40.36% ©. Nigerian Citizens and Associations 0.10% - 100.00%ii FR pang ii) income derived from normal banking operations iii, Repayment of loan and overdraft. iv. Loans and debentures obtained from other parties. ¥. Loan facilities for international organizations such as (IMF), International Bank for Reconstruction and Development (I BRD) and the African Development Bank (ADB). vi. recapitalisation fund from the Federal government of Nigeria . ii. The Nigerian Agricultural, Cooperative and Rural Development Bank. (NACRDB) It is important for you to note that the Nigerian Agricultural Cooperative and Rural Development Bank (NACRDB) is a merger of the Nigerian Agricultural and Cooperative Bank Unified, (NACB), Family Economic Advancement Program (FEAP) and the People's Bank of Nigeria. The bank was established in 2002 as a Limited Liability Company to provide micro and moan finance and other support to agriculture, and in addition, small and medium scale businesses. It is wholly owned by the government and has continued to complement efforts at boosting agricultural production in the economy. Main Objectives of the bank i) Acceptance of savings deposits from customers and the repayment of same with accrued interest, as at when due ii) provision of opportunities for self-employment in the rural areas, thereby reducing rural- urban migration. iii) augment government efforts in the diversification of the productive base of the national economy. iv) inculcation of banking habits at the grass toot level of the Nigerian society v) _ purveyor of affordable credit facilities to the less privileged segment of the\ vi) Nigerian society who cannot readily access the services of conventional banks 7 vii) promotion of capacity building through the provision of relevant training and advisory services i viii) fostering an accelerated growth and development of the agricultural sector and rural economy eae 23 /Page