Economics · Lesson 17

Financial institutions: CBN, banks & capital market

JAMBWAECNECO

What the syllabus asks

JAMB: Financial institutions: types and functions; central bank and monetary policy; commercial banks and credit creation; money and capital markets; regulatory agencies (CBN, NDIC, SEC); the Nigerian Exchange; financial sector reforms

WAEC: Financial institutions: the central bank (functions, instruments of monetary policy); commercial banks (functions, credit creation); merchant, development and specialised banks; non-bank financial institutions; money market and capital market (meaning, institutions, instruments, importance); the stock exchange

NECO: Financial institutions: the central bank (functions, instruments of monetary policy); commercial banks (functions, credit creation); merchant, development and specialised banks; non-bank financial institutions; money market and capital market (meaning, institutions, instruments, importance); the stock exchange

What you will learn

Describe the structure of Nigeria’s financial system and its regulators.
Explain the functions of the Central Bank of Nigeria and its monetary policy instruments.
Explain the functions of commercial banks and calculate credit creation.
Distinguish commercial, merchant, development, microfinance and other financial institutions.
Distinguish the money market from the capital market, with their institutions and instruments.
Explain the role of the SEC, NGX and NDIC, and major banking reforms.

Key points

Financial institutions channel savings from surplus units to deficit units.
CBN (Act 1958; currency from 1 July 1959; now CBN Act 2007): currency, banker to government and banks, lender of last resort, monetary policy, reserves, supervision.
Tight monetary policy: raise MPR, raise CRR, sell securities; easy policy: the opposite.
Commercial banks: deposits, loans, payments, credit creation, agency services; balance liquidity and profitability.
Credit multiplier = 1 ÷ reserve ratio; credit = total deposits − initial deposit.
Other institutions: merchant, development, microfinance, mortgage banks; insurance; pension funds.
Money market: short-term (T-bills, call money, CP); capital market: long-term (shares, bonds).
NGX: Lagos Stock Exchange 1960 → Nigerian Stock Exchange 1977 → NGX Group 2021; SEC est. 1979, ISA 2025.
NDIC (1988; NDIC Act 2023) insures deposits up to a limit.
Reforms: ₦25bn consolidation 2004/05; cashless policy 2012; recapitalisation announced 2024.

Start here: The financial system: an overview

When Mrs Okafor in Enugu saves part of her shop’s income in a bank, and a manufacturer in Aba borrows to buy machines, money is moving from savers (surplus units) to borrowers (deficit units). The institutions that make this possible form the financial system.

A financial institution is an organisation that mobilises savings and channels them to borrowers and investors, or provides financial services such as payments and insurance.

Main parts

Regulators: Central Bank of Nigeria (CBN); Securities and Exchange Commission (SEC); Nigeria Deposit Insurance Corporation (NDIC); National Insurance Commission (NAICOM); National Pension Commission (PenCom).
Banks: commercial, merchant, microfinance, mortgage (primary mortgage banks), non-interest banks, and development banks such as the Bank of Industry.
Non-bank financial institutions: insurance companies, pension fund administrators, finance houses, stockbrokers, discount houses (historically), cooperative societies.
Markets: the money market (short-term) and the capital market (long-term).

Importance of financial institutions

Mobilise savings and channel them into investment.
Provide a safe and efficient payments system.
Spread and reduce risk (insurance, diversification).
Help government implement monetary policy and borrow.
Promote economic growth and development.

Worked example 17.1

Classify each as a surplus unit or deficit unit: (a) a civil servant who saves ₦30,000 a month; (b) a state government running a budget deficit; (c) a poultry farmer borrowing to build pens.

(a) Surplus unit: income exceeds spending.
(b) Deficit unit: needs to borrow.
(c) Deficit unit.

Surplus; deficit; deficit

⚠️ Common mistake: listing the SEC or NDIC as banks. They are regulators; they do not take deposits from the public.

Try it yourself. Name the regulator of insurance companies in Nigeria.

Show solution

The National Insurance Commission (NAICOM).

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Practice questions

1. The Central Bank of Nigeria was established by an Act of

1958
1960
1973
1999

Show answer

A: 1958
It began operations on 1 July 1959.

2. The lender of last resort to commercial banks is the

Bank of Industry
NDIC
Stock exchange
Central Bank

Show answer

D: Central Bank
The CBN supports banks in liquidity crises.

3. To reduce inflation, the CBN may

buy government securities
print more money
raise the Monetary Policy Rate
lower the cash reserve ratio

Show answer

C: raise the Monetary Policy Rate
Tight monetary policy.

4. Selling government securities to the public to reduce the money supply is

selective credit control
open market operations
moral suasion
special deposits

Show answer

B: open market operations
OMO.

5. A bank receives a new deposit of ₦100,000 and the reserve ratio is 20%. The maximum total deposits that can be created is

₦500,000
₦400,000
₦120,000
₦20,000

Show answer

A: ₦500,000
Multiplier = 1 ÷ 0.2 = 5; 5 × 100,000.

Key words

Central bank: The apex bank that issues currency, regulates banks and conducts monetary policy.
Monetary policy: Use of money supply and interest rates by the central bank to achieve economic goals.
Monetary Policy Rate (MPR): The CBN’s benchmark interest rate that signals the direction of other rates.
Open market operations: Buying or selling government securities by the central bank to change money supply.
Cash reserve ratio: Percentage of deposits banks must keep with the central bank.
Liquidity ratio: Proportion of deposits banks must hold in liquid assets.
Moral suasion: Persuasion of banks by the central bank to follow its wishes.
Lender of last resort: Central bank role of lending to banks in difficulty.
Credit creation: The ability of commercial banks to create deposits by lending a multiple of their cash reserves.
Credit multiplier: 1 ÷ reserve ratio; the maximum multiple of a new deposit that the banking system can create.
Money market: Market for short-term loans and securities (up to one year).
Capital market: Market for long-term funds through shares, bonds and long-term loans.

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