Element of Banking PDF

ELEMENT OF BANKING MONEY INTRODUCTION ORIGIN OF MONEY: The history of money concerns the development of means of carrying out transactions involving a physical medium of exchange. Money is any clearly identifiable object of value that is generally accepted as payment for goods and services and repay...

ELEMENT OF BANKING MONEY INTRODUCTION ORIGIN OF MONEY: The history of money concerns the development of means of carrying out transactions involving a physical medium of exchange. Money is any clearly identifiable object of value that is generally accepted as payment for goods and services and repayment of debts within a market or which is legal tender within a country Many things have been used as medium of exchange in market including, for example: - livestock and sack of cowrie’s grain (from which the shekel of derived) things directly useful in them self, but also sometimes merely attractive items such as cowry shells or beads were exchanged for more useful commodities, precious metals from which only coins were made, fall into this second category! PROBLEM BARTER SYSTEM The following are the problem of barter system (i) Double coincidence of want: Exchange depends on double coincidence of wants. That is two people who can give each offer something that the other wants must be brought together. This was not easy to accomplish especially in diverse and complex societies. (ii) Lack of common measure of values: There were no common measures to determine the value of commodities. Some goods could not be reasonably quantified. (iii) Lack of storage of value: There was no satisfactory means to store the value of goods and services. (iv) Indivisibility of certain goods: Exchange became difficult and in some cases impossible with commodities which are indivisible e.g. you cannot cut off a cows head in exchange for a tuber of yam. (v) Lack of deferred payment: There was no means to defer payment due to the absence of satisfactory unit in terms of which people could go into transaction involving future payments. (vi) Problem of portability: it was also difficult to carry about bulky commodities for sales or exchange. MONEY DEFINITIONS:  Money may be defined in a functional sense as anything generally used in the purchase of goods and services and in the discharge of debts.  Money is that which is universally accepted in any economy by sellers of goods and services as payment for the goods and services and by creditors as payment for debt. The above definitions are all functional definitions of money because they define money in term of the function it performs. All sort of things has been used as money throughout history, including various metals (gold, silver, copper, iron etc.) tobacco, stone, beverage shells paper money and book entries by commercial banks “banks accounts on which cheques are drawn” 1 IMPORTANCE OF MONEY Money has been credited to be the most important single variable affecting economics activities. Money affects important economic variable such as: - 1. Gross national product (GNP) 2. The price level 3. Interest rate 4. The use of credit 5. Redistribution of wealth and income. 1. GROSS NATIONAL PRODUCT (GNP) One of the most common measures of overall economic activity is the GNP, defined as naira value of all final goods and services produced in one year in the Nigerian economy. Some economist has proven that there is a relationship between money and the level of production pf good and services. When prices are riding, that is fall in the value of money, product tent to be high and business is stimulated. The stimulus may be excessive leading to the overall expansion of industry followed by recession. On the other hand, a continuous rise on the value of money reflect retardation of economy. Somewhat stable prices imply a growing economy. Thus money is an important determinant of the level of economy activity in an economy 2. PRICE LEVEL Another key economy variable in our economy is the price level and how it changes. Inflation can be defined as a rise in the (weighted) average of all prices; which has been limited to a variety of causes. In a free society money through which the price mechanism determines the allocation of good and services, the price mechanism and our willingness and ability to pay the price determines who is going to get what goods and services. 3. INTEREST RATE Interest rates are process determined by the forces of supply and demand unlike other prices they are usually expressed as percentage (%) of the value of the item loaned rather than amounts of money. In a monetary economy interest rate depend on the supply of and demand for and loanable funds, which in turn depend on the real forces of productivity and thrift. 4. USE OF CREDIT Money is thus modern society especially a society in which its booming services are highly developed, stimulates the use of credit. The entire modern business is based on money. Credit is created when someone with purchasing power has no immediate need for it, but decides to transfer it to another person who has the immediate purchasing power need for 2 price or cost called interest. From the above therefor, you will observe that credit creation by banks plays a major role in transferring funds from deposition to investors. Thus, credit expands investment. Therefore, the more credit that banks grants, the greater the purchasing power of the economy. 5. REDISTRIBUTION OF WEALTH AND INCOME A change in the value of money makes some people richer, some poorer. When the value of money falls, people on fixed money incomes find their incomes shrinking. Anyone who is repaid when prices are high, that is, value of money drum, gets back less purchasing power that was lent, however, once inflation is anticipated, it generally becomes built into market prices. FUNCTIONS OF MONEY  Money has a medium of exchange  Money as a unit of value  Money as a standard of deferred payment  Money as a store of value 1. MONEY AS A MEDIUM OF EXCHANGE This is one of the primary function of money in the sense that out of this functions, other functions are derived. To say that money serves as a medium of exchange means that market participants will accept it as payment that means that it is generally acceptable and therefore affords the freedom of choicer. 