NIGERIAN FINANCIAL

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TOPIC 1

THEORY OF MONEY

The theory of money encompasses various concepts and principles related to the creation, value,
and function of money within an economy. This broad topic addresses the transition from barter to
money, the characteristics and functions of money, its role in different economic systems, and its
potential drawbacks.

Meaning of Barter

Barter is an ancient system of exchange in which goods and services are directly traded for other
goods and services without the use of money. This system relies on a double coincidence of wants,
meaning that both parties must have something the other wants and be willing to trade it.

Problems or Difficulties of Barter

1. Double Coincidence of Wants: Both parties must want what the other is offering, which is often
difficult to achieve.

2. Indivisibility of Goods: Some goods cannot be divided without losing value, making it hard to
trade them for smaller items.

3. Lack of Common Measure of Value: There is no standard unit to measure the value of goods and
services, complicating the process of determining fair trades.

4. Difficulty in Storing Wealth: Storing value in perishable goods or those with limited shelf life is
impractical.
5. Deferred Payments: It is challenging to make future payments or credit arrangements without a
standardized medium of exchange.

Removal of Barter Problems

The introduction of money helps eliminate the problems associated with barter by providing a
universally accepted medium of exchange, a unit of account, and a store of value. Money simplifies
transactions, facilitates trade, and enables more efficient economic activity.

Counter Trade

Counter trade is a modern system that partially resembles barter, involving the exchange of goods
and services between countries or companies. This system often includes forms like barter, counter-
purchase, and offset agreements, and is used when countries face currency shortages or when trade
imbalances need to be corrected.

What is Money?

Money is any item or verifiable record that is generally accepted as payment for goods and services
and repayment of debts in a given country or socio-economic context. Money functions as a medium
of exchange, a unit of account, a store of value, and sometimes, a standard of deferred payment.

Contents of Money

The contents or types of money include:

1. Commodity Money: Items with intrinsic value, such as gold or silver.

2. Fiat Money: Currency that has no intrinsic value but is accepted as money by government decree.

3. Bank Money: Checking accounts, savings accounts, and other forms of deposit money.

4. Digital Money: Electronic forms of money, such as cryptocurrencies and digital currencies issued
by central banks.

Functions of Money

1. Medium of Exchange: Facilitates the buying and selling of goods and services without the need for
barter.

2. Unit of Account: Provides a standard measure of value, making it easier to compare prices and
value goods and services.

3. Store of Value: Allows individuals to save and retrieve value over time.

4. Standard of Deferred Payment: Enables credit and future payments.

Dynamic and Static Functions of Money

Dynamic Functions:

1. Promotion of Trade and Industry: Money facilitates trade and industrial growth by enabling
transactions and investments.

2. Economic Development: Money supports economic development by mobilizing savings and

directing them into productive investments.

3. Income Distribution: Money helps in the distribution of income and wealth through wages,
salaries, and capital gains.

Static Functions:

1. Measure of Value: Money provides a common measure for valuing goods and services.

2. Store of Value: Money retains value over time, allowing individuals to save.

3. Medium of Exchange: Money simplifies and facilitates transactions.

Characteristics of Money

1. Durability: Money must withstand physical wear and tear.

2. Portability: Money should be easily transportable.

3. Divisibility: Money must be divisible into smaller units.

4. Uniformity: Each unit of money should be the same as the next.

5. Acceptability: Money must be widely accepted as a means of payment.

6. Limited Supply: Money should be in limited supply to maintain its value.

Importance of Money

1. Facilitation of Trade: Money simplifies transactions and promotes trade.

2. Economic Stability: Money helps in maintaining economic stability by regulating inflation and
deflation.

3. Efficient Allocation of Resources: Money enables efficient allocation of resources through pricing
mechanisms.

4. Economic Growth: Money supports economic growth by enabling savings and investments.

Money in a Socialist Economy

In a socialist economy, money is used primarily as a means of exchange rather than as a store of
wealth. The government controls the production and distribution of goods, and money facilitates
transactions within the planned economy. However, the role of money is often limited compared to
capitalist economies, as the focus is on meeting social needs rather than maximizing profits.

Evils and Defects of Money

1. Inflation: Excessive supply of money can lead to inflation, eroding purchasing power.

2. Economic Inequality: Unequal distribution of money can lead to significant economic disparities.

3. Speculation: Money can be used for speculative purposes, leading to economic instability.

4. Corruption and Crime: The pursuit of money can encourage corrupt practices and criminal
activities.

5. Dependency: Over-reliance on money can undermine community and social values.

The theory of money highlights the critical role money plays in facilitating economic activities,
promoting growth, and ensuring stability. However, it also acknowledges the potential drawbacks
and challenges associated with the use of money.

T0PIC 2

CLASSIFICATION/KINDS OF MONEY

Money is classified based on its characteristics, usage, and the form it takes in the economy.
Understanding the different kinds of money helps in comprehending how various forms of money
function and interact within the financial system.

Money and Near Money

1. Money:

- Currency: Physical forms of money like coins and banknotes that are widely accepted for
transactions.

- Demand Deposits: Bank account balances that can be accessed on demand for transactions, such
as checking accounts.

2. Near Money:

- Savings Accounts: Bank accounts that pay interest but are not as liquid as demand deposits.

- Time Deposits: Fixed-term deposits that cannot be withdrawn before a specified date without
penalty.

- Money Market Instruments: Short-term debt securities like Treasury bills and commercial paper.

- Certificates of Deposit (CDs): Time deposits with a fixed interest rate and maturity date.
Value of Money

The value of money refers to its purchasing power, which is the quantity of goods and services that a
unit of money can buy. This value can fluctuate due to changes in the price level, which is influenced
by inflation, deflation, and economic conditions.

Index Number of Prices

An index number of prices is a statistical measure designed to show changes in the price level of a
basket of goods and services over time. It helps in tracking inflation and deflation in an economy.

A Model Index Number of Prices

A model index number of prices typically involves:

1. Selection of Base Year: A reference year against which future prices are compared.

2. Selection of Goods and Services: A representative basket of goods and services.

3. Collection of Price Data: Regular collection of price data for the selected items.

4. Calculation of Index: Using formulas like the Laspeyres, Paasche, or Fisher index to calculate the
overall price level.

Difficulties in Calculating Index Numbers

1. Selection of Base Year: Choosing an appropriate and representative base year can be challenging.

2. Changing Consumption Patterns: Consumer preferences and consumption patterns change over
time, making it hard to maintain a consistent basket of goods and services.

3. Quality Changes: Adjusting for changes in the quality of goods and services can be difficult.

4. Regional Variations: Prices can vary significantly across different regions, complicating the
calculation of a national index.

5. Data Collection: Ensuring accurate and timely data collection is often difficult.

Uses of Index Numbers

1. Measuring Inflation: Tracking changes in the price level to gauge inflation or deflation.

2. Economic Policy: Helping policymakers make informed decisions regarding monetary and fiscal
policies.

3. Wage Adjustments: Adjusting wages, pensions, and other incomes to maintain purchasing power.

4. Contract Escalation: Adjusting long-term contracts for changes in price levels.

5. Economic Analysis: Assisting in the analysis of economic trends and performance.

Limitations of Index Numbers

1. Substitution Bias: The fixed basket of goods may not account for changes in consumer behavior.

2. Quality Changes: Difficulty in adjusting for improvements or deteriorations in the quality of goods
and services.

3. New Products: Delays in incorporating new products and technologies into the index.

4. Regional Differences: National indices may not accurately reflect regional price variations.

5. Time Lag: Data collection and processing delays can make the index less timely.

Supply of Money

The supply of money in an economy refers to the total amount of monetary assets available. It
includes currency in circulation and demand deposits. The central bank (like the Central Bank of
Nigeria) plays a key role in regulating the money supply through monetary policy.

Causes of Variation in Money Supply

1. Central Bank Policies: Changes in interest rates, reserve requirements, and open market
operations.

2. Government Fiscal Policies: Government spending and taxation can influence the money supply.

3. Foreign Exchange Reserves: Changes in a country’s foreign exchange reserves can affect the
money supply.

4. Banking Sector Activity: The lending and borrowing activities of commercial banks.

5. Public Demand: Changes in the public’s demand for cash and bank deposits.

Creation of Money

Money is created primarily through the banking system via the process of fractional reserve banking.
Banks keep a fraction of deposits as reserves and lend out the rest, thereby creating new deposits
and increasing the money supply.

Velocity of Circulation of Money

The velocity of circulation refers to the speed at which money moves through the economy. It is
calculated as the ratio of nominal GDP to the money supply. Higher velocity indicates more frequent
transactions and a more active economy.
Demand for Money

The demand for money refers to the desire of households, businesses, and the government to hold
liquid assets. Key factors influencing the demand for money include:

1. Transactions Motive: Money needed for everyday transactions.

2. Precautionary Motive: Money held for unforeseen expenses.

3. Speculative Motive: Money held to take advantage of future investment opportunities.

4. Interest Rates: Higher interest rates can reduce the demand for money as people prefer to invest
in interest-bearing assets.

5. Income Levels: Higher income typically increases the demand for money for transactions and
precautionary purposes.

Understanding these aspects of money, including its classifications, value, and functions, provides a
comprehensive overview of its role and significance in the economy.

