BANKING INSTITUTIONS IN NIGERIA AND THEIR FUNCTIONS (COMMERCIAL, MERCHANT, CENTRAL AND NON-INTEREST BANKS)

Different kinds of banks operate in every economy and Nigeria is no exception.

There are several banking institutions in Nigeria including commercial banks, merchant banks, development banks, non-interest banks to name just a few.

In this post and the next, we will be discussing some of them. So, stick around and read carefully. 

We start with the most familiar bank: commercial banks

COMMERCIAL BANKS

The banks and other financial institution Decree of 1991, defined commercial bank as "any bank in Nigeria whose business includes the acceptance deposit withdrawals by cheques".

They are mostly retail banks that accept deposits from the public and give loans for investment on a commercial basis.

As a financial institution, Commercial banks perform the following function

1. They accept deposit from the public through savings, current and fixed deposit account. Indeed, commercial banks are the only banks in Nigeria allowed to accept deposits withdrawable on cheques.

2. They grant advances in the form of loans and overdrafts.

3. They provide foreign exchange services.

4. Provision of money transfer services

5. They Undertake  safe custody of valuables

6. Provision of retail banking services, which may include mortgage product

It is, however, important to note that commercial banks (in Nigeria) are not allowed to partake in the following activities:

1. Underwrite insurance

2. Provide reinsurance services

3. Provide Loss adjusting services

4. Provide asset management services.

Furthermore, following the abolishment of the universal banking model in 2010 by the then CBN governor Sanusi lamido, commercial banks can be divided into regional, national, and international depending on the way they operate.

Regional commercial banks are only allowed to carry In banking business in six states to twelve states.

These three commercial banks: Providus bank limited, globus bank limited, and SunTrust bank limited have regional banking licenses

National banks carry on banking business in every state of the federation. They include Stanbic IBTC, Ecobank Nigeria Limited (not Ecobank transnational incorporated), Unity banks, and sterling banks.

in addition to carrying on banking business in all states of the federation, International banking carries on banking business in foreign countries. 

Firsbank, A commercial bank

The first bank of Nigeria Plc, United Bank for Africa Plc, Union Bank of Nigeria Plc are all international banks.

MERCHANT BANK

According to the banks and other final institution Decree of 1991, "merchant bank means a bank whose business includes receiving deposits on a deposit account, provision of finance, consultancy and advisory services relating to corporate and investment matters, making or managing investments on behalf of any persons".

Merchant banks are mostly wholesale banks established to provide medium and large-scale specialized services to their clients at a profit. They are also called acceptance houses.

In Nigeria, there are currently five merchant banks: coronation merchant bank limited, fBN merchant bank, FSDH merchant bank Ltd, Nova merchant bank, Rand merchant bank Nigeria limited

Merchant banks have carried out some specific functions that distinguish them from other banks. These are:

1. Provision of finance and credit to their clients who are wholesale customers

2. Syndication of loans 

3. Acceptance of deposits not less than 100 million nairas from large corporations and high-net-worth individuals through a deposit account called merchant accounts

4. Issuing of certificate of deposits which may be purchased by commercial banks.

5. Discounting of the bill of exchange  

6. Provision of medium and long-term loans

7. Asset management services such as fund and portfolio management are also provided by the merchant bank

It is worth noting that merchant banks are not allowed to carry out the following:

1. Accept deposits withdrawable by cheque. Only commercial banks are authorized to do so. 

2. Grant retails loans or engage in any form of retail banking. 

3. Underwrite insurance

4. Provide reinsurance services

5. Provide loss adjusting services.

Before we go any further, it is necessary that to understand the difference between commercial and merchants banks.

1. Commercial banks specialize in retail banking in that they provide financial services to the general public. Merchant banks, on the other hand, specialize in wholesale banking as they provide financial services to large corporations and individuals with high net worth.

2. Merchant banks can only accept deposits in deposit account whereas commercial banks can accept a deposit in savings, current, fixed deposits account.

3. While commercial banks accept deposits withdrawable by cheques, merchant banks do not. This is because merchant banks are unable to operate current accounts.

4. Unlike commercial banks loans, which are usually short-term, merchant bank loans are usually medium to long term.

NON–INTEREST BANK

Non-interest banks are financial institutions that provide financial services based on the non-interest principle.

Non-interest banks are also referred to on Islamic banks. The reason is this: A Muslim is not permitted to profit from the lending of money.

This means that earning interest (riba)-whether as an individual or bank is prohibited. Hence, the name non-interest bank. 

In line with their name, interests are not paid on Islamic savings, or the current account is not interest levied on Islamic mortgage.

There are just three non-interest banks in Nigeria: Jaiz bank Plc, Lotus bank limited, and TAJbank limited.

By nature, Islamic banks do not engage in any transaction involving the following:

1. Uncertainty

2. Gambling

3. Speculation

4. Porks, alcohols, arms, or pornography

5. Any other transaction that is not by the Islamic banking commercial jurisprudence regulation and principles

CENTRAL BANK OF NIGERIA.

This is the apex banking regulatory agency of Nigeria. 

It was established by the CBN act of 1958 but began operation on the 1st of July 1959. 

As the apex body, the central bank performs the following function:

1. It acts as a banker to the government

2. It also serves as a bankers' bank

3. It controls credit creation in the Nigeria economy

4. It implements the monetary policy of the federal government.

5. It is the lender of last resort to bank

6. They also keep custody of the Nigeria foreign reserves.

There you have it, We will continue our discussion of banking institutions 👇

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