LESSON NOTE

1.1 Money Supply

This is the total amount of money that is in circulation in an economy such as Nigeria. it captures
the liquidity of the system which refers to an individual’s ability to quickly and easily convert
any asset into cash. This implies that any asset which is easily convertible to cash is a component
of money supply in an economy. In Nigeria, the money supply is controlled by the government
through the Central Bank of Nigeria. According to the CBN, money is defined in two ways:
narrow and broad money. Narrow money (M1) is defined to include currency in circulation plus
current account deposits with commercial banks. Broad money (M2) measures the total volume
of money supply in the economy and is defined as narrow money plus savings and time deposits
with banks including foreign denominated deposits. There is excess money supply when the
amount of money in circulation is higher than the level of total output of the economy. When
money supply exceeds the level, the economy can efficiently absorb, it dislodges the stability of
the price system, leading to inflation or higher prices of goods. In this brief, we shall examine
how a change in money supply by the CBN affects people and the economy. In subsequent
series, we shall look at the effects of an increase/decrease in interest rate and the effects of
depreciating/appreciating the exchange rate on the people and the economy. The formula for
money supply is MS = (MB x MM). MB, or monetary base, is the amount of money in
circulation or available to be circulated. MM is money multiplier, which is calculated by dividing
1 by the required reserve set by the CBN.
1.2 Factors Affecting Supply of Money
 Bank Rate- is the rate of interest which the Central Bank charges the commercial
banks for lending money to or borrowing from them and discounting bills.
 Cash Reserve Ratio- also known as Cash or Liquidity Ratio, is the percentage of the
deposits Commercial Banks are expected to keep with them. When the Cash Reserve
is high, the supply of money will definitely below, and vice-versa.
 Economic Situation- the Central Bank reduces the supply of money during the period
of inflation and increases it during the period of deflation.
 Demand for Excess Reserves- when Commercial Banks demand excess reserves, the
supply of money will increase.
 Total Reserves of Central Bank- money supply is affected by the total reserve of the
Central Bank. If the total reserve supplied by the Central Bank is high, the money
supply will also be high, and vice-versa.

2.1 Meaning of Commercial Bank

A commercial bank is a financial institution which performs the functions of accepting deposits
from the general public and giving loans for investment with the aim of earning profit. In fact,
commercial banks, as their name suggests, are profit-seeking institutions, that is, they do bank
business with the aim of making profit. They generally finance trade and commerce with short-
term loans. They charge high rate of interest from the borrowers but pay much less rate of
Interest to their depositors with the result that the difference between the two rates of interest
becomes the main source of cost of the banking and profit of the banks. Example of commercial
banks in Nigeria are First bank, Fidelity bank, Guaranty Trust bank, Access bank etc.

2.2 Characteristics/ Principles of Commercial Banks

1. They are limited liability companies
2. They are established and owned by individuals, organizations or governments.
3. The motive for its establishment is profit-making
4. Commercial banks are incorporated under CAMA (1990)
5. They transact business with private individuals, organizations and governments
6. They are members of the money market

2.3 Functions of Commercial Banks

1. Accepting deposits from customers
2. Lending to customers, that is, they grant loans and overdrafts to their customers
3. Acting as an agent for payment
4. Discounting bills of exchange
5. Safekeeping of valuables e.g. wills, jewellery, certificates etc.
6. Offering advice to customers
7. Acting as executors or trustees
8. Acting as referees/granting of performance bonds
9. Issuing, buying and selling of securities e.g. shares
10. Issuing of letter of credit
11. Acceptance and discounting of bills of exchange
12. Buying and selling of foreign currencies
13. Funds transfers e.g. credit transfer services
14. Lending money to importers and exporters
15. Issuance of traveler’s cheques
16. Acting as agents to both importers and exporters.
17. Transfer and handling of vitals business documents

2.4 Organizational Structure of Commercial Banks

Commercial bank as a financial institution that offers banking services to customers is generally
structured with the Chief Executive Officer (CEO) at the apex as the executive officer, which is
followed by Executive Directors, then Operations Managers, Internal Auditors and lastly the
Standard Bank Staff such as Cashiers and those in the Customer Care Section. Note that all these
structures are always visible at the main branch office. Their regional office is headed by the
Regional Manager and a Branch Manager handles the activity in each subordinate branch.