TOPIC 3

QUANTITY THEORY OF MONEY

The Quantity Theory of Money (QTM) posits that the general price level of goods and services is
directly proportional to the amount of money in circulation. It provides a framework for
understanding the relationship between money supply and inflation.

Cash Transaction Approach – Fisher’s Version

Fisher’s version of the Quantity Theory of Money, also known as the Equation of Exchange, is
expressed as:

MV = PT

Where:

- M = Money supply

- V = Velocity of money (the rate at which money circulates in the economy)

- P = Price level

- T = Volume of transactions or output

Key Points:
- Fisher assumes that (V) and (T) are constant in the short run.

- An increase in (M) will lead to a proportional increase in (P) if (V) and (T) are constant.

- The equation underscores the idea that the money supply determines the price level when other
factors are held constant.

Criticisms of Fisher’s Version

1. Assumption of Constant (V) and (T): Critics argue that the velocity of money (V) and the volume of
transactions (T) are not constant but can vary with changes in the economy.

2. Simplistic View of Money Demand: The model oversimplifies the complexities of money demand
and ignores factors such as interest rates and economic expectations.

3. Neglect of Time Lags: The theory does not account for time lags between changes in the money
supply and their effects on the price level.

4. Real vs. Nominal Variables: It fails to differentiate between real and nominal variables, assuming a
direct one-to-one relationship between money supply and price level.

Cash Balances Approach – Cambridge Version

The Cambridge version of the Quantity Theory of Money focuses on the demand for money as a
function of income. It is expressed as:

M = kPY

Where:

- M = Money supply

- k = Proportion of income people wish to hold as cash balances

- P = Price level

- Y = Real income or output

Key Points:

- This approach emphasizes the role of money as a store of value.

- The demand for money is influenced by income levels and the desire to hold cash balances (k).

- Changes in the money supply (M) affect the price level (P) and income (Y) through the cash
balances people hold.
Criticisms of Cambridge Version

1. Ambiguity of (k): The proportion of income people wish to hold as cash balances (k) can vary and
is not easily quantifiable.

2. Ignoring Velocity: The Cambridge approach does not explicitly account for the velocity of money,
which can impact the overall money supply.

3. Assumption of Proportionality: It assumes a stable relationship between money demand and

income, which may not hold in practice due to economic fluctuations.

Superiority of Cambridge over Fisher’s

1. Realistic Assumptions: The Cambridge approach is considered more realistic as it takes into
account people’s preferences for holding cash balances and their income levels.

2. Focus on Demand for Money: It emphasizes the demand side of money, providing a more
comprehensive view of how money functions as a store of value.

3. Flexibility: The Cambridge model is more flexible in explaining variations in money demand due to
changes in economic conditions and preferences.

The Process of Credit Creation

Credit creation refers to the process by which banks create money through lending. When a bank
grants a loan, it creates a deposit in the borrower’s account, effectively increasing the money supply.

Key Steps:

1. Initial Deposit: A customer deposits money in a bank.

2. Reserves: The bank keeps a fraction of the deposit as reserves (reserve ratio) and lends out the
rest.

3. Lending: The bank lends money to borrowers, who deposit the borrowed amount in their
accounts, leading to a further increase in deposits.

4. Multiplier Effect: This process continues, creating a multiplier effect, where the total money
supply increases multiple times the initial deposit.

Limitations to Credit Creation

1. Reserve Requirements: Regulatory requirements on the minimum reserves banks must hold limit
the amount of money that can be created.

2. Banking Regulations: Laws and regulations can restrict lending practices and affect credit creation.

3. Public Demand for Loans: The willingness and ability of borrowers to take loans impact the extent
of credit creation.
4. Economic Conditions: During economic downturns, demand for loans may decrease, limiting
credit creation.

5. Central Bank Policies: Monetary policies such as interest rates set by the central bank influence
the lending capacity of commercial banks.

Monetary and Fiscal Policies

Monetary Policy:

- Definition: Actions taken by the central bank to control the money supply and interest rates to
achieve macroeconomic objectives like controlling inflation, managing employment levels, and
stabilizing the currency.

- Tools: Interest rate adjustments, open market operations, reserve requirements, and discount rates.

Fiscal Policy:

- Definition: Government actions involving changes in tax rates and spending levels to influence
economic activity.

- Tools: Government spending, taxation, and public borrowing.

Inflation

Inflation is the rate at which the general price level of goods and services rises, leading to a decrease
in purchasing power.

Causes of Inflation:

1. Demand-Pull Inflation: Occurs when demand for goods and services exceeds supply.

2. Cost-Push Inflation: Results from rising production costs, such as wages and raw materials.

3. Built-In Inflation: Caused by adaptive expectations, where past inflation leads to higher wage
demands, perpetuating further inflation.

4. Monetary Inflation: Occurs when there is an excessive increase in the money supply.

Effects of Inflation:

1. Erosion of Purchasing Power: Reduces the real value of money and savings.

2. Menu Costs: The cost to businesses of constantly changing prices.

3. Uncertainty: Creates uncertainty in the economy, affecting investment and spending decisions.

4. Redistribution of Wealth: Can benefit borrowers (who repay loans with cheaper money) at the
expense of lenders.
Understanding these concepts provides a comprehensive overview of the Quantity Theory of Money,
the dynamics of credit creation, and the interplay of monetary and fiscal policies in managing
economic activity and inflation.

TOPIC 4

THE NIGERIAN FINANCIAL SYSTEM

The Nigerian financial system is a complex and structured network of institutions, markets,
instruments, and regulations that facilitate financial transactions and economic development. It
comprises both formal and informal sectors, each playing a critical role in the overall financial
landscape.

Structure of the Nigerian Financial System

The Nigerian financial system is broadly divided into the formal and informal sectors.

Formal Financial Sector:

1. Central Bank of Nigeria (CBN): The Central Bank of Nigeria (CBN) is the central bank and apex
monetary authority of Nigeria, established in 1958 and commenced operations on July 1, 1959. The
CBN's major regulatory objectives are to:

- Maintain external reserves

- Promote monetary stability and a sound financial environment

- Act as a banker of last resort and financial adviser to the federal government

The CBN has played a crucial role in Nigeria's economic development, especially after the Nigerian
civil war. However, its involvement in direct consumer lending and political controversies has raised
concerns. The CBN has 36 branches across the 36 states of Nigeria and is headquartered in Abuja.
The bank's current governor is Olayemi Cardoso.

Key statistics:

- Reserves: $28.28 billion USD

- Bank rate: 18.7% (July 2023)

- Currency: Nigerian naira (NGN)

- Ownership: 100% state-owned

The CBN has been instrumental in building Nigeria's money and equity centers, forming securities
regulatory boards, and introducing treasury instruments into the capital market.

2. Commercial Banks: Provide a wide range of banking services, including accepting deposits,
providing loans, and facilitating payments.

3. Merchant Banks: Specialize in corporate finance, investment banking, and international trade
services.
4. Development Banks: Provide long-term financing for economic development projects, such as the
Bank of Industry (BOI) and the Nigerian Agricultural Cooperative and Rural Development Bank
(NACRDB).

5. Microfinance Banks: Offer financial services to the underserved and low-income segments of the
population.

6. Insurance Companies: Provide risk management services and financial protection through various
insurance products.

7. Pension Funds: Manage retirement savings and investments for employees.

8. Capital Market Institutions: Includes the Nigerian Stock Exchange (NSE) and other securities
markets that facilitate the trading of stocks, bonds, and other financial instruments.

Informal Financial Sector:

1. Savings and Loan Associations: Local cooperatives where members save and borrow money.

2. Money Lenders: Individuals or small groups that provide short-term loans at high-interest rates.

3. Rotating Savings and Credit Associations (ROSCAs): Informal groups where members contribute
regularly and take turns receiving the total amount.

Unofficial/Informal Financial Market

The informal financial market operates outside the formal regulatory framework and includes
activities such as:

- ROSCAs: Group savings and credit schemes based on mutual trust.

- Money Lenders: Individuals offering short-term, high-interest loans.

- Cooperatives: Community-based organizations providing financial services to members.

- Esusu: A traditional African savings scheme where contributions are pooled and disbursed to
members on a rotating basis.

Regulation of the Financial System

Regulation of the Nigerian financial system is primarily conducted by the following bodies:

1. Central Bank of Nigeria (CBN): Oversees monetary policy, banking regulation, and financial
stability.

2. Securities and Exchange Commission (SEC): Regulates the capital markets, including stock
exchanges and securities transactions.

3. National Insurance Commission (NAICOM): Regulates the insurance industry.

4. National Pension Commission (PenCom): Regulates pension fund administrators and custodians.
5. Nigerian Deposit Insurance Corporation (NDIC): Protects depositors by providing insurance for
bank deposits.

Problems of Regulation of Financial System

1. Regulatory Arbitrage: Financial institutions may exploit differences in regulations to minimize

compliance costs.

2. Insufficient Resources: Regulatory bodies may lack the necessary resources and personnel to
effectively monitor and enforce regulations.

3. Corruption: Corruption and lack of transparency can undermine regulatory efforts.

4. Technological Challenges: Rapid technological advancements can outpace regulatory frameworks.

5. Compliance Costs: High compliance costs can burden smaller financial institutions, limiting their
growth and competitiveness.

