A Project Report On

"MONEY & BANKING”

A Project Submitted To

University Of Mumbai For Partial Completion Of

Degree Of Bachelor Of Business Management Studies

Under The Faculty Of Commerce!

BY

MISS. TAMANNA YASIN SHAIKH

Under The Guidance Of

PROF. PAWAN ROTHE SIR

SHANTARAMBHAU GHOLAP ARTS,

SCIENCE AND GOTIRAMBHAU PAWAR

COLLEGE OF COMMERCE SHIVALE,

MURBAD 2020-21

 
 CERTIFICATE

This is to certify that MISS. TAMANNA YASIN SHAIKH has worked and
duly completed her/his Project Work for the degree of Bachelor of
Management Studies under the Faculty of Commerce entitled, "MONEY &
BANKING" under my supervision.

I further certify that the entire work has been done by the learner under my
guidance and that no part of it has been submitted previously for any
Degree or Diploma of any University. It is her/ his own work and facts
reported by her/his personal findings and investigations.

Seal of The College :

Name and

Signature

of

Guiding

Teacher :

Date of submission:
 DECLARATION BY LEARNER

I the undersigned MISS. TAMANNA YASIN SHAIKHhere by, declare that the work
embodied in this project work titled "MONEY & BANKING" , forms my own
contribution to the research work carried out under the guidance of PROF. PAWAN
ROTHE SIR is a result of my own research work and has not been previously submitted
to any other University for any other Degree/ Diploma to this or any other University.
Wherever reference has been made to previous works of others, it has been clearly
indicated as such and included in the bibliography. I, here by further declare that all
information of this document has been obtained and presented in accordance with
academic rules and ethical conduct.

Name and Signature of the

Learner :

Certified By -

Name and signature of the Guiding

Teacher :PROF. PAWAN ROTHE SIR

 ACKNOWLEDGMENTS

To list who all have helped me is difficult because they are so numerous and the depth is
so enormous.

I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to do this
project.

I would like to thank my Principal, DR. S.M. PATIL for providing the necessary
facilities required for completion of this project.

I take this opportunity to thank our Coordinator PROF. PAWAN ROTHE SIR for her
moral support and guidance.

I would also like to express my sincere gratitude towards my project guide, PROF.
PAWAN ROTHE SIR whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various reference books
and magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped me
in the completion of the project especially my Parents and Peers who supported me
throughout my project.
 TABLE OF CONTENT
SR.NO CONTENTS. Page No.

01 Introduction 1

02 Money 2

03 Difficulties of barter system 3

04 The evolution of money 6

05 Stages in The evolution of money 7

06 Qualities of goods money 9

07 Advantages of using money 10

08 Function of money 11

09 Kinds of money 12

10 The value of Money 14

11 Effect of changes in the value of money 15

12 Demand of supply of moneys 17

13 Money supply 18

14 The elementary quality theory of money 20

15 Modern financial institutions 23

16 The money market 23

17 Advantages of & well – developed money 24

18 Reason for the establishment of the nigerion money 26
market

19 The instruments of the Nigeria money market 28

20 Capital Market 33

21 Development of Capital Market Institution in west 34

Africa
22 Problem Facing the capital market 37

23 Central bank 39

24 Function of central bank 40

25 Commercial (Deposit money banks) 42

26 Other liquidity financial institution 45

27 Interest rate 47

28 Factors that influences interest rate 48

29 Conclusion 49

30 Bibliography 50

 
  
 

1. INTRODUCTION
MONEY AND BANKING

To help us understand this chapter well, the following were discussed

(a) Money: Barter system. Evolution of money. Qualities of good money.
Advantages of using money. Functions of money, Kinds of money, and Value of
money (b) Demand and Supply of money (c) Quantity Theory of Money (d)
Financial Institution: Traditional financial institution, Modern financial institution,
Money market, Capital market, Central bank. Commercial banks and other
Liquidity financial institution (e) Interest: Definition and Determinants of Interest
Rate.

