Commerce · Lesson 6

Money, commercial and central banking, stock and commodity exchanges

JAMBWAECNECO

What the syllabus asks

JAMB: 6 Aids to trade (b) Banking (types of banks, services, challenges); 8 Financing business (sources of finance: personal savings, sale of shares and bonds, loans, debentures, mortgage, bank overdraft, ploughing back profit, credit purchase, leasing; problems of sourcing finance); 10 Money (evolution, forms, qualities, functions); 11 Stock exchange (importance and functions; procedure of…

WAEC: Money (meaning, functions, qualities); banking (central, commercial, merchant, development, microfinance, mortgage, non-interest banks; services; credit creation); financial market (money and capital markets, institutions and instruments); stock exchange (functions, procedure, speculators, terms); Securities and Exchange Commission; sources of business finance; commodity exchange

NECO: Money (meaning, functions, qualities); banking (central, commercial, merchant, development, microfinance, mortgage, non-interest banks; services; credit creation); financial market (money and capital markets, institutions and instruments); stock exchange (functions, procedure, speculators, terms); Securities and Exchange Commission; sources of business finance; commodity exchange

What you will learn

Define money and explain its functions and qualities.
Identify the sources of business finance and the types of securities.
Explain the functions and services of commercial banks and the process of credit creation.
State the functions of the Central Bank of Nigeria.
Describe specialised banks and the role of the NDIC.
Distinguish between the money market and the capital market and their instruments.
Explain the functions of the stock exchange and the procedure for buying and selling shares.
Explain stock exchange terms and speculators; calculate dividend yield, rights and bonus entitlements.
Describe the role of the SEC under the Investments and Securities Act 2025.
Explain commodity exchanges and the second-tier securities market.

Key points

Money: medium of exchange, measure of value, store of value, standard of deferred payment.
Qualities: acceptability, portability, divisibility, durability, homogeneity, scarcity, stability, recognisability.
Naira replaced the Nigerian pound on 1 January 1973.
Finance: internal (savings, retained profit) and external (shares, debentures, loans, overdraft, trade credit, HP, leasing, mortgage).
Ordinary shares: votes, variable dividend, most risk. Preference: fixed dividend first, usually no vote. Debentures: loans with fixed interest; holders are creditors.
Commercial banks: deposits (current, savings, fixed, domiciliary), loans, transfers, credit creation, foreign exchange, agency and advisory services.
Credit multiplier = 1 ÷ reserve ratio; higher reserve ratio means less credit.
CBN (operations from 1 July 1959): issues currency, banker to government and banks, lender of last resort, monetary policy, supervision, reserves.
Specialised banks: merchant, development (BOI, BOA, DBN, NEXIM, FMBN), microfinance, mortgage, non-interest, payment service banks. NDIC insures deposits (₦5 m per depositor at DMBs).
Money market: short-term (treasury bills, call money, CP). Capital market: long-term (shares, bonds).
Stock exchange: liquidity, capital raising, pricing, investor protection; NGX from Lagos Stock Exchange (1960–61).
Buying shares: stockbroker, CSCS account, order, matching, settlement (T+1 from June 2026), contract note.
Bull expects rise; bear expects fall; stag buys new issues for quick premium; lame duck defaults.
Dividend yield = DPS ÷ price × 100; rights and bonus issues are in proportion to holdings.
SEC regulates the capital market under the ISA 2025, which covers digital assets and criminalises Ponzi schemes.

Start here: Money: meaning, functions and qualities

Money is anything generally accepted as a means of payment for goods and services and in settlement of debts. Over time, cowries, manillas, salt and metals served as money in West Africa; British West African currency was replaced by the Nigerian pound in 1959, and the naira and kobo replaced the pound on 1 January 1973. Today money includes notes and coins (currency) and bank deposits that can be transferred by cheque, card or electronic transfer.

Functions of money (Figure 1)

Medium of exchange: removes the need for a double coincidence of wants; a farmer sells yams for money and uses the money to buy anything.
Measure (unit) of value: prices of all goods are stated in money, so they can be compared and accounts kept.
Store of value: money can be saved for future use, unlike perishable goods. (Inflation weakens this function.)
Standard of deferred payment: debts and credit transactions are stated in money and settled later.

Qualities (characteristics) of good money

General acceptability: the most important quality.
Portability: easy to carry.
Divisibility: can be broken into smaller units (naira and kobo).
Durability: does not wear out quickly (polymer notes were introduced for this reason).
Homogeneity: each unit of a given denomination is identical.
Relative scarcity: if it were too plentiful it would lose value.
Stability of value.
Recognisability and difficulty to forge: security features such as watermarks and security threads.

Forms of money

Commodity money (cowries, manillas, gold).
Token money: coins whose face value exceeds the value of the metal.
Paper money (notes), fiat money backed by law.
Bank (deposit) money: current-account balances transferable by cheque and electronic means.
Electronic/digital money: card and mobile balances, the CBN’s eNaira.

Worked example 6.1 (JAMB-style)

When a trader sells goods today and agrees to be paid next month, money serves as a

A. medium of exchange B. store of value C. standard of deferred payment D. unit of account only

Answer: C.

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Practice questions

1. Money that is legal tender must be accepted

in settlement of debts
only by banks
only in Lagos
for imports only

Show answer

A: in settlement of debts
It is backed by law.

2. Which is a function of money?

Producing goods
Removing risk
Advertising
Store of value

Show answer

D: Store of value
Also medium of exchange, unit of account and standard of deferred payment.

3. A commercial bank’s main source of profit is

printing cheque books only
collecting taxes
interest on loans and overdrafts
issuing currency

Show answer

C: interest on loans and overdrafts
The gap between lending and deposit rates.

4. A savings account

is only for companies
earns interest and is not normally operated by cheque
allows overdrafts
has no interest

Show answer

B: earns interest and is not normally operated by cheque
Current accounts use cheques.

5. The CBN acts as banker to the government and

lender of last resort to banks
retail lender to traders
insurer of cargo
registrar of companies

Show answer

A: lender of last resort to banks
It also controls money supply.

Key words

Money: Anything generally acceptable as a medium of exchange and in settlement of debts.
Legal tender: Money that must by law be accepted in payment of debts; in Nigeria, naira notes and coins issued by the CBN.
Ordinary shares (equity): Shares that carry voting rights and receive a variable dividend after all other claims; holders bear the greatest risk.
Preference shares: Shares that receive a fixed rate of dividend before ordinary shares and are repaid first on winding up; usually no voting rights.
Cumulative preference shares: Preference shares whose unpaid dividends are carried forward and paid in later years.
Debenture: A written acknowledgement of a long-term loan to a company, carrying fixed interest; debenture holders are creditors, not owners.
Bond: A long-term interest-bearing debt security issued by government or companies.
Overdraft: Permission for a current-account holder to withdraw more than his balance up to a limit; interest is charged on the amount overdrawn.
Cash reserve ratio: The proportion of deposits a bank must keep with the central bank and not lend.
Credit creation: The process by which banks, by lending part of deposits that are re-deposited, increase total bank deposits.
Lender of last resort: The role of the central bank in lending to banks in temporary difficulty.
Treasury bill: A short-term government security sold at a discount and redeemed at face value, usually in 91, 182 or 364 days.

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