NON-BANK FINANCIAL INSTITUTIONS

1.0 INTRODUCTION

In this unit you will learn that Insurance Companies are major players in the Non-Bank Financial Services sector of the Nigerian economy. They are established under the Insurance Special Ion Rind (Amendment) Decree NO. 62 of 1992 took over the function of approving and licensing of Insurance Companies from the Federal Ministry of Finance in Nigeria. They are established under the Insurance Special Ion Rind (Amendment) Decree NO. 62 of 1992 took over the function of
approving and licensing of Insurance Companies from the Federal of Finance in Nigeria.

2.0 OBJECTIVES

At the end of this unit, you shall be able to:

1.  List Non-Bank Financial Institutions in Nigeria 
2. State the Importance of the Non-Bank Financial Institutions 
3. Distinguish between non-bank and bank financial institutions 

3.0 MAIN CONTENT

3.1 Non-Bank Financial Institutions

3.1.1 Insurance Companies

Insurance Companies are major players in the Non-Bank Financial Services sector of the Nigerian economy. The Nigerian Insurance Supervisory Board (NISB) established under the Insurance Special Ion Rind (Amendment) Decree NO. 62 of 1992 took over the function of approving and licensing of Insurance Companies from the Federal of Finance in Nigeria.
The Decree charged NISB with the responsibility of administering, supervising, regulating and controlling the business of Insurance in Nigeria- In 1997, NISB Was replaced by the National Insurance Commission (NAICOM). In Nigeria insurance companies engage in life and non-life (fire, accident, motor vehicle, burglary, life, marine, etc.) business from which premium from policy
holders. The abilities of the insurance companies are covered by the Nigeria Reinsurance Corporation
established in 1977.

The insurance companies are required to contribute 20% of the total sum to the corporation. The business of insurance has continued to grow from strength to strength and much is expected from this important sector. Currently, the number of insurance companies is over 60 with a total assets/liabilities of over N100 billion.Thevolume of business has increased proportionately. The just concluded capitalization exercise in the insurance has raised the stake with the result that
only viable ones survived the “Tsunami”.

The life insurance companies were required to raise N3.0 billion, General insurance companies N5.0 billion, and Reinsurance N10.0bon as capital base. Insurance Companies are in the main owned by both Nigerians and Foreigners. However, ownership had significantly remained more companies being controlled by indigenous interests while few have mixed ownership. In any case, a consolidation exercise could introduce a new ownership character as all the insurance companies may desire to be quoted on the Nigerian Stock Exchange.

Principles of Insurance

Insurance business is one that is basically built on trust, and peculiar principles which have formed the basis of transactions over the years

These principles are as follows:

1. Principles of insurable interest 
2. Principles of indemnity 
3.  Principles of subrogation 
4.  Principles of utmost good faith (uberrimae fidei) 
5. Principles of contribution 
6. Principles of proximate cause. 

3.1.2 Pension Scheme

Pension Scheme is an arrangement designed by the government through the constitution or other statute which guarantees an employee some financial benefits on leaving employment.
In Nigeria, the first Pension Act was promulgated in 1951 and was later replaced by the 1979 Pension Act The Public sector had its own pension arrangement different from that for private sector.
The public sector pension scheme is a non - contributory scheme while the private sector pension scheme is contributory in nature. Employees
are expected to contribute a certain percentage of their total emolument to pension scheme.
The 2004 Pension Perform Act has brought in its wake numerous changes ranging from the introduction of pension fund regulators, administrators and managers in Nigeria.

3.1.3 Traditional Financial Institutions

These are non-bank financial institutions whose existence predates both the invasion of Africa by the colonialists and the emergence of

conventional financial institutions in the contment. The traditional financial institutions have continued to thrive in most African countries especially Nigeria due to some unique characteristics surrounding their activities. Their operations are in the main very secretive, requires little amount of money and mutual Mast exist between and among members. Some of the popular traditional financial institutions are:

1. Isusu (Esusu) 
2. Local money lenders 
3.  Community Development Associations 
4. co operative, thrift and credit Union 
5.  Office savings group 
6. Input - Output sharing 
7. Social dub 
8. Town Union monthly Associations 
9. Credit union. 

3.1.4 Finance Companies

Finance companies are non - bank financial institutions regulated and supervised by the Central Bank of Nigeria under the provisions of the SOFIA 1991 (as amended). These institutions provide short-term financial services such as the local purchase order financing, project financing, leasing of equipment and debt factoring. The main sources of funds to finance companies include public offer of bonds, issuance of commercial paper, issue of equity shares, commercial bank credit facilities, and insurance companies. etc. Generally, finance companies do charge higher interests on their financial accommodation, discounts, loans fees and other services to average for high operating costs. The greatest challenge to finance companies in Nigeria has remained the crisis of confidence question
between the operators and the public. Fortunately, this appears to have been taken care of by the emergence of a vibrant post consolidation financial system in Nigeria.