3.1 Meaning of Microfinance Bank

Microfinance, also called microcredit, is a type of banking service provided majorly to

unemployed or low-income individuals or groups who otherwise would have no other access to
financial services. The Microfinance Policy, Regulatory and Supervisory Framework was issued
on December 15, 2005 and revised in 2011 to, among others, increase financial inclusion rate in
the country, improve access to financial services for the economically active poor, pursue
poverty eradication as well as mainstream the informal microfinance sub-sector into the formal
financial system. The policy established microfinance banks as the crucial vehicle for the
attainment of these goals. Microfinance banks were expected to provide access to financial
services such as micro-savings, micro-credits, transfer services and other financial products
targeted at the economically active poor. These services have, over time, evolved to include the
transmission of government’s developmental initiatives.

The CBN, in 2013, issued the Revised Regulatory and Supervisory Guidelines for Microfinance
Banks in Nigeria, to address challenges observed in the implementation of the Microfinance
Policy of 2005 and emerging developments in the industry. The Guidelines sought to promote
rapid and sustainable growth of the microfinance industry, leveraging on global best practice in
microfinance banking. The review seeks to engender strong and financially sustainable
microfinance banks, enhance the safety and soundness of the microfinance sub-sector. The
Guideline covers categories of microfinance banks, ownership and licensing requirements,
permissible and prohibited activities, funding, corporate governance, prudential and anti-money
laundering requirements, amongst others.

3.2 Permissible Activities

An MFB shall be allowed to engage in the provision of the following services to its clients:

a) Acceptance of various types of deposits including savings, time, target and demand
deposits from individuals, groups and associations;
b) Provision of credit to its customers;
c) Provision of housing micro loans;
d) Provision of ancillary services such as capacity building on record keeping and small
business management and safe custody;
e) Issuance of debentures to interested parties to raise funds from members of the public
with the prior approval of the CBN;
f) Collection of money or proceeds of banking instruments on behalf of its customers
including clearing of cheques through correspondent banks;
g) Act as agent for the provision of mobile banking, micro insurance and any other services
as may be determined by the CBN from time to time, within the geographic coverage of
its license;
h) Appoint agents to provide financial services on its behalf in line with the CBN Agent
Banking Guidelines, within the geographic coverage of its license;
i) Provision of payment services such as salary, gratuity, pension for employees of the
various tiers of government;
j) Provision of loan disbursement services for the delivery of the credit programme of
government, agencies, groups and individual for poverty alleviation on non-recourse
basis;
k) Provision of banking services to its customers such as domestic remittance of funds;
l) Maintenance and operation of various types of account with other banks in Nigeria;
m) Investment of its surplus funds in suitable money market instruments approved by the
CBN;
 n) Operation of micro leasing facilities, microfinance related hire purchase and arrangement
of consortium lending;
o) Participate in CBN Intervention Fund and funds other sources;
p) Provision of microfinance related guarantees for its customers;
q) Financing agricultural inputs, livestock, machinery and industrial raw materials to low-
income persons;
r) Investment in cottage industries and income generating projects for low-income persons
as may be prescribed by the CBN from time to time;
s) Provision of professional advice to low-income persons regarding investments in small
businesses;
t) Issuance of domestic commercial paper subject to the approval of the CBN;
u) Provide financial and technical assistance and training to microenterprises; and
v) Any other permissible activity as may be approved by the CBN from time to time.

3.3 Non-Permissible Activities

MFBs shall not engage in the provision of the following financial services:

a) Foreign currency transactions, except foreign currency borrowings;

b) International commercial papers;
c) International corporate finance;
d) International electronic funds transfer;
e) Clearing house activities;
f) Collection of third-party cheques and other instruments for the purpose of clearing
through correspondent banks;
g) Dealing in land for speculative purposes;
h) Dealing in real estate except for its use as office accommodation;
i) Provision of any facility for speculative purposes;
j) Leasing, renting, and sale/purchase of assets of any kind with related parties and/or
significant shareholders (five per cent or more of the equity) of the MFB, without the
prior written approval of the CBN;
k) Financing of any illegal activities; and
l) any activity other than those permitted as stated above or as may be prescribed by the
Central Bank of Nigeria from time to time.