6. Market Resistance: Resistance from market participants to regulatory changes can impede
effective implementation.

Financial Intermediation

Financial Intermediation is the process by which financial institutions (intermediaries) channel funds
from savers to borrowers. It plays a crucial role in the economy by:

- Mobilizing Savings: Collecting funds from individuals and entities with surplus funds.

- Allocating Capital: Directing funds to productive investments and borrowers who need them.

- Risk Management: Diversifying and managing risks associated with lending and investments.

- Liquidity Provision: Providing liquidity to savers and borrowers through various financial
instruments and services.

Financial Intermediary

A Financial Intermediary is an institution that facilitates the flow of funds between savers and
borrowers. Examples include:

- Commercial Banks: Accept deposits and provide loans.

- Investment Banks: Assist companies in raising capital and provide advisory services.

- Insurance Companies: Offer risk management and financial protection.

- Pension Funds: Manage retirement savings and investments.

- Mutual Funds: Pool funds from investors to invest in diversified portfolios of securities.

Financial Instruments
Financial Instruments are assets that can be traded in financial markets. They include:

1. Equity Instruments: Stocks and shares that represent ownership in a company.

2. Debt Instruments: Bonds, debentures, and loans that represent a claim on the issuer’s future
income.

3. Derivatives: Financial contracts like futures, options, and swaps, whose value is derived from
underlying assets.

4. Money Market Instruments: Short-term debt securities such as Treasury bills, commercial paper,
and certificates of deposit.

5. Hybrid Instruments: Convertible bonds and preferred shares that have characteristics of both
equity and debt.

Understanding the structure and dynamics of the Nigerian financial system, along with the role and
challenges of regulation, is essential for comprehending the intricacies of financial intermediation,
the functioning of financial intermediaries, and the use of various financial instruments in the
economy.

TOPIC 5

FINANCIAL MARKETS

Financial markets are platforms where financial instruments are traded, facilitating the transfer of
funds between savers and borrowers. They play a crucial role in the economy by promoting
investment, liquidity, and risk management.

Nigerian Money Markets

The Nigerian money market is a segment of the financial market where short-term financial
instruments with high liquidity and short maturities are traded. It serves as a conduit for managing
liquidity in the economy and provides a platform for meeting short-term funding needs.

Instruments of Nigerian Money Markets

1. Treasury Bills (T-Bills): Short-term government debt securities with maturities ranging from 91 to
364 days. They are considered low-risk and highly liquid.

2. Commercial Papers: Unsecured, short-term debt instruments issued by corporations to meet their
immediate financing needs. Maturities typically range from 30 to 270 days.

3. Certificates of Deposit (CDs): Time deposits issued by commercial banks with fixed interest rates
and specified maturities, usually ranging from 30 days to one year.

4. Bankers’ Acceptances: Short-term credit investments created by a non-financial firm and

guaranteed by a bank, used primarily in international trade.
5. Repurchase Agreements (Repos): Short-term borrowing agreements where securities are sold
with an agreement to repurchase them at a higher price on a specific date.

6. Call Money: Short-term loans with very short maturities, often overnight, used by banks to
manage their liquidity.

Nigerian Money Markets – A Critical Analysis

Strengths:

1. Liquidity Management: Provides a mechanism for banks and other financial institutions to
manage liquidity efficiently.

2. Government Financing: A vital tool for government short-term financing through the issuance of
T-Bills.

3. Investment Opportunities: Offers low-risk investment opportunities for investors seeking short-
term returns.

Weaknesses:

1. Limited Instruments: The market is dominated by a few types of instruments, limiting

diversification opportunities.

2. Interest Rate Volatility: Frequent fluctuations in interest rates can impact the attractiveness of
money market instruments.

3. Access and Participation: Limited participation from retail investors and smaller financial
institutions due to high minimum investment requirements.

Problems of Nigerian Money Market

1. Liquidity Constraints: Occasional liquidity shortages can disrupt market functioning.

2. Regulatory Challenges: Inconsistent regulatory policies and oversight can create uncertainty.

3. Limited Product Range: A narrow range of financial instruments limits market depth and investor
options.

4. Market Fragmentation: Lack of integration between different segments of the financial market.

5. Economic Instability: Macroeconomic instability and inflation can adversely affect market
performance.

Capital Market in Nigeria

The Nigerian capital market is a platform for trading long-term financial instruments like stocks and
bonds. It facilitates the mobilization of long-term funds for economic development.
Nigerian Stock Exchange (NSE)

The Nigerian Exchange Group (formerly Nigerian Stock Exchange) is a stock exchange located in
Lagos, founded in 1961. As of 2019, it has:

- 161 listed companies

- 8 domestic companies on the premium board

- 144 companies on the mainboard

- 4 on the Alternative Securities Market (ASeM) board

- 84 FGN bonds, 21 state bonds, 27 corporate bonds, 1 supranational bond, and 53 memorandum
listings in the Fixed Income market

The Nigerian Stock Exchange (NSE) is the principal securities exchange in Nigeria, providing a
platform for buying and selling equity and debt instruments. It plays a pivotal role in the capital
market by facilitating capital formation, investment, and wealth creation.

Functions:

1. Listing Services: Provides a venue for companies to list their shares and raise capital.

2. Trading Platform: Offers an organized marketplace for buying and selling securities.

3. Market Regulation: Ensures fair and transparent trading practices through regulatory oversight.

4. Market Information: Disseminates market data and information to investors and stakeholders.

Problems of the Nigerian Capital Markets

1. Low Liquidity: Limited trading activity can reduce market liquidity, making it difficult to buy or sell
securities without affecting prices.

2. Regulatory Issues: Inconsistent regulatory policies and enforcement can create uncertainty and
reduce investor confidence.

3. Limited Investor Base: Low participation from retail investors and insufficient foreign investment.

4. Corporate Governance: Issues with corporate governance and transparency can deter investment.

5. Economic Factors: Macroeconomic instability, inflation, and exchange rate volatility can negatively
impact market performance.

Nigerian Securities and Exchange Commission (SEC)

The Securities and Exchange Commission (SEC) is the primary regulatory body of the Nigerian capital
market, established in 1979. It is responsible for:

- Ensuring orderly and equitable dealings in securities

- Protecting the market against insider trading abuses

- Supervising the Nigerian Stock Exchange (NSE), which is privately owned and self-regulating

The SEC is supervised by the Federal Ministry of Finance and has its headquarters in Abuja. The
agency's leadership includes Olufemi Lijadu as Chairman and Timi Agama as Director General.

The SEC was established to replace the Capital Issues Commission and has played a crucial role in
regulating the Nigerian capital market, including during the 2000-2010 capital market boom and
bust. Notable leaders of the SEC include Arunma Oteh and Ndi Okereke-Onyiuke. The Nigerian
Securities and Exchange Commission (SEC) is the regulatory authority for the capital market in
Nigeria. It is responsible for overseeing and regulating the activities of the capital market to ensure
fairness, transparency, and investor protection.

Functions:

1. Regulation and Oversight: Ensures compliance with securities laws and regulations.

2. Market Development: Promotes the development and growth of the capital market.

3. Investor Protection: Protects investors through enforcement of disclosure requirements and

market integrity.

4. Education and Awareness: Enhances investor education and awareness to foster informed
investment decisions.

Appraisal of the NSEC

Strengths:

1. Regulatory Framework: Establishes and enforces a robust regulatory framework for market
participants.

2. Market Surveillance: Monitors market activities to detect and prevent fraudulent practices.

3. Investor Protection: Implements measures to safeguard investor interests and promote

confidence in the market.

Weaknesses:

1. Enforcement Challenges: Difficulty in effectively enforcing regulations and penalizing non-

compliance.

2. Resource Constraints: Limited resources can hinder the SEC’s ability to perform its functions
optimally.

3. Regulatory Overlap: Potential for regulatory overlap and conflicts with other regulatory bodies.

Central Securities Clearing System Limited (CSCS)

The Central Securities Clearing System (CSCS) is Nigeria’s central securities depository, licensed to
provide depository, clearing, and settlement services for the Nigerian capital market. CSCS is a
financial market infrastructure (FMI) that processes securities transactions in electronic book-entry
form, ensuring safe and efficient processing.

CSCS provides various services, including:

- Depository services for share certificates

- Clearing and settlement services for securities exchanges

- Issuance of International Securities Identification Numbers (ISIN)

- Custodian services for local and foreign instruments

- Issuance of Legal Entity Identifier (LEI) codes for Nigeria

The Central Securities Clearing System (CSCS) is the central depository, clearing, and settlement
service provider for the Nigerian capital market. It ensures the efficient and secure transfer of
securities and funds between buyers and sellers.

Functions:

1. Clearing and Settlement: Facilitates the timely and accurate clearing and settlement of securities
transactions.

2. Custody Services: Provides safe custody for securities and manages records of ownership.

3. Electronic Platform: Offers an electronic platform for the dematerialization and transfer of
securities.

4. Market Efficiency: Enhances market efficiency and reduces the risk of settlement failures.

Understanding the structure and dynamics of Nigerian financial markets, including the money and
capital markets, the role of regulatory bodies like the SEC, and the functions of institutions like the
CSCS, is essential for comprehending the intricacies of financial intermediation and investment in
Nigeria.