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2. Money
The Barter System
Before the evolution of money, exchange was done on the basis of direct exchange
of goods and services. This is known as barter. Barter involves the direct exchange
of one good for some quantities of another good. For example, a horse may be
exchanged for a cow, or three sheep or four goats. Hence, for a transaction to take
place there must be a double coincidence of wants. For instance, if the horse-owner
wants a cow, he has to find out a person who not only possesses the cow but wants
to exchange it with the horse. In other cases, goods are exchanged for services. A
doctor may be paid in kind as payment for his services. For example, he may be
paid a cock, or some wheat or rice or fruit. Thus a barter economy is a moneyless
economy. It is also a simple economy where people produce goods either for self-
consumption or for exchange with other goods which they want. Bartering was
found in primitive societies. But it is still practiced at places where the use of
money has not spread much. Such non-monetized areas are to be found in many
rural areas of under-developed countries.

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3. Difficulties of Barter System

The barter system is the most inconvenient method of exchange. It involves loss of
much time and effort on the part of people in trying to exchange goods and
services. As a method of exchange, the barter system has the following difficulties
and disadvantages:
  Lack of Double Coincidence of Wants: The functioning of the barter system
requires double coincidence of wants on the part of those who want to exchange
goods or services. It is necessary for a person who wishes to trade his good or
service for another, find some other person who is not only willing to buy his good
or service, hut also possesses that good which the former wants. For example,
suppose a person possesses a horse and wants to exchange it for a cow. In the
barter system, he has to find out a person who not only possesses a cow but also
wants a horse. The existence of such a double coincidence of wants is a remote
probability. For it is a very laborious and time-consuming process to find out a
person who wants the other's goods. Often times, the horse-owner would have to
carry through a number of intermediary transactions. He might have to trade his
horse for some sheep, sheep for some goats and goats for the cow he wants. To be
successful, the barter system involves multilateral transactions which are not
possible practically. Consequently, if the double coincidence of wants is not
matched exactly, no trade is possible under barter. Thus a barter system is time-
consuming and is a great hindrance to the development and expansion of trade.
  Lack of a Common Measure of Value: Another difficulty under the barter
system relates to the lack of a common unit in which the value of goods and
services should be measured.
Even if the two persons who want each other's goods meet by coincidence, the
problem arises as to the proportion in which the two goods should be exchanged.
There being no common measure of value, the rate of exchange will be arbitrarily
fixed according to the intensity of demand for each other's goods. Consequently,
one party is at a disadvantage in the terms of trade between two goods.
Moreover, under the barter system the value of each good is required to be stated
in as many quantities as there are types and quantities of other goods and services.
The exchange rate formula given by Prof. Culbertson is n (n - l)/2. For example, if
there are 100 different types of goods in a barter economy, then there would be

3 
 
  
 

