The Structure of the Nigerian Banking Institutions

The Central Bank of Nigeria

The central bank of Nigeria is the principal regulator and supervision of the entire Nigerian financial system. It establishment dates back to 1958 under the CBN act of 1958 and started operation in 1^st July 1959. It establishment came as a result of nationalism.

Before its establishment the role of currency issue and distribution in the West African sub-region was played by the West African Currency Board (WACB). As a result of mass bank failure during the WACB time 3 committee were set up to advice on the practicability of setting up of a central bank in Nigeria.

• Fisher Commission: A group led by Mr. J. L. Fisher of the bank of England was appointed to inquire into it and the result of the commission was that the establishment of the Central Bank was not feasible because the money and capital market was either non-existent or underdeveloped (Nwankwo 1980).

• World Bank Mission Team: They visited in 1953 and concluded that Nigeria was not financially developed yet for such establishment. They however recommended the establishment of a bank of issue as a forerunner for a central bank.

• Loynes Commission: In 1957 Mr. Loynes also of the bank of England was invited specifically to advice with regards to existing circumstances to perform Central Bank functions. Despite the fact that Loynes held the same opinion as Fisher he had no option but to make recommendations which led to the establishment of the central bank of Nigeria by the Central Bank Ordinance of 1959. Currently the operations of the CBN are guided by the Decree No. 24 of 1991.

Functions of The Central Bank of Nigeria

In line with the above stipulated objectives of the bank, it performs the following functions

• Currency issue and circulation
• Maintenance of external reserves
• Promotion of monetary stability
• Acting as banker and financial adviser to the government.
• Acting as lender of last resort to other banks.
• Encouragement of growth and development of financial institutions.
• Supervision and regulation of bank and other financial bodies.
• Development of money and capital markets through the creation of local investment outlets.
• Helping in the clearing and collection of cheques by banks by providing the clearing house
• Penalizing of non-complying financial institutions to ensure compliance and help achieve government objectives

Commercial Banks

The first set of banks to appear in the Nigerian banking area is commercial banks. The African banking corporation with head office in Liverpool opened a branch in Lagos in 1892. It had some problems and later metamorphosis into what is currently known as First Bank of Nigeria. The first set of banks to operate in Nigeria was expatriate banks they dominated the scene until 1933. As at 1986, Nigeria has 64 commercial banks with 2,530 branches spread the number has reduce following the widespread of distress in the system. Notwithstanding commercial banks still dominate the economy. At as 2007, the total number of commercial bank presently in existent in Nigeria is 25.

Commercial Bank Defined

The bank and other financial institutions decree No. 25 of 1991 defined a commercial bank as “any bank in Nigeria whose business includes the acceptance of deposits withdrawable by cheques”

Functions of Commercial Banks

• Mobilization of savings: Through their widespread network of branches both in the urban and rural areas, they collect savings from a large number of small and large savers which are made available for investment. These savings are collected through three (3) major type of account. The savings, current and deposit accounts.
• Financial Intermediate /Credit Extension: Commercial banks provide a link between those who have excess savings and those who needed money to borrow for investment purposes. This singular role helps to increase the production base of the economy.
• Monetary Transmission /Settlement Mechanism: Through the clearing system and other settlement mechanisms of banks they make it possible to transfer money from one person to another and from one place to another. This reduces the risk of carrying large sums of money about in cash by making use of cheques possible. Transfer of funds are made through the issuance of bank drafts, standing others cashier cheques, direct debit and credit mail/cable/telegraphic transfer and other form of electronic transfers which how transfer money in a matter of seconds
• Provision of International and Other Services: The commercial bank provides facilities for financing trade between one country and another and for remittance of funds between countries. They also provide traveler cheques and other facilities to help the international travelers, besides they perform other services like tax and investment advisory services and execution of wills. 

Merchant Banks

In 1960, the need to bridge the gap of maturity structure of commercial bank which provides more of short terms loans because of the short term deposit led to the emergency of merchant banks in the system.

The first of such banks to be established were two acceptance houses, Philip Hill Nigeria Limited and Nigerian acceptance limited. The business has been growing gradually until 1988 when the financial system was deregulated which bring the number of merchant banks to 51 with 151 branches as at 1995. Their branches are concentrated in large volume of business are carried out.

Functions of Merchant Banks

Apart from current accounts (demand deposits account) and cheque clearing, they provide other services of commercial banks but in larger scale.

They serve the need of corporate and institutional customers by providing them with medium and long term finance. They do this through the following additional buy specialize banking services.