3.4 Categories of Microfinance Banks

There shall be four (4) categories of MFBs:

3.4.1 Tier 1 Unit MFB

A Unit Microfinance Bank with urban authorization (Tier 1) shall operate in the banked and
high-density areas, and is allowed to open not more than four (4) branches outside the head
office within five (5) contiguous Local Governments Areas, subject to the approval of the CBN.

3.4.2 Tier 2 Unit MFB

A Unit Microfinance Bank with rural authorization (Tier 2) shall operate only in the rural,
unbanked or underbanked areas, and is allowed to open one branch outside the head office within
the same Local Government Area subject to the approval of the CBN.

3.4.3 State Microfinance Bank

A State Microfinance Bank is authorized to operate in one State or the Federal Capital Territory
(FCT). It is allowed to open branches within the same State or the FCT, subject to prior written
approval of the CBN for each new branch or cash centre. It shall not be permitted to open more
than two branches in the same Local Government Area (LGA) unless it has established at least
one branch or cash centre in every LGA of the State. A newly licensed State MFB shall not
commence operations with more than ten (10) branches.

3.4.4 National Microfinance Bank

A National Microfinance Bank is authorized to operate in more than one State including the FCT.
A newly licensed National MFB shall not commence operations with more than ten (10)
branches.

3.5 Capital Base Requirement for Microfinance Banks

The financial requirements for MFB types are as follows:

Capital Requirement Unit MFB State MFB (N) National MFB

(N)
Tier 1 (N) Tier 2 (N)

Minimum Capital 200,000,000 50,000,000 1,000,000,000 5,000,000,000

Non-refundable 100,000 100,000 200,000 300,000

Application fee

Non-refundable 250,000 250,000 500,000 1,000,000

Licensing fee

Non-refundable 50,000 50,000 100,000 250,000

Change of Name fee

4 Branch Banking

Branch Banking refers to a system in which a bank provides banking services through a wide
network of branch offices. If a bank has ten branches in a city, account-holders can choose a
nearby branch to make deposits, withdrawals and avail of other services. Most commercial banks
in Nigeria operate branch banking with numerous branches scattered in all the states in the
country.

5 Group Banking
Group banking is a plan offered by banks to large groups of people such as employees at a
company. Potential incentives for group banking can include low- or no-fee checking accounts,
lower interest rates, special perks, and discounts. Group banking features vary by institution but
may include access to free bank accounts, better interest rates, waived fees, and special services.
If your employer offers group banking, you can typically enroll through your HR department.
Not all group banking programs are as good as advertised, so compare perks with other banks to
see which ones are best for you.

6 Central Banking

The central bank is usually the apex bank in any country. In Nigeria, the apex bank is known as
the Central Bank of Nigeria (CBN). The development of the Central Bank of Nigeria was an
outgrowth of the characteristics and deficiencies of the period preceding its existence. The first
institution in existence was the West African Currency Board which was established in 1912 and
was the currency issuing authority. Consequent upon the criticisms of the system, Mr. Loynes
was appointed to make recommendations on the establishment of a Nigerian Central Bank, the
introduction of a Nigerian currency and other associated matters. In the 1940s and 1950s,
Nigeria's financial sector witnessed a turbulent period culminating in the collapses of many
indigenous owned private and state banks. Banking business during this time was dominated by
foreign banks, while only few Nigerians were involved and trained in the art of banking.

The enactment of the Nigerian Banking Ordinance in 1952 introduced some regulation into the
banking sector and curtailed to some extent the bank failures of no regulation era. The condition
of the economy between 1952 and 1958, and the minimal regulation of the banking industry by
the 1952 Ordinance, gave impetus to the establishment of many indigenous banks, all of which
failed. The general collapse was the resultant effects of several factors including poor
management, undercapitalization and high degree of indiscipline. The regulatory void created led
to the establishment of an institution that would not only oversee and regulate the behaviour of
the institutions in the financial sector, but also carry out stabilization policy generally. The era of
proper banking regulation began with the enactment of the Central Bank of Nigeria Act of 1958.
The Act was necessitated by the need to eliminate the deficiencies in the financial sector,
promote and integrate the Nigerian financial sector, stem the tide of bank failures and promote
the growth of the domestic money and capital markets among others.