4950 exchange rates for it to function smoothly, i.e. 100(100 – 1)/2 – 100 x 99/2 or
9900/2 = 4950. This makes accounting impossibilities because a balance sheet
would consist of a long physical inventory of the various types and quantities of
goods owned and owed. Similarly, it is difficult to draw and interpret the profit and
loss accounts of even a small shop. That is why the existence of the barter system
is associated with a small primitive society confined to a local market.
  Indivisibility of Certain Good: The bailer is based on the exchange of goods
with other goods. It is difficult to fix exchange rates for certain goods which are
indivisible. Such indivisible goods pose a real problem, under barter. A person may
desire a horse and the other a sheep and both may be willing to trade. The former
may demand more than four sheep for a horse but the other is not prepared to give
five sheep and thus there is no exchange. If a sheep had been divisible, a payment
of four and a half sheep for a horse might have been mutually satisfactory.
Similarly, if the man with the horse wants only two sheep, then how will he
exchange his horse for two sheep. As it is not possible to divide his horse, no trade
will be possible between the two persons. Thus indivisibility of certain goods
makes the barter system inoperative.
  Difficulty in Store Value: Under the barter system, it is difficult to store
value. Anyone wanting to save real capital over a long period would be faced with
the difficulty that during the intervening period the stored, commodity may
become obsolete or deteriorate in value. As people trade in cattle, grains and other
such perishable commodities, it is very expensive and often difficult to store and to
prevent their deterioration and loss over the long period.
  Difficulty in Making Deferred Payments: In a barter economy, it is difficult
to make payments in future. As payments are made in goods and services, debt
contracts are not possible due to disagreements on the part of the two parties on
following grounds. It would often invite controversy as to the quality of the goods
or services to be repaid. The two parties would often be unable to agree on the
specific commodity to be used for repayment. Both parties would run the risk that
the commodity to be repaid would increase or decrease seriously in value over the
duration of the contract. For example, wheat might rise markedly in value in terms
of other commodities, to the debtor's regret, or decrease markedly in value, to the
creditor's regret. Thus it is not possible to make just payment involving future
contracts under the baiter system.

4 
 
  
 

  Lack of Specialization: Another difficulty of the baiter system is that it is

associated with a production system where each person is a jack-of-all-trades. In
other words, a high degree of specialization is difficult to achieve under the barter
system. Specialization and interdependent in production is only possible in an
expanded market system based on the money economy. Thus no economic
progress is possible in a barter economy due to lack

of specialization. The above mentioned difficulties of barter have led to the

evolution of money.

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4. The Evolution of Money

The word, "money" is derived from the Latin word, "Moneta" which was the
surname of Roman Goddess Juno in whose temple at Rome, money was coined.
The origin of money is lost in antiquity. Even the primitive man had some sort of
money. The type of money in every age depended on the nature of its livelihood. In
a hunting society, the skins of wild animal were used as money. The pastoral
society used livestock, whereas the agricultural society used grains and food stuffs
as money. The Greeks used coins as money.
Therefore, the development of money was to overcome the various ••difficulties of
trade by barter. Money is, therefore, anything that is generally acceptable as a
means of exchange. This general acceptability is the most important requirement of
money. No matter how precious a material is, if it is not generally acceptable by
the people as a means of exchange, it will not qualify as money.

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5.Stages in the Evolution of Money

The evolution of money has passed through the following five stages depending
upon the progress of human civilization at different times and places:
  Commodity Money: Various types of commodities have been used as money
from the beginning of human civilization. Stones, spears, skins, bows and arrows
and axes were used as money in the hunting society. The pastoral society use cattle
as money. The agricultural society used grains as money. The Romans used cattle
and salt as money at different times. The Mongolians used squirrel skins as money.
Precious stones, tobacco, tea, shells, fishhooks, and many other commodities
served as money depending upon time, place and economic standard of society.
The use of commodity as money had the following defects: (a) All commodities
were not uniform in quality, such as cattle, grains, etc. Thus lack of standardization
made pricing difficult, (b) Difficult to store and prevent loss of value in case of
perishable commodities,
(c) Supplies of such commodities were uncertain, (d) They lacked in portability
and hence were difficult to transfer from one place to another, (e) There was the
problem of indivisibilities in the case of such commodities as cattle.
  Metallic Money: With the spread of civilization and trade relations by land
and sea metallic money took the of commodity money. Many nations started using
silver, gold, copper, tin, etc. as money. But metal was an inconvenient thing to
accept, weigh, divide and assess in quality. Accordingly, metal was made into
coins of predetermined weight. Thus innovation is attributed to king Midas of
Lydia in the eighth century B.C. But gold coins were in use in India many
centuries earlier than in Lydia. Thus coins came to be accepted as convenient
method of exchange. But some ingenious person started debasing the coins by
clipping a thin slice of the edge of coins. This led to the hoarding of full-bodied
coins with the result that debased coins were found in circulation. This led to the
minting of coins with a rough edge. As the price of gold began to rise, gold coins
were melted in other to earn more by selling them as metal. This led the
government to mixed copper or silver in gold coins so that their intrinsic value
might be more than their first value. As gold became dearer and scarce, silver coins
were used, first in their pure form and later on mixed with alloy or some other
metal. However, metallic had the following defect: (a) It was not possible to
change