TOPIC 6

BRETTONWOODS AGREEMENT

The Bretton Woods Agreement, established in July 1944, created a new international monetary
system. Delegates from 44 Allied nations met in Bretton Woods, New Hampshire, to design a
framework for economic cooperation and reconstruction post-World War II. This agreement led to
the creation of key international financial institutions, including the International Monetary Fund
(IMF) and the World Bank.

- Summary

The Bretton Woods Agreement established a system through which a fixed currency exchange rate
could be created using gold as the universal standard.
The agreement involved representatives from 44 nations and brought about the creation of the
International Monetary Fund (IMF) and the World Bank.

The fixed currency exchange rate system eventually failed; however, it provided much-needed
stability at the time of its creation.

International Monetary Fund (IMF)

The International Monetary Fund (IMF) is a global financial institution that aims to promote
international monetary cooperation, facilitate international trade, and support sustainable economic
growth. The IMF was established in 1945 and is headquartered in Washington, D.C., with 190
member countries.

The IMF’s main functions are:

1. Surveillance of the global economy

2. Providing financial assistance to countries facing balance of payments difficulties

3. Promoting exchange-rate stability

4. Supporting sustainable economic growth and reducing poverty

The IMF has a quota system, where countries contribute funds to a pool that can be borrowed by
countries experiencing balance of payments problems. The IMF also gathers and analyzes economic
statistics and conducts surveillance of its members’ economies.

The current managing director of the IMF is Kristalina Georgieva, and the first deputy managing
director is Gita Gopinath. The IMF has been involved in various activities, including providing loans to
countries, conducting economic research, and promoting international cooperation on economic
issues.

Despite its efforts, the IMF has faced criticisms and controversies over the years, including concerns
about its conditionality of loans, its role in globalization, and its impact on developing countries.
Nevertheless, the IMF remains a key player in the global financial system, working to promote
economic stability and cooperation among its member countries.

The IMF was created to promote international monetary cooperation, exchange rate stability,
balanced trade growth, and provide resources to member countries in financial difficulty.

Functions:

1. Surveillance: Monitors the global economy and the economic and financial policies of its member
countries.

2. Financial Assistance: Provides financial support to countries facing balance of payments problems.

3. Technical Assistance: Offers expertise and training in areas like fiscal policy, monetary policy,
exchange rate policies, and financial sector supervision.

Criticisms of the IMF

1. Policy Conditionality: Critics argue that the IMF’s financial assistance comes with stringent
conditions, often requiring austerity measures that can exacerbate economic hardship in borrowing
countries.

2. Impact on Sovereignty: The IMF’s influence over domestic economic policies is seen as infringing
on national sovereignty.

3. One-Size-Fits-All Approach: The standardized policy prescriptions may not suit the unique
economic contexts of individual countries.

4. Social Impact: IMF programs have been criticized for neglecting social considerations, leading to
increased poverty and inequality in some cases.

5. Transparency and Accountability: There are concerns about the transparency and accountability
of the IMF’s decision-making processes.

Achievements of the IMF

1. Global Financial Stability: The IMF has played a crucial role in maintaining global financial stability,
particularly during financial crises.

2. Economic Surveillance: Its surveillance mechanisms have helped identify and address economic
vulnerabilities in member countries.

3. Financial Assistance: The IMF has provided crucial financial support to countries in economic
distress, helping to stabilize economies and restore growth.

4. Capacity Building: The IMF’s technical assistance and training programs have strengthened the
capacity of member countries to manage their economies.

IMF and the Underdeveloped Countries Including Nigeria

1. Financial Assistance: The IMF has provided financial support to Nigeria during economic crises,
such as the Structural Adjustment Program in the 1980s.

2. Policy Advice: The IMF offers policy advice to Nigeria on macroeconomic management, fiscal
policy, and structural reforms.

3. Technical Assistance: The IMF provides technical assistance to improve Nigeria’s economic
governance and statistical capacity.

4. Criticism: The IMF’s programs in Nigeria have faced criticism for imposing austerity measures that
negatively impact the poor and vulnerable populations.

Special Drawing Rights (SDRs)

Special Drawing Rights (SDRs) are a supplementary foreign exchange reserve asset created by the
International Monetary Fund (IMF) in 1969. SDRs are units of account for the IMF and represent a
claim to currency held by IMF member countries, which can be exchanged for currencies such as the
US dollar, euro, Chinese yuan, Japanese yen, and pound sterling.
Key points:

- SDRs are allocated by the IMF to countries and cannot be held or used by private parties.

- The value of a SDR is based on a basket of key international currencies, reviewed every five years.

- The current basket consists of the US dollar, euro, Chinese yuan, Japanese yen, and pound sterling.

- SDRs are used to supplement member countries’ official reserves and provide liquidity to the global
economic system.

- The IMF has allocated additional SDRs in response to global financial crises, such as the 2009 global
financial crisis and the COVID-19 pandemic.

Overall, SDRs play a critical role in the international monetary system, providing a supplementary
source of liquidity and supporting global economic stability.

SDRs are an international reserve asset created by the IMF to supplement its member countries’
official reserves. They can be exchanged among member countries and used to settle international
payments.

Functions:

1. Reserve Asset: Acts as a supplementary reserve asset that countries can use to support their
currencies and meet balance of payments needs.

2. Unit of Account: Used as a unit of account by the IMF and some other international organizations.

3. Exchange Mechanism: Countries can exchange SDRs among themselves for freely usable
currencies in times of need.

International Bank for Reconstruction and Development (IBRD) or World Bank

The International Bank for Reconstruction and Development (IBRD) is a global financial institution
established in 1944 to finance the reconstruction of European nations after World War II. Today, it is
the lending arm of the World Bank Group, providing commercial-grade or concessional financing to
sovereign states to fund projects that promote economic development and poverty reduction.

Key points:

- IBRD is owned and governed by its 189 member states, with each country represented on the
Board of Governors.

- The Bank’s mandate has expanded to include advancing worldwide economic development and
eradicating poverty.

- IBRD provides financing for projects in various sectors, including transportation, education,
healthcare, energy, and environmental conservation.

- The Bank acquires most of its capital by borrowing on international capital markets through bond
issues, and has a AAA credit rating.
- IBRD offers various financial services and products, including flexible loans, grants, risk guarantees,
and financial derivatives.

- In 2011, it reported lending commitments of $26.7 billion to 132 projects.

Overall, the IBRD plays a critical role in promoting economic development and poverty reduction
globally, by providing financing and other financial services to its member countries.

The IBRD, part of the World Bank Group, provides loans and financial assistance to middle-income
and creditworthy low-income countries for development projects that aim to reduce poverty and
support economic development.

Functions:

1. Project Financing: Provides funding for infrastructure, education, health, and other development
projects.

2. Policy Advice: Offers expertise and advice on economic policy and development strategies.

3. Capacity Building: Helps build institutional capacity in member countries to implement

development projects.

International Finance Corporation (IFC)

The International Finance Corporation (IFC) is a global financial institution that promotes private-
sector development in less developed countries. It is a member of the World Bank Group and
provides investment, advisory, and asset-management services to encourage economic development
and poverty reduction.

Key points:

- IFC was established in 1956 as the private-sector arm of the World Bank Group.

- Its stated aim is to create opportunities for people to escape poverty and achieve better living
standards.

- IFC focuses on development goals such as sustainable agriculture, healthcare, education, access to
financing, infrastructure, and climate health.

- It is owned and governed by its member countries but has its own executive leadership and staff.

- IFC offers debt and equity financing services, advice to companies, and helps governments build
infrastructure and partnerships.

- It has been criticized for its use of financial intermediaries, making it difficult to track its money, and
for working with large companies or wealthy individuals who may not need public funding.

Overall, the IFC plays a significant role in promoting private-sector development and economic
growth in less developed countries, while also facing challenges and criticisms in its operations.

The IFC, part of the World Bank Group, focuses on private sector development by providing
investment and advisory services to private enterprises in developing countries.
Functions:

1. Investment: Provides loans, equity, and risk management products to private sector projects.

2. Advisory Services: Offers advice on business operations, environmental sustainability, and social
responsibility.

3. Resource Mobilization: Mobilizes private capital for investment in developing countries.

International Development Association (IDA)

The International Development Association (IDA) is a development finance institution that provides
concessional loans and grants to the world’s poorest developing countries. It is a member of the
World Bank Group and is headquartered in Washington, D.C. in the United States.

Key points:

- IDA was established in 1960 to complement the International Bank for Reconstruction and
Development.

- It lends to developing countries with the lowest gross national income, troubled creditworthiness,
or lowest per capita income.

- IDA’s aim is to reduce poverty and promote economic growth in the poorest nations.

- It is the largest provider of funds to economic and human development projects in the world’s
poorest nations.

- From 2000 to 2010, IDA financed projects that recruited and trained teachers, immunized children,
funded small and medium enterprises, built roads and bridges, and expanded access to improved
water and sanitation facilities.

- IDA has issued a total of $238 billion in loans and grants since its launch in 1960.

- Thirty-six borrowing countries have graduated from IDA’s concessional lending, but nine have
relapsed.

Overall, the IDA plays a crucial role in supporting the economic and human development of the
world’s poorest nations.

The IDA, part of the World Bank Group, provides concessional loans and grants to the world’s
poorest countries to support development projects and programs.