The Bank commenced business in July 1959. At different times, the powers of the Central Bank
of Nigeria were enhanced. The promulgation of the CBN Decree 24 of 1991 and the Banking and
Other Financial Institutions Decree (BOFID) No. 25 of 199 1 was another milestone in central
banking history because of the powers conferred on the Bank to perform the modern primary
functions of a central bank. Together with BOFID, the CBN Decree confers larger powers on the
Bank in the areas of banking supervision and examination, monetary management and promotion
of safety measures and soundness of the financial system. While these changes are welcome
developments, some have argued that the CBN has not achieved much in the area of independent
selection of suitable instruments to achieve its objectives. Similarly, not much has been done by
the recent amendments on the issue of central bank autonomy. The objects of the CBN are as
follows:
 1. ensure monetary and price stability;
2. issue legal tender currency in Nigeria;
3. maintain external reserves to safeguard the international value of the legal tender
currency;
4. promote a sound financial system in Nigeria; and
5. act as Banker and provide economic and financial advice to the Federal Government.

Consequently, the Bank is charged with the responsibility of administering the Banks and Other
Financial Institutions (BOFI) Act (1991) as amended, with the sole aim of ensuring high
standards of banking practice and financial stability through its surveillance activities, as well as
the promotion of an efficient payment system.

In addition to its core functions, CBN has over the years performed some major developmental
functions, focused on all the key sectors of the Nigerian economy (financial, agricultural and
industrial sectors). Overall, these mandates are carried out by the Bank through its various
departments.

7.1 Payment Systems

A payments system refers to the established infrastructure (institutions, people, set of

instruments, rules, procedures, standards and computer networks) through which financial
obligations are discharged by economic agents. It entails the physical and organizational
structure that enables the transfer of value between parties discharging mutual obligations. In
other words, a payments system refers to an arrangement in the financial system which supports
the transfer of funds from suppliers/savers to users/borrowers, and from payers to payees, usually
through the exchange of obligations by financial institutions. A payments system comprises three
main elements or processes – payment instruments, processing, and a means of settlement for the
relevant banks ECB (2010). It consists of a paper-based mechanism for handling cheques and
drafts, and a paperless mechanism (such as electronic funds transfer) for handling electronic
commerce transactions.

The goal of any payments system is to ensure that the financial system operates without
interruption so that transactions take place with minimum delay, low risk and are cost-efficient.
Similarly, an efficient payments system reduces the cost of exchanging goods and services and is
indispensable to the functioning of the interbank, money, and capital markets. It also underlies
the optimal utilization of resources and enhances the implementation of monetary policy to
achieve price stability. Furthermore, it is a channel for the settlement of all types of transactions
including cross-border financial flows. An efficient payments system must be supported by a
sound legal basis, secure, reliable, accessible, prompt and cost-effective to meet the needs of all
users. Its technical efficiency would determine the extent to which monetary transactions are
consummated in any economy as well as the risks associated with its use. In contrast, a weak
payments system may impact the stability and development of an economy, while its failures can
result in inefficient use of financial resources.

The payments system plays a crucial role in any economy as it remains the main channel for
inter-sector, inter-industry, inter-company, and interpersonal financial resource flow, thus
promoting economic growth, thus, representing the major foundation of the modern market
economy. Essentially, there are four pivotal roles for the payments system, as shown below:

a) Financial Intermediation: The Deposit Money Banks (DMBs) provide services as financial
intermediaries by making funds available to all economic agents. The payments system
facilitates intermediation through the transfer of value from a payer/depositor to the
payee/receiver of the fund, in the process of exchange of goods and services. Thus, the system is
the channel through which liquidity and credit are transferred from one participant to another in
the financial system.