• Loan syndication: This is an arrangement when more than 1 bank comes together to grant loan to customer they do this because they considered the amount too large and too risky for 1 single institution to provide.
• Debt Factoring: is a scale of account receivable (trade debts) to a person or institution called a factor that collects the proceeds of such debts from the debtors. Company that has large outstanding debts can sell the debt to a merchant bank. The amount paid by the bank is usually less than the actual amount.
• Equipment Leasing: This is a situation whereby owner of equipment (lessor) allow another person (lessee) the right to use the equipment in returned for a regular payment of an amount (lease rental). Through leasing corporate bodies that has need for costly equipment goes to merchant bank to rent.
• Underwriting of shares and securities: They help corporation who want to sell their shares or to issue other securities to get buyers through underwriting.
• Investment advisory services: They provide technical financial and managerial advisory services for investors through highly trained expert personnel. 

Development Banks

These are financial institutions which are set up to provide banking services that will help in the development of a particular sector or aspect of the economy. They are government owned institutions for enhancing growth and development, not for profit making. The major reason for its introduction is to bridge the gap in the provision of long-term finance for individuals.

Before now there are six development banks operating in Nigeria, each with specific role:

• The Nigerian Industrial Development Bank Ltd (NIDB): It was established in 1964 with the main function of encouraging the establishment and growth of medium and large scale industries in Nigeria. This is done through the provision of finance for the private and public sectors, promotion and development of projects and provision of finance.
• The Nigerian Bank for Commerce and Industry (NBCI): It was established in 1973, with its main functions to assist indigenous business through share underwriting, identification of viable projects, feasibility studies and managerial and technical advice.
• Nigerian Agricultural and Co-operative Bank (NBCB): It was set up in 1973 mainly to provide the much needed finance for agriculture development projects and allied industries. The bank does not accept deposit it sources funds from government, CBN and international development financial institutions. The state serves as a guarantor of such loans.
• Federal Mortgage Bank (FMB): Established in 1977, primarily to help reduce the problem of housing in most Nigerian cities through the provision of medium and long-term finances.
• Urban Development Bank (UDB): Established by decree 51 of 1992 mainly to take care of the problems of inadequate housing transportation electricity and water supply that has posed serious concern in most Nigerian urban areas.
• Nigerian Export-Import Bank (NEXIM): The need for financial import and exports generally led to the establishment of NEXIM of 1991 with its main function to increase export growth as well as a structural balance and diversification in the product composition. It functions also include provision of export credit guarantee and export insurance functions.

Non Banking / Finance Institutions

These are also known as other financial institutions apart from banks that help to perform the role of financial intermediation. They collect funds from the surplus unit under various titles and go ahead to make fund available to the investors who have need for such funds.

These are as follows:

• Insurance Companies: They spread the loss of the unfortunate few over many people in performing their functions, they collect premiums from several insured, this role is similar to the mobilization of funds by bank in the sense that a large amount of money is pooled together as premium, these amount so collected by the insurance firms are subsequently invested by them into government securities public sector enterprises and share of private companies. By doing these they have performed the role of financial intermediation.
• Finance Houses: They mobilize funds from the public mainly through the issuance for money market instrument like certificated of deposit and other commercial papers. They provide these funds to investors in form of short-term and medium-term finances such as local purchase order (LPO) financing, Leasing, Hire Purchase, Debit Factorizing and Investment In securities.
• Primary Mortgage Institutions (PMI): These are institutions involved in mortgage financing apart from the Federal Mortgage Bank. They are referring to as primary because they deal with individual and firms, while the federal mortgage bank serves as a supervisory body. They mobilize savings from small savers and borrow from other institutions to finance the development of the housing sector.
• National Economic Reconstruction Fund (NERFUND): As part of the economic reconstruction under the structural Adjustment programme, the NERFUND was establishing in 1988 by decree No. 25. Its functions is to provide soft medium and long term finance to small and medium scale enterprises that are 100% owned by Nigerians. It sources it fund through the Federal Government, CBN, foreign government, International Development finance Institution, like the African Development Bank.
• Discount Houses: These are institutions that specialize in the provision of discounting and rediscounting facilities, buying and selling of securities especially government securities. They issue their own securities to banks as a means of raising funds. Discount houses are new in Nigeria it was a gradual shift from the use of direct to indirect monetary control and the subsequent emphasis on open market operations that led to the establishment of the first discount houses in 1993.

• Nigeria Social Insurance Trust Fund (NSITF): It was established in 1993 by decree No. 7 it main function is to provide a more comprehensive social security scheme for Nigerian private sector employees. It raises funds through a compulsory contribution to the fund by private and public sector employees and employers, the funds so mobiles are use to provide pension benefits to contribution.