Functions:

1. Concessional Financing: Offers low-interest loans and grants to the poorest countries.

2. Development Projects: Funds projects in sectors such as health, education, infrastructure, and
agriculture.

3. Capacity Building: Enhances the capacity of countries to implement development initiatives.

International Centre for Settlement of Investment Disputes (ICSID)

The International Centre for Settlement of Investment Disputes (ICSID) is an international arbitration
institution that resolves legal disputes between international investors and states. It was established
in 1966 and is part of the World Bank Group, headquartered in Washington, D.C., USA.

Key points:

- ICSID is an autonomous, multilateral specialized institution that encourages international flow of

investment and mitigates non-commercial risks.

- It has 153 contracting member states that agreed to enforce and uphold arbitral awards in
accordance with the ICSID Convention.

- ICSID performs advisory activities and maintains several publications.

- It resolves disputes through arbitration and conciliation.

- The centre has been criticized for its perceived bias towards investor interests and lack of
transparency.

Overall, ICSID plays a crucial role in resolving investment disputes and promoting international
investment flows. However, it has faced criticism and calls for reform to address concerns around
transparency, accountability, and balance between investor and state interests.

The ICSID, part of the World Bank Group, provides facilities for the arbitration and conciliation of
investment disputes between governments and foreign investors.

Functions:

1. Dispute Resolution: Facilitates arbitration and conciliation to resolve investment disputes.

2. Legal Framework: Provides a legal framework for the fair and impartial resolution of disputes.

3. Investor Confidence: Enhances investor confidence by providing a reliable dispute resolution

mechanism.

Multilateral Investment Guarantee Agency (MIGA)

The Multilateral Investment Guarantee Agency (MIGA) is an international financial institution that
provides political risk insurance and credit enhancement guarantees to protect foreign direct
investments in developing countries. It is a member of the World Bank Group and is headquartered
in Washington, D.C., USA.

Key points:

- MIGA was established in 1988 to encourage investment in developing countries.

- It offers political risk insurance and credit enhancement guarantees to protect investments against
non-commercial risks.

- MIGA is owned and governed by its member states, but has its own executive leadership and staff.
- It insures long-term debt and equity investments, as well as other assets and contracts.

- The agency is assessed by the World Bank’s Independent Evaluation Group each year.

- MIGA has 182 member countries and is a key player in promoting foreign direct investment in
developing countries.

Overall, MIGA plays a crucial role in promoting economic development and reducing poverty by
encouraging investment in developing countries.

MIGA, part of the World Bank Group, provides political risk insurance and credit enhancement to
encourage foreign investment in developing countries.

Functions:

1. Political Risk Insurance: Offers insurance against political risks such as expropriation, breach of
contract, and war.

2. Investment Promotion: Promotes foreign direct investment in developing countries by mitigating

risks.

3. Advisory Services: Provides advice on investment environments and risk management.

Euro

The Euro is the official currency of the Eurozone, used by 19 of the 27 European Union member
countries. It is the second most widely held reserve currency and one of the most traded currencies
in the world.

Functions:

1. Common Currency: Facilitates trade and economic integration among Eurozone countries.

2. Price Stability: Aims to maintain price stability within the Eurozone through the European Central
Bank (ECB).

3. Economic Integration: Promotes economic integration and coordination among member

countries.

African Development Bank (ADB)

The African Development Bank (AfDB) is a multilateral development finance institution that provides
financial services to African governments and private companies investing in regional member
countries. It was founded in 1964 by the Organisation of African Unity and is headquartered in
Abidjan, Ivory Coast. The AfDB has 81 member countries and is governed by a Board of Executive
Directors. Its mission is to promote economic development and social progress in Africa. The AfDB
comprises three entities: the African Development Bank, the African Development Fund, and the
Nigeria Trust Fund.
Key points:

- Provides financial services to African governments and private companies

- Founded in 1964 by the Organisation of African Unity

- Headquartered in Abidjan, Ivory Coast

- 81 member countries

- Governed by a Board of Executive Directors

- Mission is to promote economic development and social progress in Africa

- Comprises three entities: African Development Bank, African Development Fund, and Nigeria Trust
Fund

Overall, the AfDB plays a crucial role in promoting economic development and social progress in
Africa by providing financial services to African governments and private companies.

The ADB is a regional multilateral development bank focused on promoting economic and social
development in Africa.

Functions:

1. Project Financing: Provides funding for development projects in infrastructure, health, education,
and agriculture.

2. Policy Advice: Offers expertise and advice on economic policy and development strategies.

3. Capacity Building: Enhances the capacity of African countries to implement development

initiatives.

ADB Performance with Reference to Nigeria

1. Project Funding: The ADB has funded numerous projects in Nigeria, including infrastructure
development, agriculture, and social services.

2. Policy Support: Provides policy advice and technical assistance to support Nigeria’s economic
development.

3. Capacity Building: Helps build institutional capacity in Nigeria to effectively implement

development projects.

4. Challenges: The effectiveness of ADB projects in Nigeria can be hampered by issues such as
corruption, poor governance, and security challenges.

Bank for International Settlements (BIS)

The Bank for International Settlements (BIS) is an international financial institution that aims to
promote global monetary and financial cooperation among central banks. It was established in 1929
to oversee the settlement of World War I war reparations and is owned by its member central banks.
Key points:

- Primary goal is to foster international monetary and financial cooperation

- Serves as a bank for central banks

- Established in 1929 to oversee war reparations

- Based in Basel, Switzerland with representative offices in Hong Kong and Mexico City

- Provides banking services exclusively to central banks and international organizations

- Carries out work through meetings, programs, and the Basel Process to promote global financial
stability

Overall, the BIS plays a crucial role in promoting global financial cooperation and stability by serving
as a platform for central banks to interact and collaborate. The BIS is an international financial
institution that fosters cooperation among central banks and provides banking services to them.

Functions:

1. Central Bank Cooperation: Facilitates cooperation and information sharing among central banks.

2. Research and Analysis: Conducts research and provides analysis on financial and economic issues.

3. Banking Services: Offers banking services to central banks and international organizations.

Understanding the Bretton Woods institutions and their impact on global and national economies,
particularly in developing countries like Nigeria, is essential for comprehending the complexities of
international financial

systems and their role in promoting economic stability and development.

TOPIC 7

DEFINITION OF BANKING

Banking refers to the business activity of accepting and safeguarding money owned by individuals
and entities, and then lending out this money to earn a profit. Banks provide a wide array of financial
services, including accepting deposits, making loans, and providing investment products and wealth
management services.

Unit and Branch Banking System

Unit Banking System:

- Definition: A system where individual banks operate independently and do not have branches. Each
bank is a single unit serving its local community.

- Advantages:

- Closer customer relationships.

- Easier management and control.

- Disadvantages:

- Limited resources and capital.

- Higher risk concentration.

- Less ability to diversify services.

Branch Banking System:

- Definition: A system where a bank operates multiple branches under a single corporate structure.

- Advantages:

- Economies of scale.

- Diversification of risk.

- Better resource allocation.

- Wider range of services.

- Disadvantages:

- Complex management.

- Potential for slower decision-making.

- Higher operational costs.

Central Banking

Central banking refers to the activities of a central bank, which is a national institution that manages
the currency, money supply, and interest rates of a country. It plays a key role in ensuring economic
stability and financial soundness.

Functions of Central Bank

1. Monetary Policy: Regulates the money supply and interest rates to control inflation and stabilize
the currency.

2. Banker to the Government: Manages government accounts and facilitates transactions.

3. Banker’s Bank: Acts as a banker to other banks, providing them with services such as clearing and
settlement.
4. Regulator of the Financial System: Supervises and regulates financial institutions to ensure
stability and compliance.

5. Currency Issuance: Issues and manages the national currency.

6. Foreign Exchange Management: Manages the country’s foreign exchange reserves and exchange
rate policies.

7. Lender of Last Resort: Provides emergency funding to banks facing liquidity crises.

8. Economic Research and Data Collection: Conducts research and collects data to inform policy
decisions.

The Central Bank’s Balance Sheet

The balance sheet of a central bank reflects its financial position and includes assets, liabilities, and
equity. Major components include:

- Assets:

- Foreign currency reserves.

- Government securities.

- Loans to commercial banks.

- Gold reserves.

- Liabilities:

- Currency in circulation.

- Deposits from commercial banks.

- Government deposits.

- Equity:

- Capital and reserves.

The Central Bank of Nigeria (CBN)

The Central Bank of Nigeria (CBN) is the central bank and apex monetary authority of Nigeria,
established in 1958 and commenced operations on July 1, 1959. The CBN’s major regulatory
objectives are to:

- Maintain external reserves

- Promote monetary stability and a sound financial environment
- Act as a banker of last resort and financial adviser to the federal government
The CBN has played a crucial role in Nigeria’s economic development, especially after the Nigerian
civil war. However, its involvement in direct consumer lending and political controversies has raised
concerns. The CBN has 36 branches across the 36 states of Nigeria and is headquartered in Abuja.
The bank’s current governor is Olayemi Cardoso.

Key statistics:

- Reserves: $28.28 billion USD

- Bank rate: 18.7% (July 2023)
- Currency: Nigerian naira (NGN)
- Ownership: 100% state-owned

The CBN is Nigeria’s central bank, established in 1958. It plays a crucial role in the Nigerian financial
system, performing the standard functions of a central bank.