b) Facilitates Settlement of Transactions: The payments system helps to speed up the

exchange and settlement of funds and securities. In terms of settlement techniques, the payments
system can be grouped into two: Real-Time Gross Settlement System (RTGS) and Deferred
Settlement (Netting) System. RTGS is used by central banks for high-value payments and does
not bear any credit risk as payments are settled in real-time. It is a system that enables banks to
settle payments immediately and in full; however, liquidity issues could occur in the system
which may require credit extension. One way to reduce such a system liquidity requirement is by
using the deferred settlement system to net transactions. In a netting system, payment
instructions are deferred until some designated time when banks exchange net amounts owed to
each other. In other words, deferred net settlement system refers to an arrangement that affects
the settlement of obligations or transfers between counterparties on a net basis at some later time.

c) Minimizes Risks: An efficient payments system minimizes liquidity, settlement, systemic,

credit and operational risks involved in the transfer of monetary value that may arise from one or
more economic units.

d) Provides the Necessary Framework for Monetary Stability: An efficient payments system
is a precondition for the smooth functioning of the money/credit market and the safe execution of
monetary policy operations that can guarantee moderation of interest rates. In essence, an
efficient payments system enhances the implementation of monetary policy and the maintenance
of monetary and price stability.

7.2 Type of Payments System and Instruments

Different types of payments system are available through different platforms and these can be
broadly categorized into two: Retail/Small Value and Large Value/Wholesale payments system.

7.2.1 Retail or Small Payments System: An individual with a payment card of any kind is part
of the retail payments system. At the retail level, most transactions involve cash, cheques, draft,
cards, and Automated Teller Machines (ATM), Automated Clearing House (ACH), bulk
payments, etc. Retail processes are relatively small payments among consumers and businesses
and are used primarily by the non-bank public for making and receiving payments.

7.2.1.1 Instruments of Retail Payments: These payment instruments can be classified into four,
namely: currency or cash; paper-based instruments; paperless or electronic instruments; and
other instruments. i. Currency or Cash This instrument takes the form of banknotes and coins and
is the most preferred method for small payments in Nigeria because it is free of credit risk. ii.
Paper-based Instruments These include cheques, bank drafts and traveler’s cheques. Despite the
obvious advantage of these instruments over cash, their use is still very limited in Nigeria. This is
due to the low level of trust and acceptability of the instruments for the settlement of obligations,
predominance of peasantry in the real sector and informality in the trade sub-sector of the
economy. iii. Paperless or electronic instruments Paperless or electronic instruments are
essentially technology platforms such as Automated Teller Machines (ATM), Automated
Clearing House (ACHs), point-ofsale terminals (PoS), internet payments, mobile telephones and
wire transfers. iv. Other Payments Instruments Other paper-based instruments include postal
orders, money orders, vouchers, and pre-paid cards. The use of these instruments is diminishing
over time due to the poor postal system, preferred use of banking services especially bank drafts
or certified cheques and increased use of electronic payments instruments in the country.

7.2.2 Large Value/Wholesale payments system: This system typically processes critical high-
value payments. LVPs are primarily used for corporate financial transactions. It enables
payments to be made electronically within the country and transactions are settled in real-time.
Other advantages of the system are its speed, reliability, safety, convenience, cost-effectiveness,
and accuracy. However, if this system fails, it could trigger disruptions and transmit shocks to
financial markets, the domestic economy as well as at cross-border levels. The LVP system is
privately run by the Nigeria Interbank Settlement System (NIBSS) Plc. The instruments of
Wholesale Payments System are; i. The Real Time Gross Settlement (RTGS) System which are
large-value funds transfer services that operate continuously during the business day to provide
irrevocable settlement of payments obligations via the Central Bank. The most important feature
of the RTGS system is that it provides instant settlement with finality as soon as payment
instructions are received, provided that sufficient funds are available in the settlement account of
the authorizing bank. In the RTGS system, settlement refers to the actual transfer of funds from
the sending bank to a receiving bank. Finality refers to a settlement that is unconditional and
irrevocable. On the other hand, real-time means that payment instructions are executed
continuously as they enter the system, while gross settlement means that for each payment
instruction, the total gross amount of funds is transferred. ii) Society for Worldwide Inter-bank
Financial Telecommunication (SWIFT). It is designed for international payments using the
messaging system. It facilitates international trade e.g. Letters of Credit, and transfers are
characterized by high transaction costs denominated in US dollars because the network is not
domiciled in Nigeria.