3.1.5 Discount Houses

The discount houses sub-sector is a very important part of the Nigerian financial system. The idea of Discount Houses was muted and nurtured by the Central Bank of Nigeria in the 1990's to strengthen and sustain the ailing banking system. Sections 28 of the Central Bank of Nigeria Act 1991 land
Section 59 of BOFIA 1991 charged the bank with the responsibilities of licensing, regulating and supervising of discount house business in Nigeria. A discount house is a non - bank financial institution engaged in discount house business. The business of discount house include the trading in and holding of money market instruments - treasury bills, treasury certificates, commercial bills, etc.

Discount houses save as conduit through which banks were able to channel excess liquidity and access same to and from the Central Bank of Nigeria. They also serve as secondary market for the trading of treasury bills and other commercial bills. Currently, many of the discount houses have identified with corporate finance hence, established advisory services units in other to provide additional services to their clients. Discount houses are in the main owned by group of financial institutions (mainly banks). Their major sources of fund include:

1.  Paid up capital (subject to changes) 
2. Income from advisory services 
3. Reserves 
4. Call money 
5. Short-term borrowing 
6. Selling of short-term bills to the CBN, and 
7. Out right borrowing from the CBN through night advances. 

3.1.6 Bureau De Change

Bureau De Changes are spot market institutions in the foreign exchange market licensed by the Central Bank of Nigeria. Before now, the business of Bureau De Change was directly regulated by the Federal Ministry of Finance. The Bureau De Change business started in Nigeria in 1989 and the number of the operators as at 1995 was 223. In 2006, the Central Bank of Nigeria took steps to further liberalize the foreign exchange market. The apex bank brought the Bureau De Changes into the official foreign exchange market as brokers and sells foreign exchange to them on bi-weekly basis. The business of Bureau De Changes is already seriously thriving in Nigeria with the permission granted the commercial banks to run Bureau De Changes.

3.2 Importance of the Non-Bank Financial Institutions by Fund Mobilization and Contributions to the Economy in General

1.  Although the non-bank financial institutions are not legally mandated to act as the conventional banking institutions, they do mobilize funds from the private and public sectors of the economy. They in turn channel part of these funds to the ultimate users and /or members. For instance, the insurance companies do mobilize funds arising from the payment of premium part of which they may lend to people and organizations on special arrangement. Similarly, the traditional financial institutions do mortgage funds frame members and in most cases lend to them from the pool for overall economic growth and development of the county 
2. The non - bank financial institutions offer greater accessibility in the borrowing of funds at the micro level to the members of the society. The provision of micro credit guarantees both grass root and even economic growth and stability necessary for meaningful economic development 
3.  The non-bank financial institutions offer specialist services in the economy. These services enhance the efficiency of the operation of both the banking and other sectors of the economy. For instance, the insurance companies reduce the risks associated with various businesses through underwriting, the pension fund scheme provide reassurance to the workers by promising them wonderful post- active days, etc. 
4.  Employment Creation The non - bank financial institutions have continued to provide employment for over 21 percent the entire Nigeria work force. 

Self assessment exercise

List Non-Bank Financial Institutions in Nigeria

3.3 Distinguish between non - bank and bank financial institutions

Generally, non - bank financial institutions are not designed to render in totality the services of banks. Therefore, there are several differences between the services rendered by the two groups of financial
institutions. Ugwuanyi in Ugwuanyi (1997: 91 - 2) identified the differences as follows:

1. NEFIs tend to be characteristic of a sophisticated financial system, which, in turn, is indicative of a high income economy. 
2. The changing reasons why people save as an economy develops have been offered as a primary reason for the growth of the non - bank financial institutions. 
3. It has been noted that the financial instruments issued by the non - banks as they go about their business are not classified as money for they are mere money substitutes, i.e. alternative forms of debt. 
4. The growth of the non-banks is consistent with certain features of high income economy as follows; (i) Increasing income alters the propensity to save of those fortunate to be in the high income category. A major consequence of the revision in the propensity to save is that cash receives less priority in a person's wealth portfolio. As persons seek to hold assets which combines income and certainly, intermediaries will develop financial instruments which satisfy this demand. This is known as financial proliferation of financial instruments. 

Self assessment exercise

State their major sources of fund for discount Houses

4.0 CONCLUSION

In this unit you have learned that Insurance Companies are major players in the Non-Bank Financial Services sector of the Nigerian economy.