7 
 
  
 

its supply according to the requirements of the nation both for internal and
external use. (b) Being heavy, it was not possible to carry large sums of money in
the form of coins from one place, to another by merchants, (c) It was unsafe and
inconvenient to carry precious metals for trade purposes over long distances, (d)
Metallic money was very expensive because the use of coins led their debasement
and their minting and exchange as the mint cost a lot to the government.
  Paper Money: The development of paper money started with goldsmiths
who kept strong safes to store their gold. As goldsmiths were thought to be honest
merchants, people started keeping their gold with them for safe custody. In return,
the goldsmiths gave the depositors a receipt promising to return the gold on
demand. These receipts of the goldsmiths were given to the sellers of commodities
by the buyers. Thus the receipts of the goldsmiths were a substitute for money.
Such paper money was backed by gold and was convertible on demand into gold.
This ultimately led to the development of bank notes.
The bank notes are issued by the central bank of the country. As the demand for
gold and silver increased with the rise in their prices, the convertibility of bank
notes into gold and silver was gradually given up during the beginning and after
the First World War in all the countries of the world. Since then the bank money
has ceased to be representative money and is simply fiat money which is
inconvertible and is accepted as money because it is backed by law.
  Credit Money: Another stage in the evolution of money in the modem world
is the use of the cheque as money. The cheque is like a bank note in that it
performs the same function. It is a means of transferring money or obligations
from one person to another. But a cheque is different from a bank note. A cheque
is made for a specific sum, and it expires with a single transaction. But a cheque is
not money. It is simply a written order to transfer money. However, large
transactions are made through cheques these days and bank notes are used only for
small transactions.
  Near Money: The final stage in the evolution of money has been the use of
bills of exchange, treasury bills, bonds, debentures, savings certificates, etc. They
are known as "near money". They are close substitutes for money and are liquid
assets. The final stage of its evolution money has become intangible. Its ownership
is now transferable simply by book entry. Thus the evolution of money has been
through various stages: from commodity money to metallic money, and to paper
money, and from credit money to near money.

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6.Qualities of Good Money

Nowadays, when we talk of money, we generally think of notes and coins such as
Naira and Kobo in Nigeria, Cedis and Pesewa in Ghana and Leone and Cents in
Sierra Leone. However, it is important to know that in the past, many things had
been used as money in West Africa. The most important one that comes to mind is
the Cowry, which dominated West African trade as a common medium of
exchange in the nineteenth century. Cowries and other things that were used
suffered a number of problems, such as being too heavy to carry and being
subjected to intense depreciation. However, since they were then generally
acceptable as a medium of exchange, they qualified as money.
For anything to serve satisfactorily as money, that thing must fulfill the following
requirements.
  Divisibility: Money must be easily divisible into smaller units to facilitate
both big and small transaction.

  Portability: Money must be easy to carry around to long and short distances.
  Acceptability: Money must be legal tender. Money is legal lender when it
has the backing of law, in which case it cannot be refused in payment or settlement
of debt within a defined territory. Such money is said to be generally acceptable.
  Durability: Money must not wear easily or suffer undue mutilation.
 Scarcity: Money must be relatively scarce, but not too scarce. Gold and
diamond are too scarce; hence they do not meet this requirement.
  Standardized Unit: The various unit of money must be homogeneous. There
must be no disagreement about value and identity.
  Stability: The value must be relatively stable over time. Money whose value
is very unstable may cease to be generally acceptable.