Functions:

1. Monetary Policy: Implements policies to control inflation, manage interest rates, and stabilize the
currency.

2. Bank Supervision: Regulates and supervises financial institutions to ensure soundness and
compliance.

3. Currency Management: Issues and manages the Nigerian Naira.

4. Financial Stability: Ensures the stability of the financial system through oversight and regulatory
measures.

5. Developmental Role: Supports economic development through funding and initiatives aimed at
promoting growth.

CBN and the Monetary Control

The CBN exercises monetary control through various tools and policies to achieve macroeconomic
stability:

1. Open Market Operations (OMO): Buying and selling government securities to regulate the money
supply.

2. Discount Rate: Setting the interest rate at which commercial banks can borrow from the central
bank.

3. Reserve Requirements: Mandating the minimum reserves that banks must hold against deposits.

4. Moral Suasion: Persuading banks to adhere to policy objectives through dialogue and persuasion.

5. Foreign Exchange Controls: Managing exchange rates and foreign currency reserves.
6. Credit Control: Regulating the amount of credit that banks can extend to ensure balanced
economic growth.

Understanding these fundamental aspects of banking, especially the role and functions of central
banks, is crucial for comprehending how monetary policies are implemented and how financial
stability is maintained within an economy.

TOPIC 8

COMMERCIAL BANKING

Commercial banking refers to the banking services provided to the general public and businesses.
These services include accepting deposits, providing loans, offering checking and savings accounts,
and other financial products.

Commercial Banking in Nigeria

Commercial banks in Nigeria play a crucial role in the financial system by mobilizing savings,
providing credit, and facilitating payments. They are regulated by the Central Bank of Nigeria (CBN)
and must comply with the Banking and Other Financial Institutions Act (BOFIA) and other relevant
regulations.

Major Functions:

1. Deposit Mobilization: Collecting deposits from the public in the form of savings, fixed, and current
accounts.

2. Credit Provision: Offering various types of loans and advances to individuals, businesses, and
governments.

3. Payment Services: Facilitating payment transactions through checks, electronic transfers, and
other means.

4. Financial Advisory Services: Providing advice on investments, business expansion, and financial
planning.

5. Foreign Exchange Services: Offering currency exchange and international trade financing.

Nigeria Banking System – An Appraisal

Strengths:

1. Regulatory Framework: A robust regulatory framework ensures stability and compliance.

2. Technological Adoption: Increasing use of technology in banking services enhances efficiency and
customer experience.
3. Market Liberalization: Liberalization policies have attracted foreign investment and competition,
improving service quality.

4. Financial Inclusion: Efforts to increase financial inclusion have expanded access to banking
services.

Weaknesses:

1. Infrastructure Challenges: Inadequate infrastructure can hinder the efficient delivery of banking
services.

2. Corruption and Fraud: Issues with corruption and fraud can undermine trust in the banking
system.

3. Economic Instability: Macroeconomic instability and policy uncertainty can affect bank
performance.

4. Limited Access: Despite efforts, a significant portion of the population remains unbanked or
underbanked.

Banks’ Sources and Uses of Funds

Sources of Funds:

1. Customer Deposits: Savings accounts, checking accounts, and fixed deposits.

2. Borrowings: Interbank loans, central bank loans, and international borrowings.

3. Shareholder Equity: Capital raised from shareholders through the issuance of shares.

4. Retained Earnings: Profits retained in the business for reinvestment.

Uses of Funds:

1. Loans and Advances: Personal loans, business loans, mortgages, and overdrafts.

2. Investments: Investment in government securities, corporate bonds, and other financial

instruments.

3. Operational Expenses: Salaries, rent, utilities, and other operational costs.

4. Reserves: Mandatory reserves with the central bank and contingency reserves.

Profitability and Liquidity

Profitability:

1. Interest Income: Earned from loans and advances.

2. Non-Interest Income: Fees, commissions, and trading profits.

3. Cost Management: Controlling operational and funding costs.

Liquidity:

1. Liquidity Management: Ensuring the bank has sufficient liquid assets to meet short-term
obligations.

2. Cash Reserves: Holding adequate cash and near-cash assets.

3. Liquidity Ratios: Monitoring liquidity ratios to comply with regulatory requirements and ensure
financial stability.

Balancing Profitability and Liquidity:

- Banks must strike a balance between maintaining sufficient liquidity to meet short-term
obligations and achieving profitability through lending and investment activities.

Nigeria Deposit Insurance Corporation (NDIC)

The Nigeria Deposit Insurance Corporation (NDIC) is a regulatory body established in 1988 to
administer the Deposit Insurance System (DIS) in Nigeria. Its primary responsibility is to protect
depositors and guarantee the payment of insured sums when a deposit-taking financial institution’s
license is revoked by the Central Bank of Nigeria (CBN).

Key points:

- Established in 1988

- Responsible for administering the Deposit Insurance System (DIS) in Nigeria

- Protects depositors and guarantees payment of insured sums

- Ensures the safety and soundness of the Nigerian banking system

- Headquartered in Abuja, Nigeria

- Managed by a Managing Director/CEO (currently Bello Hassan)

Overall, the NDIC plays a crucial role in maintaining the stability of the Nigerian banking system and
protecting the interests of depositors.

The NDIC is an independent agency established to provide deposit insurance and protect depositors
in the event of bank failures.

Functions:

1. Deposit Insurance: Provides insurance coverage for deposits in commercial banks and other
financial institutions.

2. Bank Supervision: Collaborates with the CBN to supervise and regulate banks.
3. Resolution of Distressed Banks: Manages the resolution of failed banks to protect depositors and
maintain stability.

4. Public Awareness: Educates the public on deposit insurance and financial stability.

Impact:

- The NDIC enhances confidence in the banking system by protecting depositors and
contributing to the overall stability of the financial system.

TOPIC 9

DEVELOPMENT BANKING

Development banking involves financial institutions dedicated to funding projects that promote
economic development, particularly in sectors like industry, agriculture, infrastructure, and housing.
These banks typically offer long-term financing at favorable terms to stimulate growth and
development.

Development Banking in Nigeria

Development banks in Nigeria play a crucial role in providing long-term financing for sectors that are
vital to the country’s economic development. These banks are instrumental in supporting industries,
agriculture, and housing, thereby contributing to overall economic growth and development.

The Nigerian Industrial Development Bank (NIDB)

The Bank of Industry (BOI) is Nigeria’s oldest and largest Development Finance Institution (DFI),
established in 1959. It is owned by the Ministry of Finance Incorporated (MOFI), the Central Bank of
Nigeria (CBN), and private shareholders.

Key points:

- Owned by MOFI (94.80%), CBN (5.19%), and private shareholders (0.01%)

- Established in 1959

- Headquartered in Lagos, Nigeria

- Provides financial services, including term loans, working capital loans, insurance products, trustee
services, and leasing services

- Has subsidiaries, including BOI Investment Trust Company, BOI-Microfinance Bank Limited, and BOI
Insurance Brokers Limited.

Established in 1964, the Nigerian Industrial Development Bank (NIDB) was designed to promote and
finance industrial projects in Nigeria.
Functions:

1. Project Financing: Provides long-term loans for industrial projects.

2. Technical Assistance: Offers technical and managerial advice to enterprises.

3. Equity Participation: Invests in the equity of industrial ventures.

4. Promoting Industrialization: Aims to accelerate industrial development by supporting various

sectors.

Impact:

- NIDB has played a significant role in the establishment and expansion of numerous industrial
projects across Nigeria, contributing to job creation and economic diversification.

The Bank for Commerce and Industry (BCI)

The Bank of Industry (BOI) is Nigeria's oldest and largest Development Finance Institution (DFI),
established in 1959. It is owned by the Ministry of Finance Incorporated (MOFI), the Central Bank of
Nigeria (CBN), and private shareholders.

Key points:

- Owned by MOFI (94.80%), CBN (5.19%), and private shareholders (0.01%)

- Established in 1959

- Headquartered in Lagos, Nigeria

- Provides financial services, including term loans, working capital loans, insurance products, trustee
services, and leasing services

- Has subsidiaries, including BOI Investment Trust Company, BOI-Microfinance Bank Limited, and BOI
Insurance Brokers Limited.

The Bank for Commerce and Industry (BCI) was established to support small and medium-sized
enterprises (SMEs) in Nigeria.

Functions:

1. SME Financing: Provides loans and credit facilities to small and medium-sized enterprises.

2. Advisory Services: Offers business advisory services to help SMEs grow and succeed.

3. Capacity Building: Provides training and development programs for entrepreneurs.

Impact:
 - BCI has been instrumental in fostering the growth of SMEs, which are crucial for economic
development and employment generation in Nigeria.

The Nigeria Agricultural and Cooperative Bank (NACB)

Bank of Agriculture (BOA) Limited was incorporated as Nigerian Agricultural Bank (NAB) in 1972 and
became operational in 1973 to carry out the functions of a Development Finance Institution (DFI) for
the Agriculture and Rural Development sector. The Bank is wholly owned by the Federal Government
of Nigeria through the Federal Ministry of Finance Incorporated (MOFI) and Central Bank of Nigeria
(CBN) in the ratio of 60%: 40% respectively. The Nigeria Agricultural and Cooperative Bank (NACB)
was established in 1973 to provide financial support for the agricultural sector.

