HISTORY AND FUNCTIONS OF THE CENTRAL BANK OF NIGERIA (CBN)

A central bank is a financial institution that is in charge of printing currency and implementing the monetary policies of the government.

Central banks also serve as the apex banking institutions in a country and also controls the activities of commercial banks and other financial institutions.

The name given to the central bank differs by country. In the United States, it is known as the Federal Reserve system, whereas in India, it is known as the Reserve Bank of India. In the United Kingdom, it is known as the Bank of England, while in Nigeria, it is known as the Central Bank of Nigeria

However, for the purpose of our post title, we shall be limiting our focus to the central bank of Nigeria

The Central Bank of Nigeria is the apex banking regulatory agency of Nigeria. 

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

The central Bank Act has however been amended numerous times, with the most recent being the 2007 amendment. 

The history of the Central Bank of Nigeria (CBN) is based on the characteristics and flaws of the monetary system that existed before it. This was the currency board system.

The West Africa Currency Board (WACB) was established in November 1912, following the Emmott committee's recommendation. 

At that time, the Board was responsible for the production and distribution of British west African pounds in the four anglophone countries: Gold Coast (Ghana), Nigeria, Sierra Leone, and The  Gambia.

However, due to various shortcomings of the West African currency board (WACB), the establishment of an entity in the shape of the Central Bank of Nigeria was deemed necessary.

As a result, the supporter of Nigeria's independence mounted pressure on the colonial government and the colonial government responded by establishing the Paton committee in 1948. 

Following the commission report, The first banking legislation in Nigeria, the banking ordinance of 1952, was passed in 1952.

The proposal to establish the Central Bank of Nigeria (CBN) was originally trounced, but the call could not be dismissed altogether. 

As a result, in 1953, Mr. J.L. Fisher of the Bank of England investigated the propriety and feasibility of establishing a Central Bank of Nigeria (CBN), although his report concluded that such a bank could not be established. 

However, in 1957, Nigeria gained internal autonomy, which was aided by a report from the World Bank mission on the subject. 

The federal government formed a committee led by Mr. J.B. Loynes, a Bank of England official, to make recommendations on the establishment of the Central Bank of Nigeria (CBN), the launch of the Nigerian currency, and other related issues. 

Following the committee report, The CBN act was Enacted in 1958 and the Central Bank Of Nigeria (CBN) began full operations on the 1st of July, 1959.

FUNCTIONS OF THE CENTRAL BANK

1. Prints Money: This is undoubtedly the most unique function of the Central Bank in that the central bank has the exclusive right of printing money in a country. No other bank in Nigeria can print money.

2. Serves as Government's banker and agent: Legally, the government can't deposit money in commercial Banks. The government is only allowed to deposits its funds in the central bank.

The reason is not farfetched. The central bank is the banker and agent to the government. As bankers to the government, They carry out all banking functions of the government just like commercial banks do to the public.

These banking functions include acceptance of deposits of government deposits, safekeeping of taxes collected from the public, and giving out loans to the government.

The Central Bank of Nigeria also acts as an agent for the government, handling the public debt, paying interest on it, and providing all other debt-related services. 

3. Advisor to the governmentThe four basic objectives of government macroeconomic policies are: reduce unemployment, maintain price stability, the correct balance of payment problem, and create economic growth.

All of these objectives necessitate central bank involvement; as a result, the central bank advises the government on the best method to attain these objectives. 

In addition to this, CBN assists the government in the preparation of the budget and provides the funds necessary for the implementation of the budget.

4. Control of credit creation: The amount of credit that banks and other financial institutions grant to the public is more or less control by the central bank of Nigeria. 

The credit creation depends upon the number of deposits, cash reserves, and interest given to the commercial banks by the central bank.

5. Lender of last resort: This is another function of the central bank. In addition to controlling the number of credits created, the central banks also serve as the lender of last resort to banks. 

As lenders of last resort, banks turn to the central banks when they are in dire need of funds. 

That is, when banks are unable to obtain the capital they require for their everyday operations, they turn to the central bank for loans.

6. Clearinghouse for checks and another financial instrument:  Banks depositors offer checks as well as demand drafts drawn on other banks. 

In such a situation, it is not feasible that commercial banks approach each other for clearance, settlement, or transfer of deposits. 

The Central Bank facilitates this process by establishing a clearinghouse. 

A clearinghouse is an organization that facilitates the exchange of payments through the settling of mutual indebtedness among banks.

7. Custodian of Foreign reserve: Foreign reserves refers to foreign currency that a government or central bank holds. The central bank is also in charge of keeping foreign reserves. It  maintains the minimum international currency reserve

The main purpose of holding this reserve is to meet immediate foreign exchange requirements while also overcoming the negative impact of a balance of payments deficit. 

8. Custodian of cash reserve: Banks are legally required to keep a ratio of their funds with the central bank. This ratio of cash reserves is determined by the central bank of Nigeria.

Part of the reserves kept in the central bank is used to provide loans to the commercial bank. Because central banks safe keeps cash reserves of commercial banks, they are often referred to as banker's banks.

9. Influencing the financial markets: In a specific sense, Nigeria's financial market can be classified into money and capital market. 

The money market is a market for trading short-term credits whereas the capital market is a market for dealing with medium and long-term credits. 

In the financial markets, the CBN serves as a promoter ( supports the financial markets), regulator (regulates the activity of every player in the financial markets), and participator (when it performs open market operations).

By promoting, regulating, and participating in the Nigerian financial markets, the Central Bank of Nigeria (CBN) promotes the growth and development of Nigeria's Economy.

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BOTTOM LINE

The Central Bank of Nigeria (CBN) plays a crucial role in the economic growth and development of the Nigerian economy. 

In the Nigerian financial market, it serves a promotional, regulating, and participative function

Therefore, For the Nigerian government to achieve its macroeconomic objectives, the Central Bank of Nigeria's policies must be closely aligned with those of the federal government.

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