2. MONEY AS A UNIT OF VALUE The monetary unit serves as the unit in terms of which the value of all goods and services relative to other goods and services is measure and expressed. A unit of value is used to measure the value of goods and services. The naira, for example is the monetary unit in Nigeria. It is the ward stick that allows individuals to compare easily the relative value pf goods and services. Another way of describing money as a unit of account is to say that it is to say that it is a standard of value that allows economics transactions to compare the relative worth of various goods and services 3. MONEY AS A STANDARD OF DEFERRED PAYMENT Once the money serves the two primary functions already stated, it invariably becomes the unit in terms of which all future; deferred or postponed payment are stated. This function in other words simultaneously involve the use of money as a medium of exchange and as a unit of accounting, debits are typically stated in terms of a unit of accounting and are paid with s monetary medium of exchange. that is to say, a debt is specified in a naira amount and paid in the currency or by cheque. The lending and the repayment process, because the unit of value is durable. Money has facilitated borrowing by firms and business men from bank and 3 non-bank financial institutions future supply of goods and services otherwise called contact is also made possible. 4. MONEY AS A STORE OF VALUE The commodity chosen as money by a community is always somethings which can be kept for long periods without deterioration. Under certain conditions holding money as a store of value may cause the holder to inure some costs. Holders of currency and transaction account balance pay an opportunity cost for any benefits obtained from holding money as a store of value. The opportunity cost is therefore, the interest income that can be earned if the money held in those forms, is held in another form there are other alternatives to money as a temporary of value, such as promissory note, bonds, mortgages stocks, land, house and other valuables. These assets have some advantage over money because they yield an income inform of interest, profit or rent and sometimes appreciate in terms of monetary value. CHARACTERISTICS OF MONEY For money to perform its functions, satisfactory, it must possess certain qualities as follows: 1. Portability 2. Divisibility 3. Recognisability 4. Durability 5. Acceptability 6. Scarcity 7. Stability 1. Portability. For any commodity to serve as money it had to be portable. Money by bring portable must be easy to carry around and easy to transfer in other to make purchase in different location. 2. Divisibility. Money must be easily divided into equal parts in order to permit the purchase of smaller units of goods and services 3. Recognisability. For anything to serve as money it had to be easily recognise, if it is not easily recognised, market participant will find it difficult to determine whether they are dealing with money in some inferior counterfeit. 4. Durability. Money on circulation must be durable that is, it should last for a reasonable time without deterioration. 5. Acceptability. Whether or not money possess any of the attribute mentioned previously, if it is to perform satisfactory it must be generally acceptable, no commodity can successfully serve as money unless it is widely acceptable within the given community as money, this is the most important quality of money, people must be prepared to accept the money in use otherwise will cease to regarded as money. 4 6. Scarcity. For money to have value and therefore be acceptable, it must be limited in supply it must be relative to demand and the productive capacity of their country. So in other words to be generally acceptable the supply of anything being used as money must be restricted. It must neither be too plentiful nor too scarce, it is because of the fear that private parties would not restrict the issuance of money that made the federal government to create constitutional power to control monetary institutions. 7. STABILITY. Money performing one of its functions as a medium of exchange causes difficulties if its unstable. You would recon that when people lose confidence in their money, they try to dispose of it as fast as possible, the increase in the rate of turnover of money in a period of falling prices encourage further price decline and breakdown of the medium of exchange function of money CREDIT CREATION OF BANKS The principal process by which the banking system creates deposits is the granting of loans and over drafts. Every loan and overdraft approved by a bank creates a new deposit ILLUSTRATION 1 To explain the process of deposit creation let us how an initial cash deposit of N10,000 can yield total bank deposits of N100,000. This process goes on and on and can be measures by the credit creation multiplier, which is calculated as follows: Total amount of new deposits created= 100,000 = 10% Amount of new deposit advance = 10,000 Money creation by banks – the, multiplier Effect (10% reserve ratio) Deposit Reserves Loans Extended Original deposit 10,000 1,000 9,000 Redeposit 1st 9,000 900 8,100 Redeposit 2nd 8,100 810 7290 Redeposit 3rd 7290 729 6561 Redeposit 4th 6561 656 5905 ----- ------ ------ ----- ------- ------ ----- ------- ------- Maximum 100,000 10,000 90,000 Possible Deposit A simpler approach to the calculation of the credit multiplier could be obtained mathematically 5 Credit multiplier 1/r Where r is the Legal Reserve Ratio Therefore, Total Deposit Credit = CM x IOD Where IOD is the Original Deposit ILLUSTRATION 2 East bank ltd has initial deposit of N1 million given a legal reserve ratio of 40%. You are required to calculate (A) Calculate the credit multiplier (B) Total amount of deposit created (C) Illustrate the credit creation process assuming there are five bank in the baking system Solution (A) Credit multiplier = 1/r 1,000,000/0.40 Cm = 2.5 (B) Total deposit created = cm x IOD = 2.5 x N1m (C) Deposit creation process Deposits Reserves loan extended Original deposit 1,000,000 400,000 600,000 Redeposit 1st 600,000 240,000 360,000 Redeposit 2nd 360,000 144,000 216,000 Redeposit 3rd 216,000 86,400 129,600 Redeposit 4th 129,600 51,840 77,760 1,383,360 NOTE: you may be also be required to determine the amount of services necessary to back up the total deposit created by the five banks Solution: Is to find 40% of 1.383,360 = 1,383,360 x 40/100 = 1383,360 x 0.40 =N553, 344 Types of Money These are types of money used in the transaction of business and payment of debts such as: i. Coins money ii. Notes money 6  iii. Quasi money  Coins are mined by the CBN (central bank of Nigeria) on behalf of the federal government of Nigeria  Notes are issued by the CBN on behalf of the federal government of Nigeria. Recently, the CBN phased out the fifty kobo and one naira noted replacing them with fifty kobo and naira coins.  