Functions:

1. Agricultural Financing: Provides loans for agricultural production, processing, and marketing.

2. Cooperative Support: Supports agricultural cooperatives with funding and technical assistance.

3. Rural Development: Promotes rural development through financing rural infrastructure projects.

Impact:

- NACB has helped enhance agricultural productivity and rural development, contributing to
food security and poverty reduction in Nigeria.

Federal Mortgage Bank of Nigeria (FMBN)

The Federal Mortgage Bank of Nigeria (FMBN) was established in 1977 to replace the Nigerian
Building Society. It is a government-owned institution that aims to provide housing finance to all
citizens of Nigeria. FMBN is the apex mortgage finance institution in Nigeria and regulates the
activities of primary mortgage loan originators.

Key points:

- Established in 1977

- Replaced the Nigerian Building Society

- Government-owned institution

- Aims to provide housing finance to all citizens of Nigeria

- Apex mortgage finance institution in Nigeria

- Regulates primary mortgage loan originators

Overall, FMBN plays a crucial role in Nigeria's housing finance sector, providing mortgage loans and
regulating the activities of other mortgage institutions to ensure that housing is accessible to all
Nigerians.
The Federal Mortgage Bank of Nigeria (FMBN) was established in 1956 to promote home ownership
and provide affordable housing finance.

Functions:

1. Mortgage Financing: Provides long-term loans for home purchases and construction.

2. National Housing Fund (NHF): Manages the NHF to provide affordable housing finance to
Nigerians.

3. Housing Development: Supports the development of housing projects across the country.

Impact:

- FMBN has facilitated home ownership for many Nigerians and contributed to the
development of the housing sector, addressing the country’s housing deficit.

TOPIC 10

MERCHANT BANKS IN NIGERIA

Merchant banks, also known as investment banks, are financial institutions that primarily offer
services related to underwriting, business loans, and capital market activities. They do not typically
provide retail banking services like checking accounts or consumer loans.

Functions of Merchant Banks

1. Corporate Finance: Assisting companies with raising capital through equity and debt financing.

2. Advisory Services: Providing financial and strategic advisory services for mergers, acquisitions, and
other corporate actions.

3. Underwriting: Underwriting new issues of stocks and bonds.

4. Loan Syndication: Arranging large loans by pooling resources from multiple lenders.

5. Investment Management: Managing investment portfolios for institutions and high-net-worth

individuals.

6. Trade Finance: Facilitating international trade by providing services like letters of credit and export
financing.

Differences between Merchant Banks and Commercial Banks

- Client Base: Merchant banks primarily serve corporate clients, while commercial banks serve the
general public, including individuals and small businesses.
- Services Offered: Merchant banks focus on corporate finance, advisory services, and capital
markets, whereas commercial banks offer deposit accounts, consumer loans, and basic financial
services.

- Regulation: Merchant banks are often subject to different regulatory frameworks compared to
commercial banks.

- Capital Requirements: Merchant banks typically engage in high-risk, high-reward activities,

requiring different capital adequacy standards than commercial banks.

People’s Bank of Nigeria

Background: Established in 1989, the People’s Bank of Nigeria aimed to provide banking services to
the underprivileged and unbanked population.

Functions:

1. Micro-Credit: Offering small loans to individuals and micro-enterprises.

2. Savings Accounts: Providing savings accounts with low minimum balances.

3. Financial Inclusion: Promoting financial inclusion by extending banking services to rural and
underserved areas.

Community Banks in Nigeria

Background: Community banks were introduced in the 1990s to promote grassroots banking and
support local economic development.

Functions:

1. Local Financing: Providing loans and credit facilities to local businesses and individuals.

2. Savings Mobilization: Encouraging savings among the local population.

3. Economic Development: Supporting local economic activities and development projects.

Universal Banking

Definition: Universal banking is a system where banks are allowed to offer a wide range of financial
services, including commercial banking, investment banking, and insurance.

Implications and Effectiveness of Universal Banking

Implications:
1. Increased Competition: Banks compete across a broader range of services, leading to better
customer choices.

2. Risk Diversification: Banks can diversify their income sources, potentially reducing risk.

3. Regulatory Challenges: Requires robust regulatory frameworks to manage the increased

complexity and risks.

Effectiveness:

- Universal banking can lead to increased efficiency and customer convenience, but it also
necessitates strong oversight to prevent systemic risks.

Microfinance Banking in Nigeria

Background: Microfinance banks (MFBs) provide financial services to the economically active poor,
who are traditionally underserved by conventional banks.

Functions:

1. Micro-Credit: Offering small loans to micro-entrepreneurs.

2. Savings Products: Providing savings accounts tailored to low-income individuals.

3. Capacity Building: Offering training and support to improve financial literacy and business skills.

Non-Bank Financial Intermediaries

Definition: These are financial institutions that provide services similar to banks but do not have full
banking licenses and are not allowed to accept deposits from the general public.

Examples:

1. Insurance Companies: Provide risk management through insurance products.

2. Pension Funds: Manage retirement savings and investment plans.

3. Finance Companies: Offer loans and credit facilities without accepting deposits.

4. Investment Funds: Manage pooled investments in securities and other assets.

Nigerian Institute of Bankers

Background: The Chartered Institute of Bankers of Nigeria (CIBN) is the professional body for bankers
in Nigeria, established in 1976 and chartered in 1990. It regulates the banking profession, sets
standards, and maintains professional ethics. Corporate members include the Central Bank of
Nigeria, Deposit Money Banks, Development Banks, Mortgage Banks, Micro Finance Banks, and
Discount Houses.

Key points:

- Professional body for bankers in Nigeria

- Established in 1976 and chartered in 1990

- Regulates banking profession, sets standards, and maintains professional ethics

- Corporate members include Central Bank of Nigeria and various banking institutions

- Headquartered in Lagos, Nigeria

- Led by President Kenneth Onyewuchi Opara

Overall, CIBN plays a crucial role in promoting professionalism and ethical conduct in the Nigerian
banking industry.

Functions:

1. Professional Certification: Offers certification programs for banking professionals.

2. Training and Development: Provides training programs and continuous professional development
opportunities.

3. Industry Standards: Sets ethical and professional standards for the banking industry.

4. Advocacy: Represents the interests of bankers and promotes best practices within the industry.

TOPIC 11

NEGOTIABLE INSTRUMENTS

Negotiable instruments are written documents that promise or order the payment of a specific
amount of money, either on demand or at a set time, and can be transferred from one person to
another.

Promissory Notes

Definition: A promissory note is a written promise by one party (the maker) to pay a specified sum of
money to another party (the payee) at a future date or on demand.

Key Features:

1. Written Document: Must be in writing.

2. Promise to Pay: Contains an unconditional promise to pay.

3. Definite Sum: Specifies a fixed amount of money.

4. Time of Payment: Indicates the date or conditions under which payment will be made.
5. Parties Involved: Involves at least two parties, the maker and the payee.

Example:

“I promise to pay John Doe or order the sum of $1,000 on or before December 31, 2024. Signed, Jane
Smith.”

Bill of Exchange

Definition: A bill of exchange is a written order from one party (the drawer) directing another party
(the drawee) to pay a specified sum of money to a third party (the payee) at a future date or on
demand.

Key Features:

1. Written Document: Must be in writing.

2. Order to Pay: Contains an unconditional order to pay.

3. Definite Sum: Specifies a fixed amount of money.

4. Time of Payment: Indicates the date or conditions under which payment will be made.

5. Parties Involved: Involves three parties, the drawer, the drawee, and the payee.

Example:

“Pay to the order of John Doe the sum of $2,000 on March 1, 2024. Signed, Jane Smith (Drawer),
Acme Corp (Drawee).”

Cheques

Definition: A cheque is a written order directing a bank to pay a specified sum of money from the
drawer’s account to the person named on the cheque (the payee) or to the bearer of the cheque.

Key Features:

1. Written Document: Must be in writing.

2. Order to Pay: Contains an unconditional order to the bank.

3. Definite Sum: Specifies a fixed amount of money.

4. Payee: Names the person or entity to be paid.

5. Drawer and Drawee: Involves the drawer (account holder) and the drawee (bank).
Example:

“Pay to the order of John Doe the sum of $500. Signed, Jane Smith (Drawer), XYZ Bank (Drawee).”

Crossing of Cheques

Definition: Crossing a cheque involves drawing two parallel lines across the face of the cheque, with
or without additional instructions. This is done to specify that the cheque can only be deposited
directly into a bank account and cannot be cashed immediately.

Types of Crossing:

1. General Crossing: Two parallel lines with or without the words “and company” or “not negotiable”.

2. Special Crossing: Two parallel lines with the name of a specific bank written between them,
directing the cheque to be deposited into that bank only.

Negotiation and Endorsement

Negotiation: The transfer of a negotiable instrument in such a way that the transferee becomes the
holder of the instrument.

Endorsement: Signing the back of a negotiable instrument to transfer ownership to another party.

Kinds of Endorsement:

1. Blank Endorsement: The endorser signs their name only, without specifying a payee, making the
instrument payable to the bearer.

