Functions of Financial Institutions

 Introduction

In the last unit, we have been able to compose and specify what financial institutions are. This will help to assemble the functions of the various financial institutions in this unit. Having defined what financial institu- tions are legally, the laws also establishes different types of financial institutions. The types of financial institution depends on the law establishing it and its functions. Depending on the stage of economic political and technological developments in a nation, each nation has the authority to grant licences to various types of financial institutions.

Objectives

It is hoped that by the end of this unit, you will be able to:

1. recognise the functions of banks financial institutions like CBN, Commercial Banks, Merchant Banks, and Development Banks, 
2. recall the functions of non-bank financial institutions like the insurance companies, Finance Companies, Primary Mortgage Institutions, NERFUND, Discount Houses, NSITF, etc., and 
3. define the functions of specialised banks – Non-Conventional Banks. 

Definitions

3.1 Banks Financial Institutions
 Central Bank of Nigeria
The Central Bank of Nigeria stands as the apex of the banking system. It licenses, supervises and regulates the banks within the banking system. It is owned by the Federal Government.

The CBN was established in 1959. It goes ahead to perform the following functions:

1. Currency issue and circulation 
2. Promotion of monetary stability through the formation and implementation of government monetary 
3. policies. 
4. Acting as banker and financial adviser to the government. 
5. Encouragement of the growth and development of financial institutions. 
6. Supervision and regulation of banks and other financial institutions. 
7. Development of the money and capital markets through the creation of local government outlets. 
8. Helping in the clearing and collection of cheques by banks by providing the clearing house. 

Penalising of non-complying financial institutions to ensure compliance and help achieve government
objectives.
Undertake research and publications of a country
Maintains close contact with other international financial institutions. The CBN safeguards the Interna- tional value of the currency of the nation.


The CBN mobilises capital resources for economic development.

Students Assessment Exercise

• List the functions of Central Bank of Nigeria. 

Commercial Banks

The Banks and other financial institutions Decree No 25 of 1991 defined a commercial bank as “any bank in Functions of Financial Institutions 23Nigeria whose business includes the acceptance of deposits withdrawable by cheques. This definition presents the major distinguishing functions of commercial banks from other banks. According to Osumbor (1984) in his book Business Finance and Banking in Nigeria, commercial banks are unique in their performance of services and are distinguished from other forms of financial institutions or intermediaries because of the following functions:

Accept deposits from customers i.e. savings, current or demand deposit, fixed deposit or time deposit.
Lend money to approved customers i.e. overdraft, loan.
Allow the use of cheque

Safe-keep valuable assets for customer.
Provision of standing order facilities.
Give business advice to their customers.
Agents of government for monetary policy.
Assists customers for acquisition and sales of shares.
Issue of discount bills of exchange i.e. payment on behalf of customer.
Commercial bank creates money, this is done through deposits.
Money created = Original Deposits.
Cash ratio or reserve requirements.
They involve in agricultural financing. 

They offer employment opportunities.
They act as guarantors to their customers.
They solve problem of foreign exchange.
They issue traveller’s cheques.


Their activities accelerate the economic development of a nation since they act as intermediaries between large number of depositors and borrowers. These banks could assume the responsibility of carrying out the duties of attorney, executor and trustee.

Assessment Exercise
Restate the Statutory functions of Commercial Banks.

Merchant Banks

According to the Nigerian Banking Amendment Decree (No. 88) of 1979, Merchant Bank means any person in Nigeria who is engaged in wholesale banking, medium and long-term financing equipment leasing, debt factoring, investment management issue and acceptance of bills and the management of unit trust. They are also called Acceptance Houses or Discount Houses.

Functions or services of merchant banks are often divided into two classes – banking and corporate finance services.

Banking Services / Functions:

Acceptances of Merchant Banks (MB) accept bills of exchange from importers and exporters which are easily rediscountable.
Principles of Economics
Loans and Advances – MB provides loans and advances of short, medium and long term nature
Deposits – MD accepts the following deposits- current account deposits for corporate clients, fixed- term deposits accounts for both corporate and non-corporate clients and Negotiable Certificates of Deposits.
Equipment leasing – MDs lease equipment, machine, tools, motor vehicles to farmers and industrialists.
Foreign Exchange Services: MBs as authorised dealers performing foreign exchange services: Corpo- rate Finance Services.