Quasi money these are close substitutes for money and are liquid assets. The savings account is referred to as near money. The most important examples of other near money:  Time deposit  The cash value of issuance policies  Bills of exchange  Government short-term securities and bonds  Other easily liquidated assets Note: it has become intangible; its ownership is now easily transferable by just a book entry FACTORS THAT INFLUENCES THE DEMAND FOR AND SUPPLY OF MONEY These are factor that can effects the money demand and supply so as the inflation in the economy as  Higher production cost  Excessive demand by consumers  War  Rural – urban drift  Increase in population  Decrease in supply of goods and services  Activities of middle men  Excessive money supply and so on 1. Higher production Cost: in the case of increase in wages of workers salary, may lead to reduction in quantity of goods produced thereby causing and influence the money demand and supply in the economy 2. Excessive Demand by Consumers: where there is an increase in the number of people in the country, there will be more demand of money so they can achieve their goals, this condition will therefore increase bank income and overdraft. 3. War. During war, more efforts and resources are channelled toward the production of war armament instead of other goods and services like foods. 4. Rural urban drift: With abandonment of rural areas by able bodied youth in search of jobs in urban centre, agriculture will definitely suffer in rural area whereby resulting in 7  insufficient foods production corresponding there will be pressure on facilities in the urban areas and higher demand for goods due to the migration 5. Increase in population: This is another major cause that influences the demand for money, especially when the majority of the population consist of children who fall under the unproductive sector of the economy. 6. Decrease in supply of goods and services. This especially in agricultural products when goods are in short supply of agricultural products this influence the demand of money for food. 7. Activities of middle men. This is man made or man influence over the demand and supply, when there are too many middle men in the chain of distribution of goods and services. They hoard especially the essential one in other to sell at higher price. 8. Excessive money supply. This means there is too much money in circulation and there are no effective monetary measures to contain the situation. EVOLUTION AND THE STRUCTURE OF BANKING INSTITUTIONS The first commercial bank the African banking corporation opened its first branch in Lagos in 1892. Messi elder dempster & co a shipping firm based in Liverpool, was instrumental in its formation. The bank experienced some initial difficulties and eventually decided to transfer it interest to elder dempster & co n 1893 this lead to the formation of a new bank known as the British bank of west African (BBWA) it was registered to London as a limited liability company in march 1894 and the first Lagos branch was opened in the same year, the bank opened it second Nigerian branch in old calabar in 1900. Barchys bank known as union bank open it first branch in Lagos in 1917. The British and French bank now known as united bank for Africa ltd was established in 1945 making it the third expatriate bank to dominate early Nigeria commercial banking. The foreign bank come principally to render services in connection with international trade so their relations at that time were chiefly with expatriate trading companies and with the government. In 1929, the industrial and commercial bank was set up by a handful of patriotic Nigerians. It folded u by 1930 due to under-capitalisation, poor management and aggressive competition from the expatiate bank in 1931. Another indigenous bank, the Nigerian mercantile bank was 8 established by it predecessors, it went into liquidation in 1936, with greater courage and planning the same group of pioneers in 1933 launched the national bank of Nigeria limited, which was the first indigenous bank to survive. The next private indigenous bank to be established was the agbonmagbe bank founded by chief okupe in 1945. This bank was taken over by the western state government in 1969 and its name was changed to wema bank. Indeed, this was a period of free for all banking between 1947 and 1952 a total of 22 banks were registered in Nigeria according to the study conducted by the CBN. STRUCTURE The structure of commercial banking in Nigeria, is tailored toward that prevailing in the UK, which can be described as the branch banking system, branch baking is characterised by a single banking company conducting operations at two or more places. Usually, the branches are continuous from a central point. This is characterised by a few large banks with a wide network of branches extending throughout the CENTRAL BANK A central bank is usually a government owned bank charged with the responsibility to supervise, regulate, direct assist and co- ordinate the operations to other financial institutions in its capacity as the apex bank in the country. The central banks function may differ from country to country but they are generally rum by a board of directors chaired by a governor in most country. STRUCTURE, MANAGEMENT AND FUNCTION OF THE CENTRAL BANK OF NIGERIA The central bank of Nigeria formally came into existence on the 29th of July, 1959.it stands as the apex of the banking system. It is managed by a board of directors chaired by the governor of the bank. At has branches in at least 18 states capital including Abuja and the branches are usually headed by an officer of the bank of branch controllers