REGULATORY AGENCIES OF FINANCIAL INSTITUTION

Agencies that regulate money market

Central Bank of Nigeria (CBN)
Nigeria Deposit Insurance Corporation (NDIC)

CENTRAL BANK OF NIGERIA

The central bank is the apex financial institution in a country which is responsible for the management, supervision and control of monetary affairs and financial institutions of the country.

Before independence of most of the British colonized countries of West African (Nigeria, Ghana, Sierra Leone, and Gambia), the West African Currency Board (WACB) with its headquarters in London was responsible for all monetary matters.

As soon as each country gained or approached political independence, it established herown central bank. A central bank was established in Ghana in 1957, in Nigeria in 1959, in Sierra Leone in 1964 and in Gambia in 1971.

FUNCTION OF THE CENTRAL BANK

It serves as banker to the government: The Central Bank keeps all the revenue accounts of the government and makes payment out of it on behalf of the Government. More importantly, it leads to the government and also manages the National Debt i.e. the government’s external and internal borrowings.
Issuing of Currency: The Central Bank is the only authority empowered by law to issue all paper money (banknotes) and coins in the country
It is a bankers’ bank: The Central Bank serves as a bank to commercial banks, meaning that by law, the commercial banks are required to keep account (deposits) with the central bank
The Central Bank serves as the clearing house for the settlement of interbank debts
Lender of last resort: The Central Bank lends money to commercial banks in serious needs to enable them satisfy or settle their customers demand for cash
Adviser to the Government: The Central Bank advises the government on monetary matters such as on methods of raising loans particularly foreign loans.
Management of the National Debt: The arrangements for new borrowings as well as the servicing and rescheduling of existing debts are handled by the Central Bank
Foreign Monetary Transactions: The Central Bank holds and manages the foreign exchange reserve and advises government on the trends.
Carrying out or implementation of the government’s Monetary Policies.
The Central Bank maintains close contact with other international financial institutions e.g. IMF, IBRD (World Bank), ADB etc.

EVALUATION

State four features of Central bank.
Explain three functions performed by the central bank.

MONETARY POLICY

Monetary Policy is mainly concerned with varying the money supply in the economy.

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The central bank uses some measures like the bank rate, open market operators, special deposits, directives, cash ratio, etc, all to regulate the volume of money in the economy; thereby checking inflation or deflation when necessary.

INSTRUMENTS OF MONETARY POLICY / OR HOW THE CENTRAL BANK CONTROL THE COMMERCIAL BANKS

The government carries its monetary policy through the central bank. The central bank itself enforces the monetary policy through the various ways by which it controls the ability of the commercial bank to create credit

The central bank controls the commercial bank to implement government monetary policy through the following instruments

Bank Rate / Discount Rate: This is the rate of interest the central bank charges commercial banks and other financial institutions for discounting their bills or the rate at which it lends money to them. The bank rate influences the other interest rates in the economy. A higher bank rate leads to higher interest rate. If there is inflation, the central bank will increase the bank rate. This will curtail the lending power of the commercial banks by making the cost of borrowings by bank customers to be very exorbitant

If there is deflation in the economy, the Central Bank will reduce the bank rate thereby allowing the commercial banks to create more credit, thereby increasing the supply of money in the economy.

Liquidity Ratio / Cash Reserve Ratio: This is a requirement by law to the commercial banks to keep certain percentage of their total cash / liquid assets or deposits with the central bank. In Nigeria for example the Liquidity Ratio is 20%. The central bank uses this ratio in increasing or decreasing the amount of money in circulation. Therefore the higher the cash reserve ratio, the lower the power of commercial banks to grant credit / loans to their customers. This policy of increasing the cash reserve ratio is therefore used to control inflation. The reverse is also true.
Special Deposit: This is an instruction to the commercial banks to keep with the central bank special deposits over and above their statutory requirements thereby, curtailing the ability of the commercial banks to create credit. This instrument is used when the use of cash reserve ratio alone is not adequate to keep down the rate of inflation.
Open Market Operations (OMO): This is the method of buying and selling of securities (Treasury Bills) to the public and the commercial banks by the central bank to alter the volume of money in circulation and also to vary the ability of the commercial banks to create credit.

If the Central Bank feels that the money in circulation is too small and wants to increase it, it will buy securities in the open market paying with its own cheque. On the other hand, if the volume of money in circulation is too much and the Central Bank wants to reduce it, it will simply sell securities in the open market to the general public and the commercial banks thereby withdrawing a lot of money from the economy.

