11.0     INTRODUCTION

Financial institutions are organizations that provide financial services to individuals, businesses, and governments.

DEFINITION OF BANKS: Banks are a specific type of financial institution that primarily accepts deposits from the public and provides loans and credit to individuals and businesses.

          11.1     TYPES AND FUNCTIONS OF BANKS     

• CENTRAL BANK: Acts as the bank of banks, regulates the money supply, manages inflation, and implements monetary policy. E.g The Central Bank of Nigeria (CBN).

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CHARACTERISTICS OF CENTRAL BANK OF NIGERIA

• Regulatory Authority: Serve as the regulatory authority for the banking sector.
• Monetary Policy Implementation: Implement monetary policy to control inflation and stabilize the economy.
• Lender of Last Resort: Provide emergency funding to banks in distress.
• Currency Issuer: Responsible for issuing and managing the national currency.

• COMMERCIAL BANKS: They Accept deposits, provide loans, and offer various financial services like savings accounts, checking accounts, and credit cards. e.g First Bank, Access Bank.

CHARACTERISTICS OF COMMERCIAL BANKS

• Accept Deposits: They accept deposits from individuals and businesses.
• Provide Loans: Offer various types of loans, including personal loans, business loans, and mortgages.
• Payment Services: Facilitate payment services such as checking accounts, debit cards, and electronic transfers.
• Profit-Oriented: Operate to make a profit for their shareholders.

• MORTGAGE BANKS: Specialize in providing loans for purchasing real estate and housing development. E.g Federal Mortgage Bank of Nigeria.

CHARACTERISTICS OF MORTGAGE BANKS

• Specialized Lending: Focus on providing loans specifically for purchasing real estate and housing development.
• Long-Term Financing: Offer long-term loans with fixed or variable interest rates.
• Partnerships: Often work with real estate developers and government housing programs.

• MERCHANT BANKS: Provide financial services to corporations, including underwriting, loan syndication, and advisory services. Example: Stanbic IBTC Bank.

CHARACTERISTICS OF MERCHANT BANKS

• Corporate Focus: Primarily serve corporations and large businesses rather than individual consumers.
• Investment Services: Provide services such as underwriting, loan syndication, and advisory services for mergers and acquisitions.
• Risk Management: Help businesses manage financial risks through various financial instruments.

          11.2     THE ROLE OF FINANCIAL INSTITUTIONS IN ECONOMIC DEVELOPMENT

• Facilitate savings and investments, which are crucial for capital formation.
• Provide credit to businesses and individuals, promoting entrepreneurship and consumption.
• Enhance liquidity in the economy by providing various financial products.
• Support government initiatives through the purchase of government bonds and securities.

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          11.3     MONEY MARKET

The money market deals with short-term borrowing and lending, typically with maturities of one year or less. Instruments include Treasury bills and commercial paper.

CHARACTERISTICS OF THE MONEY MARKET

• Short-Term Instruments: Deals with short-term financial instruments with maturities of one year or less (e.g., Treasury bills, commercial paper).
• Liquidity: Provides high liquidity, allowing investors to quickly convert their investments into cash.
• Low Risk: Generally considered low-risk investments due to the short duration and high credit quality of instruments.
• Interest Rates: Interest rates in the money market are typically lower than those in the capital market.

          11.4     CAPITAL MARKET

Capital market involves long-term securities, such as stocks and bonds, facilitating the raising of capital for long-term investments.

CHARACTERISTICS OF THE CAPITAL MARKET

• Long-Term Instruments: Involves long-term financial instruments with maturities greater than one year (e.g., stocks, bonds).
• Investment Growth: Focuses on raising capital for long-term investments and projects.
• Higher Risk and Return: Generally associated with higher risk and potential returns compared to the money market.
• Market Segments: Divided into primary markets (where new securities are issued) and secondary markets (where existing securities are traded).

          11.5     MONETARY POLICY AND ITS INSTRUMENTS

Monetary Policy is the process by which the central bank manages the money supply and interest rates to achieve macroeconomic objectives.

MONETARY POLICY AND ITS INSTRUMENTS

• Open Market Operations: Buying and selling government securities to influence liquidity.
• Discount Rate: The interest rate charged to commercial banks for loans from the central bank.
• Reserve Requirements: The percentage of deposits that banks must hold as reserves.

          11.6     CHALLENGES FACING FINANCIAL INSTITUTIONS IN NIGERIA

• High levels of non-performing loans due to economic instability.
• Inadequate infrastructure and technology.
• Regulatory challenges and compliance costs.
• Limited access to finance for small and medium-sized enterprises (SMEs).
• Currency fluctuations and inflation affecting profitability.