or distant directors. Functions 9 (A) Bank Notes Issues: The central bank has the sole authority to print currency and mint coins and ensure their circulation in the economy through the banking system. (B) Banker to the Government: The CBN serves as a banker and financial adviser to the federal government (C) Bankers bank: Being the apex and controlling bank, the CBN acts as a banker to the commercial banks in the sense that it keeps part of their deposits. Make short term advances available to the commercial banks as a lender of last resort and provides a clearing system for the clearing settlement of checks among banks. (D) Maintenance of External Reserves: The CBN maintains the country’s external reserves in other to pressure the countries’ currencies against other international currencies. (E) Regulation of The Economy: The CBN does this through liquidity management approach. If it feels that there is excess liquidity in the system, it sells treasury bills, treasury certificate and other money market instrument in other to mop up excess liquidity in the system and vice versa. COMMERCIAL BANKS SOURCES OF FUNDS With the explanation of the evolution of commercial banks discuss in the above notes, these are the sources of funds in the commercial banks as follows. (1) Profit Before Tax: this is clear source of funds for any business enterprise. It is generated and applied in the cause of business because a company’s business activities continuous throughout the year and profit will only be reckoned with or shared among shareholders after the company’s account has been audited at the end of the financial year. The amount of tax payable will be determined by the auditors after the end of the financial year. So until the tax authorities, the amount of payable would continue to assist the bank in its operation. (2) Shares Capital/ Shareholders’ Funds: Shared capital in this context refers to that part of authorised share capital issued and paid up by the shareholder’s fund comprise of paid u share capital, bonus shares, general reserve account and the profit for the period. The totality of these serves as a banker’s source of funds. 10 (3) Demand/ Current Savings and Fixed Deposits: This constitutes the banks biggest liability and also its biggest source of funds. It id from this funds that loan is given to borrowing customers. Other up front interest earning funds like banker’s acceptances also serve as a banks source of funds. (4) Inter-bank Lending and The CBN: Commercial banks borrow and lend money to each other in the interbank money market in addition to borrowing money from the CBN. Which is the lender of last resort to commercial banks. The governor of the central bank informed the police that commercial banks were owing the CBN FUNCTIONS OF COMMERCIAL BANKS 1. They accept deposit from their customer current, saving and fixed deposit account. The saving and fixed deposit account yield interest to the depositors. 2. They give loans and overdraft to their customer after due process and borrowing customers are charged interest on loans and overdraft at the prevailing or agreed interest rate. 3. Commercial bank make payment on behalf of their client like insurance premiums, standing order, stock and share transactions etc. 4. Commercial banks act as referees to their customers and issue status report indicating the integrity and financial standing of their customer to third party. 5. Commercial banks keeps customer important document, certificate, jewels, ornaments etc, in safe custody and receipts are issued by the bank to customers. 6. They render services like foreign exchange procurement and sales on behalf of their customer through the platform of the interbank foreign exchange market (IFEM) and the weekly Dutch auction sales. 7. Commercial banks render registrar services on behalf of various companies quoted on the stock exchange and they also provide investment and business advisory services. 8. The advent of universal banking has led to commercial banks involvement in insurance business, stock broking and merchant banking business all under one roof. 11 DEVELOPMENT BANKS Development banks in Nigeria were set up to find solution to the problems of under development and they are specialized financial institutions providing medium and long term credit for the creation and expansion of agricultural, commercial and industrial enterprises in the developing countries such as Nigeria. They are mostly established and owned by government especially in Nigeria. At the international level such banks include African development bank and Asian development bank among others. Is also known as “bank of industry” which is established in 1964 to provide medium and long term fiancé mining and industrial sector, hotel and tourism. SOURCES OF FUNDS 1. Development banks received subvention from the government “the new bank of industry was recapitalized with the sum of $50 billion in 2002. 2. Lines of credit from the worlds bank and other institutional lenders 3. The Nigeria capital market FUNCTIONS 1. Provision of medium of long term finance for the public and private sector 2. Promotion and development of projects 3. Advice and assistance to indigenous enterprises in in Nigeria 4. Supervising the implementation of projects financed by it, by visiting the project sites and requesting for progress reports. 