2. Special Endorsement: The endorser specifies the name of the person to whom the instrument is to
be paid.

3. Restrictive Endorsement: The endorser restricts the further negotiation of the instrument, e.g.,
“For deposit only”.

4. Conditional Endorsement: The endorser specifies conditions that must be met for the transfer to
be valid.

5. Qualified Endorsement: The endorser limits their liability, e.g., “Without recourse”.

TOPIC 12

PAYMENT OF CHEQUES

The payment of cheques involves the bank (drawee) honoring the payment request made by the
account holder (drawer) to the payee. Various rules and situations can affect the payment process.

Payment of Cheque by Mistake

Definition: This occurs when a bank pays out money on a cheque due to an error. Errors can be due
to various reasons such as:

1. Forgery: Paying a cheque with a forged signature.

2. Stop Payment Orders: Ignoring a valid stop payment order.

3. Post-Dated Cheques: Paying a post-dated check before the date written on it.

4. Altered Cheques: Paying a cheque that has been altered.

Implications:

- Bank Liability: Generally, if a bank pays a check by mistake, it is liable to reimburse the account
holder unless the account holder's negligence contributed to the mistake.

- Customer Responsibility: The account holder must promptly review their bank statements and
report any unauthorized transactions.

Payment in Due Course

Definition: Payment in due course means payment made by the drawee bank to the holder of the
cheque, in good faith and without negligence, in accordance with the apparent tenor of the
instrument.

Requirements:

1. Good Faith: The payment must be made honestly, without any knowledge of defects or forgery.

2. Without Negligence: The bank must exercise reasonable care in processing the check.

3. According to Tenor: Payment must align with the terms and conditions of the cheque.

Holder, Holder for Value, and Holder in Due Course

Holder:

- Definition: A holder is a person in possession of a negotiable instrument that is payable either to

bearer or to an identified person who is in possession of it.

- Rights: Can demand payment from the drawee.

Holder for Value:

- Definition: A holder for value is a person who has given value (consideration) for the instrument.
This can include payment, services rendered, or other financial commitments.

- Importance: Being a holder for value provides the holder with additional rights and protections
under the law.
Holder in Due Course (HDC):

- Definition: A holder in due course is a holder who has taken the instrument under the following
conditions:

1. For value.

2. In good faith.

3. Without notice of any defect in the instrument or claim against it.

4. Before it is overdue.

Rights and Protections of HDC:

1. Free from Defenses: An HDC takes the instrument free from most defenses that could be raised
against previous holders.

2. Better Title: Has a better title than the person from whom they acquired the instrument.

3. Right to Payment: Can demand payment even if the instrument was previously dishonored,
provided the dishonor was not known at the time of acquisition.

Importance in Commercial Transactions:

- Trust and Reliability: The concept of HDC enhances trust in the use of negotiable instruments,
making them reliable means of payment.

- Encourages Trade: Promotes fluidity in trade and commerce by ensuring that instruments are easily
transferable without the risk of previous disputes affecting the new holder.

TOPIC 13

BILLS OF EXCHANGE

A bill of exchange is a written, unconditional order by one party (the drawer) directing another party
(the drawee) to pay a specified sum of money to a third party (the payee) either on demand or at a
future date.

Inland Bill

Definition: An inland bill is a bill of exchange that is drawn and payable within the same country.

Characteristics:

- Domestic Transactions: Used for transactions within the same country.

- Legal Framework: Governed by the laws of the country where it is drawn and payable.

Foreign Bill

Definition: A foreign bill is a bill of exchange that is drawn in one country and payable in another.

Characteristics:

- International Transactions: Used for international trade and finance.

- Legal Framework: Subject to the laws of multiple jurisdictions, depending on where it is drawn,
accepted, and payable.

Inchoate Instruments

Definition: Inchoate instruments are incomplete negotiable instruments that lack some essential
details, such as the amount, date, or payee.

Usage:

- Completion: The holder of an inchoate instrument has the authority to fill in the missing details.

- Legal Effect: Once completed, it has the same legal effect as if it were originally issued with all
details.

Accommodation Bill

Definition: An accommodation bill is a bill of exchange that is drawn, accepted, or endorsed by one
party (the accommodation party) for the benefit of another party (the accommodated party) without
receiving value in return.

Characteristics:

- Credit Enhancement: Used to enhance the creditworthiness of the accommodated party.

- Liability: The accommodation party is liable to any holder in due course but can seek
reimbursement from the accommodated party.

Escrow

Definition: Escrow refers to a financial arrangement where a third party (escrow agent) holds and
regulates the payment of funds or documents until specified conditions are met.
Usage:

- Security: Ensures that both parties in a transaction fulfill their obligations before the funds or
documents are released.

- Common in Real Estate: Often used in real estate transactions and other large financial deals.

Drawee in Case of Need

Definition: A drawee in case of need is an alternative drawee named in a bill of exchange to whom
the holder can present the bill if the original drawee refuses to accept or pay it.

Characteristic:

- Alternative Payment: Provides a backup option for payment.

- Specified in Bill: The drawee in case of need must be explicitly mentioned in the bill of exchange.

Acceptance

Definition: Acceptance is the act of the drawee signing a bill of exchange to acknowledge and agree
to pay it when due.

Types:

1. General Acceptance: The drawee agrees to pay the bill without any conditions.

2. Qualified Acceptance: The drawee agrees to pay the bill subject to certain conditions, such as
partial payment or payment at a different place.

Noting and Protesting

Noting:

- Definition: Noting is the process of recording the fact that a bill of exchange has been dishonored
(not accepted or paid) by the drawee.

- Purpose: Provides official evidence of dishonor for legal purposes.

Protesting:

- Definition: Protesting is a formal declaration by a notary public that a bill of exchange has been
dishonored.

- Purpose: Serves as a legal document that can be used in court to prove dishonor.
Discharge of a Negotiable Instrument

Definition: Discharge of a negotiable instrument refers to the cancellation of the instrument and the
release of all parties from liability.

Methods:

1. Payment in Due Course: Full payment of the instrument to the holder.

2. Cancellation: Intentionally canceling the instrument by tearing it up or marking it as canceled.

3. Material Alteration: Any unauthorized change to the instrument that affects its terms.

4. Release: The holder may voluntarily release the obligor from liability, either expressly or by
implication.

TOPIC 14

COMMERCIAL LETTER OF CREDIT

A commercial letter of credit (LC) is a financial document issued by a bank that guarantees the
payment of a specified sum of money to a beneficiary (usually a seller) upon the fulfillment of certain
conditions. It is commonly used in international trade to ensure that exporters receive payment and
importers receive goods.

Types of Letter of Credit

1. Revocable Letter of Credit: Can be amended or canceled by the issuing bank at any time without
prior notice to the beneficiary.

2. Irrevocable Letter of Credit: Cannot be amended or canceled without the consent of all parties
involved. This type offers more security to the beneficiary.

3. Confirmed Letter of Credit: A second bank (usually in the beneficiary’s country) adds its guarantee
to the credit issued by the original (issuing) bank, providing additional security to the beneficiary.

4. Unconfirmed Letter of Credit: Only the issuing bank’s commitment to pay is available, without any
additional guarantee from a second bank.

5. Sight Letter of Credit: Payment is made to the beneficiary upon presentation and verification of
the required documents.

6. Deferred Payment Letter of Credit: Payment to the beneficiary is made at a future date, after the
specified documents are presented and verified.

7. Transferable Letter of Credit: Allows the beneficiary to transfer part or all of the credit to another
party, typically used when the beneficiary is not the actual supplier of goods.

8. Back-to-Back Letter of Credit: Involves two LCs. The beneficiary uses the first LC to obtain a second
LC in favor of the actual supplier.
9. Standby Letter of Credit: Functions more like a guarantee, used as a backup if the buyer fails to
fulfill the terms of the contract.

10. Revolving Letter of Credit: Automatically reinstates itself for the same amount and terms after
being used, up to a certain period or number of transactions.

Opening of Letter of Credit

1. Application: The importer (applicant) applies to their bank (issuing bank) to open an LC in favor of
the exporter (beneficiary).

2. Agreement: The issuing bank and the applicant enter into an agreement, including details such as
the amount, validity period, and conditions of the LC.

3. Issuance: The issuing bank issues the LC and sends it to the advising bank (usually in the
beneficiary’s country).

4. Notification: The advising bank notifies the beneficiary about the issuance of the LC.

5. Acceptance: The beneficiary reviews the LC terms and agrees to ship the goods as specified.

Outward Letter of Credit Arrangement

1. Importer Request: The importer requests their bank to issue an LC in favor of the exporter.

2. Issuing Bank: The bank assesses the importer’s creditworthiness and issues the LC.

3. Advising Bank: The LC is sent to the advising bank in the exporter’s country.

4. Exporter Notification: The advising bank notifies the exporter of the LC.

5. Document Submission: The exporter ships the goods and submits the required documents to their
bank.

6. Payment: The advising bank forwards the documents to the issuing bank, which then makes the
payment to the exporter.

Inward Letter of Credit Arrangement

1. Exporter Receives LC: The exporter receives the LC through the advising bank.

2. Shipment of Goods: The exporter ships the goods as per the LC terms.

3. Document Submission: The exporter submits the shipping documents to the advising bank.

4. Verification: The advising bank verifies the documents and forwards them to the issuing bank.

5. Payment: Upon verification, the issuing bank pays the advising bank, which then credits the
exporter’s account.