Special Directives: These are special instructions which the central bank gives to commercial banks and other financial institutions regarding the size of loan to give and the areas (sectors of the economy) to which it should direct bank lending e.g agriculture, manufacturing etc.
Moral Suasion: This is persuasion based on moral grounds not with the use of force of law by the central bank to the commercial bank as to the kind of lending policy they should adopt regarding the expansion or contraction of money supply. Failure to comply can thereafter necessitate force of law. Directives and moral suasions are widely used in developing countries.
Funding: This is the conversion of short term government securities to long term securities.

For example Treasury Bills (of 91 days maturity) could be converted to bonds (long term securities). If the central bank feels that the conditions of the economy has not yet improved for the short term loans to be repaid eg if there is inflation, the short term securities may be converted to long term securities.

EVALUATION

Define Central Bank.
Describe five instruments used by the Central Bank to control money supply.

NIGERIA DEPOSIT INSURANCE CORPORATION

The NDIC role is to administer the deposit insurance system in Nigeria and protect depositors. The Corporation provides incentives for sound risk management in the Nigeria banking system and promotes as well as contributes to the stability of the financial system.

FUNCTIONS OF NIGERIA DEPOSIT INSURANCE CORPORATION

Section 2b of the Nigerian Deposit Insurance Corporation Act of 2006 stipulates the function for the corporation as follows:

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Issuing all deposit liabilities of licensed banks.
Giving assistance to insured institutions in the interest of deposit in case of imminent.
Guaranteeing payment to depositor
Assistance monetary authoritiesd in formulating and implementing policies so as to ensure sound banking practicing and fair competition.
Pursing any other measures necessary to achieve the function of the corporation provided measures.

EVALUATION

Give four functions of the central bank of Nigeria.
Write short note on i) Cash ratio ii) special deposit

MONEY MARKET

Money market is a market where short term securities are traded in. The market consistsof institutions or individuals who either have money to lend or wish to borrow on a short-term basis.

INSTRUMENTS USED IN THE MONEY MARKET

Treasury Bill – This is issued by the central Bank. It enables the government to raise capital for ninety days.
Treasury Certificate – is also a means by which the government raises short – term loans. Unlike a treasury bill, however, a treasury certificate falls due for repayment in twelve to twenty-four months. Because of its longer maturation, it earns a higher rate of discount than the treasury bills
Bill of Exchange – This is a promissory note where the debtor acknowledge his debt and intend to pay within ninety days (90days).
Call money Funds – The surplus are often invested through a special arrangement in which participating institutions invest surplus money for their immediate requirement on an overnight basis with the interest and withdrawal on demand. This enhances the liquidity of the money market.

INSTITUTIONS INVOLVED IN THE MONEY MARKET

Central Bank
Commercial Banks
Acceptance House
Finance House
Discount House
Insurance companies

FUNCTIONS OF MONEY MARKET

Money market helps to provide capital (working capital) for day to day running of the business.
Through investing in call money extra income generated.
Money market helps to mobilize savings.
Money market helps to promote economic growth and development
It enhances good saving habit by those having surplus funds
Money invested in the money market are very easy to recall

EVALUATION

Write a short note on Money market Treasury bill Call money
Outline the functions of money market.

CAPITAL MARKET

Funds are needed by entrepreneur, government and business firm on a long term basis. Money market cannot provide these needed funds. Hence Capital Market bridges this gap. Capital Market is a market where long term securities are traded.

INSTRUMENTS USED IN CAPITAL MARKET

Securities such as shares, stocks, development stock, bond, debenture

Share- is a unit of capital measured by a sum of money which is an individual portion of the company’s capital owned by a shareholder. It is a means of raising long-term loans for company through the Stock Exchange Market.
Stock- is the bundle of shares or mass capital which can be transferred in fractional amounts. Stocks are always fully paid, for example stocks can be quoted per N100 nominal value. They are collections of shares into a bundle. Stocks are not issued but converted from share issued.
Development Stock- is a debt instrument through which governments get long-term loans or borrowing for a period of up to five years and above.
Bond- is an interest bearing or discounted government or corporate security that obliges the issuers to pay the bondholder a specified sum of money annually at specific intervals and to repay the principal amount of the loan at maturity.
Debenture- is an instrument or a loan certificate for raising a long-term loan from the public by a limited company. A debenture is a debt and a debenture holder is not a co-owner of the business but a creditor.

INSTITUTIONS INVOLVED IN CAPITAL MARKET

Issuing houses
Insurance companies
Development Banks
Building Societies
National Provident Fund (NPF)
Stock Exchange

FUNCTIONS OF CAPITAL MARKET

Capital market provides long term loan purpose of investment.
Capital market serves a forum through which public sector takes part in running of the economy.
Capital market helps to mobilize savings for investment purpose.
It provides means through which merchant banks can grow and develop.
It gives opportunity to the general public to participate in the running of the economy of the country.