5. Foster the development of the capital market in Nigeria by encouraging prospective borrower to list their shares in the stock market 6. Serves as a channel for bringing into Nigeria investable funds from international organisation. THE FEDERAL MORTGAGE BANK This bank was established in 1977 through decree no 7 of January 1977 and in commenced operation, in July the same year after absorbing the and liabilities of its predecessor, the Nigerian building society. The bank was meant to provide long term credit facilities to 12 mortgage institution at such terms and rate designed to enable such institutions to grant facilities to individuals, groups desiring to acquire houses of their own. As the apex mortgage institution, it promotes the development of mortgage institution and supervises their activities, provide credit facility to commercial property developers and administer the national housing fund. FUNCTIONS OF FEDERAL MORTGAGE BANK 1. To provide long term credit facilities to mortgage institution in Nigeria for the purpose of building houses to be let out or sold at reasonable Rates to the public 2. Encouragement and promotion of the development mortgage institution at state and national level 3. Supervision and control of the activities of mortgage institution in Nigeria 4. Provision of long term credit facilities directly to Nigerian wishing to build their own houses for residential purpose 5. Provision of competitive commercial rate of interest credit facilities to commercial property developers of offices and other specialised types of building COMMERCIAL BANKS’ BALANCE SHEET STRUCTURE The usual company balance sheet, which lists assets in order of liquidity that is, commencing with fixed asset and ending with cash. Nigerian banks attempt to place emphasis on liquidity the more by listing the more liquid assets first, so that customers can see that they hold sufficient cash and other liquid asset to meet depositors demand CASH AND SHORT TERM FUNDS 1. CASH. This is the amount of notes and coins held in the strong room of all branches of the bank and in the head office to meet customers demand for cash withdrawals. Cash kept in strong room of banks as regarded as idle funds, since they cannot earn interest. Therefore, efforts are made to keep the balance low Banks know from experience what amount to keep in their strong rooms as cash. Should there be a usually high demand for cash at any time either money is transferred from one 13  branch to another branch or cash or cash is withdrawn from the bank account with the central bank. 2. SHORT TERM FUNDS. This refers to items in course of collection within Nigeria as well as balance abroad. Any cheque credited to an account and drawn by another customer in the same branch is debited to the drawers account on the same day. However, most of the cheques credited to customers account are drawn on other banks or branches of the bank. Such cheque need to be “cleared” before the payee can receive the proceeds it takes about four days to clear cheques in a clearing area. 3. GOVERNMENT SECURITIES. This include treasury bills, treasury certificates and development stocks and bonds. Treasury bills and treasury certificate provide a safe short term investment avenue for the surplus funds of banks. A reasonable return is normally expected though it is lower than other riskier investment. They are issued by the CBN weekly for 90-91 days, but they are very liquid as they can be rediscounted with the CBN before their maturity date. 4. STATUTORY AND OTHER DEPOSIT WITH THE CBN. These include balance on current account with the central bank which is not attract interest, cash reserve deposit, special deposits and letter of credit deposits. The balance on current account is a working balance to meet the day to day cash requirement of the bank such as cash withdrawer by branches, foreign exchange allocations, adverse clearing balance and payment for other investments. 5. INVESTMENNT WITH OTHER BANKS. These include investment in all money, fixed deposits and negotiable certificate of deposit with other banks. The investment yields a high return and are reasonably safe. 6. LOANS AND ADVANCES. This is by far the largest asset on the balanced sheets of many banks. All loans and advances are technically repayable on demand, except for term loans. In practice, this is not the case the rate charged on these assets are quite high and are usually fixed b the central bank. 7. OTHER ASSETS. Items under other assets include prepayment, accursed interest, receivable, suspense resources and capitalised expenditure 14 FIXED ASSET This represents the bank investment in building equipment and furniture etc. the amount shown under this item is he depreciate value of the bank buildings, furniture, fixtures and all equipment and all equipment and machinery acquired for the bank operation. LIABILITIES OF A BANK 1. SHARE CAPITAL. The issue of paid up share capital is represented by the shares held by individuals, institutional investors and government 2. STATUTORY RESERVES. Ever bank in Nigeria is requires by law to maintain a reserve fund, and shall not of its net profit each year and before any dividend is declared. 3. UNDISTRIBUTED PROFIT. These are the profit earned over the years, which have not been distributed. Part of balance on these accounts may eventually be capitalised or used for the purpose it was set aside for it can also be called revenue reserve. 4. DEBENTURE STOCK. These are medium term loans to a bank at a fixed rate of interest and repayable over a fixed period of time to finance certain capital projects of a bank. In the event of a winding up, the holder shall be paid only after depositors have been fully repaid. long-term debts are issued either through public underwriting or private placement. 5. CUSTOMER DEPOSIT Is the largest liability on a bank balance sheet? The depositors are creditors of the bank whose money or part of it must be repaid on demand or notice in accordance with the agreement. 6. OTHER LIABILITIES. This include provision for taxation due to the board of inland revenue and provision for dividend. They also include cash securities for letters of credit, collection deposits and remittance deposits. These deposits relate to foreign exchange transaction awaiting allocation by the central bank. Also included are interest reserves in respect of deposit liabilities, which have been accrued but have not been paid i.e. 15 Use of funds Cash and short term funds 57,848,754 Statutory and other deposit with other bank 75,295,864 Government securities 26,240,000 Investment with other bank 50,000,000 Loan and advance 540,321,762 Other assets 24,662,762 Fixed assets 43,327,670 Total 817,696,608 Financed by Share capital 25,000,000 Statutory reserve 13,468,000 Undistributed profit 11,460,360 Shareholders’ funds 49,928,360 Customers deposit 489,039,818 Other liability 263,728,430 Debenture stock 15,000,000 817,696, 608 LIQIUDITY AND PROFITABILITY Liquidity: liquidity is the ability of a bank to meet its customer short term cash requirement. Banks needs to be liquids at all time to customer demand and financial obligation. This is always necessary in other to avoid rumour and bank run. Where a bank fails in