Types Of Financial Institutions In Nigeria And Their Functions

The Nigerian financial system comprises different types of financial institutions in Nigeria.

However, in this article, we will be talking about the types of financial institutions in Nigeria and their functions.

Before we talk about the types of financial institutions, let’s talk more about the importance of the financial system. Because without the financial system, there is no how the financial institutions will exist.

The financial system is important for its role in the intermediation process. It is a prime mover of economic development and growth of a nation. It facilitates the process of intermediation by providing the institutions, operators, and regulators of the system.

The financial system is also important because it functions by providing a mechanism for organizing and managing the payment system in the economy. The financial system also functions to shield domestic industries and development against the tough competition of international economies.

In addition, the system helps in the efficient allocation of resources as well as the mobilization of savings for investment.

Finally, the financial system provides the necessary environment and facility for the implementation of the nation’s economic and fiscal policies among others.

The financial system of Nigeria has a lot of instruments and operators. They include the Central Bank of Nigeria (CBN), the Federal Ministry of Finance (FMF), the Security and Exchange Commission (SEC), and the Nigerian Deposit Insurance Corporation (NDIC) which are regulatory bodies.

Others include commercial banks, merchant banks, specialized banks, development banks, finance companies, stock exchanges, and other finance bodies like the National Provident Funds (NPF), Nigeria Social Insurance Trust Fund (NSITF), National Economic Reconstruction Fund (NERFUND), Bureau De Change, credit unions, mutual associations, investment companies, etc.

Some of these institutions and operators are discussed below:

Types Of Financial Institutions In Nigeria And Their Functions

1. The Central Bank Of Nigeria (CBN)

Established through a central bank ordinance of 1958, the CBN started operation on July 1st, 1959 as the Apex bank that regulates all other financial institutions in the country. The Central Bank advises the Federal Government on all monetary policy matters.

The CBN issues the legal tender currency as well as circulars, guidelines, and prudential directives that help in the running of the country’s financial system.

2. The Federal Ministry Of Finance (FMF)

The federal ministry of Finance shares the leading role with the Central Bank as the Apex financial institution in the country. Although the CBN is an autonomous institution there is however an interwoven and intertwined relationship existing between her and the federal ministry of Finance in the management of the economy and the formulation of regulatory policy for financial institutions in the country.

The ministry advises the Federal Government on fiscal policy matters and because fiscal policy has a lot to do with government revenue income and expenditure as well as the level of liquidity in the system the federal ministry of finance is said to be actively involved in the management of the economy.

3. The Security And Exchange Commission (SEC)

The Security and Exchange Commission was established in 1979. And it was formerly called the capital issues commission, this body which is the apex regulatory authority of the capital market is for the promotion of an orderly and active capital market in the country.

In 1988, its enabling act was amended to strengthen the regulatory framework of the body. The Security and exchange commission is charged with the regulation and approval of companies for public issues, listing, and regulation of prices for issuance of company securities.

In addition, the SEC was given the power to approve and regulate mergers and acquisitions as well as the establishment of unit trust associations by the companies under the Allied Matters decree of 1990.

4. The Nigeria Deposit Insurance Corporation (NDIC)

The Nigerian Deposit Insurance Corporation was established by NDIC decree no of 1988 as a regulatory body responsible for ensuring the deposits of banks in the country.

NDIC ensures that there is effective supervision of banks and works hand-in-hand with the Central Bank. She is empowered to examine the books and affairs of the insured bank and other financial institutions and do play the role of receiver/liquidator when the need arises.

The purpose of NDIC activities is to instill and maintain confidence in the financial system by adequately protecting depositors and their deposits.

Financial Institutions


5. The National Insurance Commission (NAICOM)

The National Insurance Commission was established in 1997 as a regulatory body for the insurance industry in Nigeria. The purpose of the commission is to establish standards, a code of conduct for insurance businesses as well as monitor the activities of insurance companies in the country.

6. Commercial Banks

This is another type of financial institution in Nigeria that forms the pillar of the financial system and control the largest portion of the fund in the economy. Their unique characteristics put them apart from other financial institutions.

The history of commercial banking in the country dates back to 1892 and the story has continued to change till date. As of today, there are 25 commercial banks in the country following the recapitalization of banks which ended on December 31st, 2005.

7. Merchants Banks

A Merchant Bank according to the 1979 banking act is any person in Nigeria who engaged in wholesale banking, medium and long-term financing, equipment leasing, debt factory, investment management, issuing and acceptance of bills, and management of unit trusts.

Merchants banks are eventually wholesale bankers but the universal banking decree of 2000 has made most banks register and provide services in both retail and wholesale banking.

8. Development Banks

Development banks are used to provide medium and long-term finance to bankable economic units and the industrial and agricultural sectors of the economy.

Development banks came into existence to bridge the gap existing in the financing arrangements within the financial system as well as meet the domestic financial requirements of our people which the international financial institutions could not provide.

The development banks in Nigeria include:

1. Bank of Industry:

this is an offshoot of the Nigerian industrial development bank, the Nigerian Bank for Commerce and Industry, and the National Economic Reconstruction Fund (NERFUND).

2. The federal Montage Bank of Nigeria:

this provides mortgage loans as well as acts as a regulatory body for primary mortgage institutions in the country.

3. Nigerian Agricultural, cooperatives, and Rural development bank is an offshoot of the Nigerian Agricultural and cooperative bank, the People’s Bank, and the family economic advancement program (FEAG).

Other Types Of Financial Institutions In Nigeria

Other financial institutions important in the smooth and efficient functioning of the financial system include:

1. The insurance companies
2. The Bureaux de change
3. Credit unions and mutual associations
4. Investment trust companies
5. Pension funds and Nigeria Social Insurance Trust Fund (NSIFT)
6. Finance houses.

These are the financial institutions in Nigeria.

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