The Control of Financial Institutions/Principles of Economics

Introduction

In the last unit, we have examined fully the functions of financial institutions. Now we have to look at the control of financial institutions in this unit. To ensure that good standards are maintained by the various operators within the financial system to check any excesses of these operators, and ensure a well functioning and safety of the system, certain institutions are created by the Federal Government to regulate and oversee their activities. These institutions are the regulatory and supervisory authorities. The specific roles of these authorities will be discussed in this unit.

Objectives

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

• identify the regulatory and supervisory authorities of the various Financial Institutions. 
• examine how Central Bank of Nigeria controls the various Financial Institutions. 
• specify the role of the Nigerian Deposit Insurance Corporation. 
• assess the importance of the Federal Ministry of Finance incorporated. 
• explain the activities of the Securities and Exchange Commission (SEC).
• appreciate the role of the National Insurance Commission. 
• illustrate the impact of the Federal Mortgage Bank of Nigeria. 
• categorise the very essence of the National Board for Community Banks. 

Central Bank of Nigeria

The Central Bank of Nigeria is the principal regulator and supervisor of the entire Nigerian Financial Insti- tutions. The Central Bank of Nigeria stands at the apex of the banking system. It licenses, supervises and regulates the banks within the system in order to pursue an effective monetary policy and to control credit in the economy, the Central Bank uses the following weapons:

1. Open Market Operations 
2. The Bank Rate 
3. Moral Suasion 
4. Special Directives 

The CBN is charged with the responsibility for promoting a sound financial structure in Nigeria. To this end, the Bank acts as a banker to and supervisor of banks and other financial institutions by providing the following:

1. Bankers’ Clearance 
2. Banks’ Examination 
3. Foreign Exchange Monitoring 
4. Prudential Guidelines 
5. Acts as lender of the last Resort 
6. Reserve Requirements 
7. Cash Reserve Requirement 
8. The stabilisation Securities 
9. Interest Rate Policy 
10. Capital Funds Adequacy 

 Principles of Economics

• Students Assessment Exercise 

How does the CBN Control the Financial Institutions?

The Nigerian Deposit Insurance Corporation (NDIC)

The NDIC was established by Decree No. 27 of 19 June 1988. Although it is a special type of insurance company, it complements the efforts of the Central Bank in the regulation and supervision of banks. Specifi- cally, NDIC performs the following functions:

• Provision of deposit insurance of related services for banks. 
• Examination of the books and affair of insured banks and other deposit taking institutions to ensure a healthy operation. 
• Identification and restructuring of acting banks to avoid bank failures. 
• Settlement of the depositors of failed banks up to a maximum indemnity of N50,000. Deposits in excess of this amount are to be settled along with other creditors as part of the bank liquidation process in the event of bank failure. 
•  Resolution of the problem of distress in the Nigerian Financial system. 

In performing the above functions, the NDIC works hand-in-hand with the CBN. This regulatory body is meant to insure all deposit liabilities of licensed banks and other financial institutions.

Students Assessment Exercise

“It has been said that the existence of Nigeria Deposit Insurance Co-operation serves in itself to reduce the frequency of loss by depositors” Develop arguments to support this position and then examine the basic reasons behind the adoption of an insurance plan in Nigeria.

The Federal Ministry of Finance

This ministry acts as an agent of the government in the financial system. Its functions are:

• Advising the government on its monetary and fiscal operations after consultations with the Central Bank of Nigeria. 
• Preparation of the Federal Government Budget and its break-down. 
• Licensing of bureau de change. It was also involved in the licensing of banks until 1991 when it became the sole responsibility of the Central Bank of Nigeria. 
•  Carrying out related financial institutions as directed by the Presidency. Before the CBN was given more autonomy, the CBN was reporting to the Ministry of Finance. 

The Securities and Exchange Commission (SEC)

This body is responsible for the regulation of capital market operations in Nigeria. It was established in 1979 by the SEC Act of 27 September 1979 to replace the capital issues Commission that existed before then. The SEC Decree of 1988 further strengthened its activities. Its functions among others are as follows:
Promotion of an orderly and active Capital Market.

• Determination of the amount and timing of securities to be offered privately with intent to transfer them later. 
• Registering and supervising stock exchange and branches stock brokers issuing houses investment advisers and other bodies involved in securities trading. 
• Approval of companies to be listed in the capital market. 
• Creating the necessary atmosphere for orderly growth and development of the capital market. 
• The Control of Financial Institutions 35 
• Approval and regulation of mergers and acquisitions vide the companies and Allied matters Decree 1990. 
• Issuance of guidelines on foreign investments, in the Nigerian Capital Market. 
•  Maintenance of Surveillance over the Capital Market. 

Students Assessment Exercise
In Nigeria, apart from the CBN, the financial system consists of bank financial institutions and non-bank financial institutions. Name the institutions in these groups and discuss the differences between them as well as their importance to the society.

The National Insurance Commission

The National Insurance Commission (NIC) was established in 1997. This body which was established by the president in his 1997 annual budget speech took over the Supervision and control of the business of insurance in Nigeria from the National Insurance Supervisory Board which was established by the Insurance Special Supervision Fund (Amendment) Decree No. 62 of 1992. This commission is the apex institution in the insur- ance industry. However, it collaborates with the Central Bank of Nigeria in performing its (NIC) functions. Prior to 1992, the insurance department of the Federal Ministry of Finance carried out the supervision of insurance companies and their operations.

The functions of the Nigerian Insurance Commission include among other things:
(a) The supervision and control of insurance business in Nigeria.

(b) Settings of standards for the conduct of insurance business.

(c) Establishment of a bureau to receive and resolve public complaints against insurance companies and intermediaries.

(d) Consideration and approval of insurance premium rites applicable to various classes of insurance. Now that the distress syndrome is affecting the insurance industry, this commission is expected to be involved in the resolution of distress in the industry.

 The Federal Mortgage Bank of Nigeria

To help tackle the problem of housing which has been an issue of serious concern in most Nigeria cities, the Federal Mortgage Bank was established by Decree No. 7 of 1997. This new body took over the assets and liabilities of the Nigerian Building Society which was established in 1956. From inception, the bank has been functioning as one of the development banks. It provided both finance and advisory services in the area of housing. 

The regulatory and supervisory role of this institution became prominent from 1991. To help imple- menting the National Housing policy which was adopted in 1990 by the government, Decree No. 3 of 1991 gave more powers to the Federal Mortgage Bank of Nigeria to act as the apex Mortgage institution in Nigeria.

Furthermore, in 1993, the finance functions of this institution were transferred to a new institution known as Federal Mortgage Finance Limited which was carved out of the bank. This is to enable the bank concen- trate on its regulatory role.

Principles of Economics

- Encouragement and promotion of the development of mortgage institution at states and

national levels and provision of long-term finance for them (Ugwuanyi 1997).

 The National Board for Community Banks 

Following the introduction of a new set of self-sustaining banks called Community Banks in 1990, the National Board for Community Banks was established to serve as an apex institution for Community Banks. Like other supervisory bodies, its roles are performed in collaboration with the Central Bank of Nigeria. Specifically, the functions of the Board are:

• To receive and process application for the establishment for Community Banks and issuance of provi- sional license to Community Banks before their formal licensing by the Central Bank of Nigeria. 
•  To supervise and control the activities of Community Banks, provide them with long-term finance and set standards to ensure the safety of Community Banks