its financial obligation for a considerable period of time, thus indicate distress or sign of distress. REASONS WHY BANKS NEED TO BE LIQUID (i) To be able to repay its customers on demand and meet other financial obligation. (ii) To satisfy the CBN statutory requirements for liquidity. (iii) To ensure and maintain the confidence of the public at large and the depositors in particular. (iv) To meet the legitimate credit demand of its customers. For this reasons, commercial banks assets are acquired and kept in such a way to demonstrate sufficient liquidity that is ability to meet the financial obligation as they fall due. 1. Profitability. As a bank need to make profit to remain in business it has to acquire the resources in the cheapest way possible and this influence the structure of it liabilities. The asset is acquired in such a way that maximum returns are made; so far as the need for liquidity is met sufficiently as well. It is to ensure good profit operations that commercial banks invest a large part of their resources in loans and advances that constitutes the simple most important item on the asset side of their balance sheet. It should be stated 16  that the need to be liquid and the need to be profitable are two conflicting ends the bank seek. These ends are conflicting because the more liquid a bank is, the less profitable and vice versa. For a bank to be liquid, it must invest in short term and low yielding assets and consequently it would not be highly profitable. Or if a bank invests in high interest yielding assets, such as loans. It will not be liquid as such assets are necessarily long term in nature because these two need must be met to enable a bank to survive and remain in business, bank at all-time cleverly reconcile these needs by acquiring sufficient liquid assets amounting to a minimum of 25% of their deposit liabilities and investing freely thereafter in high interest yielding assets. BALANCING LIQUIDITY WITH PROFITABILITY Balancing liquidity and profitability requires careful planning, experience and skill on the part of bank management. If the bank keeps most of their funds in idle cash in order to avoid liquidity problems, they will not make profit. On the other hand if they lend most their funds in pursue of excess profit, it could create problem especially if borrowers default on loan repayment and the loan are subsequently classified as unperforming. Meanwhile the depositors whose money has been tied down in these unperforming loans may start clamouring for their money. The bottom is that a balance must be struck between liquidity and profitability. BORING AND LENDING BORROWING: is define as the act of taking with permission usually for a certain length of time from an individual, business or company, these can be rate into many materials things like items, raw materials, machines and money. LENDING: is defined as the act of banks given out financial assistance to its customers in a period of time which is payable with interest, this can through overdraft, loan and leasing (of any kind). Borrowing and lending are more or less same item of usage, before the bank grants it’s any financial assistance in various means, its customers most meeting with s certain condition/ principal of lending of the banks all commercial banks has way of checking their customer if they can meet up with the lending and repayment of the loan (loan capital) and the interest to the bank. PRINCIPLES/ CANONS OF BORROWING AND LENDING The principles or canons that govern is called the 5cs of lending, these are: 1. CHARACTER: character refer to the human attributes of honesty and reputation, consistency, reliability, frankness, courage, reasonableness and loyalty such that 17  people who possess these positive attributes are said to be good and can be trusted with other people’s money However, because the ethnical standard of business is different from the societal standard, the banks interpretations of characters is narrow. As much as a smugger pays his bank loan, as at when due, he would be considered to be a good character banking wise, even though his occupation affects societal norms 2. CAPABILITY: Refers to the ability of borrower to generate income this ensuring repayment facility and schedule. Capability also includes the customers state of health, level of education, professional skill, management experience, ability to repay (cash flow evaluation), connection, social status etc. 3. CAPITAL: Refers to money securities and financial commitment. It is evident from past experience that the borrower tends to be more committed and even demonstrate prudence where his own personal financial commitment is at stake. In a capital intensive project, the proportion of capital contributed by the borrower is expected to be higher than amount proposed to be financed by the bank. 4. CONDITION: This refers to the prevailing economic condition in the country as to be able to justify the investment channel. For case of economic condition is most important as repayment is expected to be made in the future. The success or failure of a business lies on the environmental conditions and this could be economical, social and political cultural factors. A bank manager is expected to access a loan proposal on the basis of.  Will there continue to be demand for the goods to be invested on?  Will the raw material importation be banned or restricted? etc. 5. CONNECTION: This refers to other account with which the customer has a linkage through which the bank can gain more business or gain more goodwill for other profitable business. In practice, each banking has its own credit policy, guild line tailored to meet its target market and risk acceptance, criterial, but falls within the frame work of CBN monetary and credit policy guide lines. The bank loanable find it limited and there is ceiling, which they would not exceed yet credit request and overwhelming consequently, they must embark upon critical selection using well thought out guide lines. THE ROLE OF THE BANKING We saw that the basic function of any bank are to accept, safe guide and lend surplus funds of its customers while permitting the withdrawal of funds or their transfer from one account to another. Nowadays, the banking has come a long way from financing the shipping business of colonial masters to meeting the needs of particular groups of customers, such as 18 companies or small savers, the clearing banks provide a range of service to satisfy the financial needs of all types of customers from the personal account holder to the largest. These services can be grouped under the following headings 1. Deposit and savings 2. Advance 3. Money transmission 4. Financial and advisory service 5. Foreign services. 1. Deposits: Are the funds customers leave in their account, whether these are current accounts, which are for” current” money that is not intended to be served or deposit or saving account which are for money that will not be requires immediately. Customers with a current account are usually issued with a cheque book which enable le them to draw or write of cheque that instruct the bank to pay cash from the account or to make payment to other people. 2. Advance: Are the money lent by a bank, generally in the form of an overdraft on an account, by which the customer draws out more money than he has put into the account. They may also be made by means of a loan. Interest is charged on all advance, the rate varying with the method of granting the advance. The credit worthiness of the customer and the length of time for which funds are borrowed. Advance represent that part of customers deposits which the bank considered may safely be lent. While the remainder is retained in the form of cash and other assets. 3. Money Transmission: Enables customers to make payment without having to carry around large sum of cash, because the cheque is covenant method of settling a debt. He may also instruct his bank to debit or deduct amount from his account to make regular payment to meet recurring debts such as club subscription, life assurance, premiums or mortgage repayment by means of the standing order or direct debit system. 4. Financial And Advisory Service: Cover a wide range of facilities that can be tailored to suit the individual of the customer. Financial service carry one form is the cheque guarantee card for personal customers. Which can be used to guarantee or backup a cheque when paying for goods in a shop or drawing cash at branches other that at which the account is maintained. An order might be business service such as factory, in which the bank administer a client sales ledger and enable a company to obtain an advance against debit which are due to it. 5. Foreign Service: of the bank include traveller’s cheque and currency service, they also make international payment. All large banks have links with oversea banking groups, so payments of this kind can easily be made. So banks have linked more formally with a number of overseas banking to form consortia which are able to provide large scale finance to suit the need of multinational cooperation. THE VARIOUS SERVICE OFFERED BY THE BANKS Available service offered by the banks generally to their personal customers. Some of these are equally applicable to business customers. Most of these services mentioned in the chapters are available to current account holders and most, but not all can be used by those 19 with savings and deposit accounts. Various banking services are offered directly by the bank or it subsidiaries as they operate as group, these are the available banking services offered by bank as follows: 1. Current 2. Savings 3. Fixed deposit account 4. Foreign currency domiciliary account (FCDA) 5. Investment service 6. Insurance service 7. Executorship and trusteeship 8. Leasing service 9. Hire purchase 10. Taxation advice 11. Travel service 12. Local payment service 13. Payment abroad 14. Safe custody service 15. Personal advisory service etc. METHOD OF PAYMENT THROUGH THE BANKING SYSTEM 1. CHEQUE CLEARANCE: funds are transferred through proceed of cheques collected on behalf of customers. The funds will move from one bank to another. This is possible through cheque clearance. 2. IN HOUSE TRANSFER: this is a situation whereby two customers of the same bank or branch transfer money from one to another with the issuance of the bank cheque, both customers operate in the same bank or branch. 3. BANK GIRO CREDIT: this is a simplified credit transfer system by which anyone can make payment to bank to the credit of an account holder who has an account anywhere within the country’s banking system. In this way a house holder can pay his gas bill, PHCN bills, or an instalment under a hire purchase contract without himself been a customer of any bank, though he may be, and without going to the branch at which his creditors has his account. 4. BANK DRAFT: a bank draft is a special instrument used to transfer money from one bank to another bank or from one branch to another branch. A bank draft is issued to a customer on request in favour of a named beneficiary. For more understanding on this, it is better to define a bank draft. A bankers draft maybe defined as a unconditional order in writing address by one branch of a bank to its head office or to another branch or by the head office of bank to its self or to a branch singed by the branch drawing it by requiring the branch to whom it is addressed to pay on method. The stated sum certain in money to the order of a specified person. 20 5. International transfer: this involve the transfer of und from one country to another country. Hence, it is possible to transfer funds from Nigeria to any other part of the world. The transfer could be made through foreign bank draft, mail transfer, telegraphic transfer and electronic transfer. BANKS CLEARING SYSTEM The bankers clearing system was developed to enhance and facility Coleton of cheques and other instruments such as dividend warrant, direct debit, bank draft, banker’s payment etc. to the customers account. To forward this instrument directly to individual bank branches for collection would be a complicated and cumbersome process. to enhance an effective collection system, clearing centres were designated at the central bank branch at each state to facilitate the clearing system among the commercial banks domicile in the state. TYPES OF CLEARING a) Local clearing: the local clearing deals with the clearing cheques drawn and payable within the state, for example, for OYO state cheques drawn in any of the following town, Minna. Bida, Doko, Babeqqi, etc. are payable within Niger state are local cheques meant for local clearing. Such cheques would be deemed paid as far as collecting/ presenting bank is concerned after two clearing session from the data of presentation from the date of lodgement with the collecting bank. If the paying bank fail to return the cheque within the stipulated period, the presenting bank will release the fund to the customer’s account. b) Upcountry/interstate clearing: this involves clearing of cheques collected by banks branch in one state but payable by another banks branch domiciled in another state. For instance, cheque paid by customers in Kano state and payable by another banks branch is Lagos state is an upcountry cheque and requires interstate clearing system. The same thing is applicable to cheque paid into an account in IMO, Osun, Ekiti, Rivers state etc. and payable or drawn on another banks branch different from the state, the cheque was paid is such as OYO, KWARA, KADUNA, BENUE, etc. such cheque would be recognised paid after two clearing session from the date of presentation at the state clearing/8 house 3 working days from the date of lodgement provided it is lodge in before 12 noon of the day. Usually failure of the paying bank to return on unpaid cheque to the presenting bank within the stipulated period would be resisted afterwards unless the transaction was fraudulent and fund related to the cheque is still held by the presenting bank. THE ROLE OF BANKING AS CATALYSTS IN DEVELOPMENT The banking system plays and important role in the development of the economic development as capital market. These are some of the roles that it plays: 21  1. It provides opportunities for the company to borrow funds needed for long term investment purposes. 2. It provides avenue for the marketing of shares and their securities in order to raise fresh funds for expansion of operations, leading to increase in output/ opportunity. 3. It provides facilities that enable foreign businesses to offer their shares to the economic market development, the public has the opportunity to invest and participate in the ownership of foreign business. 4. It encourages inflow of foreign capital when foreign companies or investors invest in domestic securities 5. It provides opportunities for government to finance project aimed at providing essential amenities for socio-economic development. 6. It provides employment opportunities for the ever growing labour force. 7. It encourages transparency and good accounting/ management practices by ensuring that companies disclose relevant and adequate information to enable potential investors and shareholders make well informed decisions. 8. It creates an avenue for the populace to participate in the corporate sector of the economy and share in its wealth through ownership of securities 9. It reduces the over reliance on short-term financing for long term projects. 10. It provides the needed seed money for venture capital development which could serve as a vehicle for industrial development 11. Government can also use banking/ capital market to carry out it privatisation exercise by offering its shareholding in state owned enterprises to members of the public through the stock exchange. THE NON-BANK INTERMEDIARIES AND THEIR CONTRIBUTION TO THE ECONOMY 1. NIDB/BANK OF INDUSTRY: The Nigerian industrial development bank now known as bank of industry was established in 1964 to provide medium and long term finance to the mining and industrial sectors, hotel and tourism etc. The bank is wholly owned by the deferral government of Nigeria and central bank of Nigeria and it is managed by a board of directors with the managing director as the chief executive. Its main source of und like other development bank in Nigeria is the subvention from the government. The new bank of industry was recapitalised with the sum of N50 billion in early 2002 by federal government to enable it operate effectively while the management was also restructured. 22  The formal Nigerian industrial development bank, Nigeria economic reconstruction fund were merged together in November 2001 to form the bank of industry. 2. NIGERIAN AGRICULTURE AND CO OPERATIVE BANK. This bank was established in march 1973 and the major objective for establishing it was to provide loans for agriculture and finance co-operative societies. However, the bank has now been merged with peoples bank to form Nigeria agriculture, co-operative and rural bank this merger took in November 2001. THE FEDERAL MORTGAGE BANK This bank was established in 1977 through decree No.7 of January 1977 and it commenced operation in July the same year after absorbing the assets and liabilities of its predecessor the Nigeria building society. The bank was meant to provide long term credit facilities to mortgage institutions at such terms and rates designed to enable such institution to grant facilities to individual groups desiring to acquire houses of their own. As the apex mortgage institution, it promotes the development of mortgage institution and supervises their activities, provide credit facility to commercial property development and also administer the Fund. FUNCTIONS OF NON BANK FINANCIAL INTERMEDIARIES (1) They help to channel resources from the surplus unit to deficit unit (2) They manage a portfolio of stock on behalf of their client. (3) They provide advisory and investment management services (4) Non bank finance institution take active part in the money and capital market activities and contribute greatly to the development of the economy. (5) Through risk diversification, investment are spread in order to reduce risk. Non bank financial intermediaries are able to buy a large number of investment and reduce the negative effect of one investment returning a much lower than expected. (6) Some of the finance companies operate as primary mortgage institution through which mortgage funds/building loans are channel from the federal mortgage bank to the borrower or their customer. (7) They use their training and expertise to screen prospective securities so as to obtain the best yield available for the risk level that suit the investors preferences. (8) Institutional management of portfolio result in convenience, protection against fraud, quality of investment selection and low transaction cost 23