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7.Advantages of Using Money

The use of money provides the following advantages;
  Access to a variety of Goods and Services: Money enables the owner to
obtain a variety of goods and services that could give him maximum satisfaction. If
a man has N10, for example, he can distribute this N10 to buy a number of goods
and services that will give him full satisfaction. Under trade by barter, if a man has
a goat he might give up the whole goal only to obtain a few yams in exchange.
  Division of Labour: Exchange is an important condition for division of
labour. Without the use of money, division of labour would have been
unreasonable. It is only when money is used that it makes sense for people to
specialize. If you cannot exchange part of what you produce with other goods
produced by others, it would be better to produce all that you will need.
  Easy Facility for Loans: The use of money facilitates the making of loans.
When you loan someone a hundred naira, you collect back a hundred naira later.
Without the use of money, it would have been difficult to operate this system as
disagreements might occur over the identity of objects after a few years interval.
  Deferred Spending: The use of money makes it possible to save now and
spend later. Without money, saving would have been difficult. Living things might
die and objects might depreciate or rot.

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8.Functions of Money
Money performs four main functions:
  A Medium of Exchange: Money facilitates the exchange of goods and
services. This was probably the earliest function of money. Without money, we
will probably have trade by barter with all the disadvantages which we mentioned
earlier.
  A Unit of Account and a Measure of Value: Money serves as a common unit
which is used to measure the relative value of goods and services. We use
kilometer to measure distance, so we can compare distance from one locality to
another. In like manner, we use money to express the value of one commodity in
terms of other commodities, say rice in terms of shoes, house, chairs, books, etc.
Certainly, exchange would have been extremely complicated without the use of
money.
  A Store of Value: Money makes it possible to save now for later use. Goods
and services are difficult to store. Farmers cannot store if their goods are
perishable. Many producers

cannot even store their products at all. A teacher, for example, cannot save what he
produces since they are intangible. A doctor cannot save his production, i.e. what
he produces because it is direct service which is produced and consumed
simultaneously. By selling their services for money, the value received can be
stored for future use.
  A Standard of Deferred Payment: Deferred payment means settlement of
debts at a later date. Money makes it possible for payment to be deferred -from
now till a later date. It also facilitates future contracts to be carried out. When we
buy goods on credit, we promise to pay the money value of the goods at a later
date. Without money, it would have been impossible to record debts and settle
them at a later date.

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9.Kinds of Money
  Commodity Money: Commodity money that is generally acceptable as a
medium of exchange. Such a commodity has a money value as well as an intrinsic
value of its own. The history of money shows that many commodities have been
used as money in different places and at different periods. Pastoral tribes have, for
example, used cattle and some still do. The problem was that cattle are neither
divisible nor uniform in size and quality. Some common articles of trade, such as
tobacco, salt, skin, had also been used provided they were not perishable and were
easy to handle. In West Africa, cowries were for very long time used as a medium
of exchange.
  Gold and Silver: Gold and silver will come under the category of commodity
money. In some countries, mostly in Britain and other European countries, gold
and silver had been used as money for many years. Gold and silver were fairly
generally desired for their own sake. They were durable, divisible and
homogeneous and not too heavy to carry. They therefore, met most of the quality
requirements of money. But since they were exchanged against goods without been
coined, everybody who received gold or silver as payment had to satisfy himself as
to their weights and fineness. They were also too scarce.
  Metal Coin: A coin is a piece of metal whose weight and fineness have been
standardized by the maker. The invention of coins eliminated the problems of
everybody certifying the standard and fineness of gold and silver. Different
countries developed different coins, and labeled them differently.
  Bank Note: This is paper money called currency. Originally, the bank note
developed as a promise to pay gold on demand. In other words, it developed as
convertible currency. If a bank note can be exchanged on demand for gold or silver
coins, it is said to be convertible. The earliest bank notes had to be convertible
because people were willing to use only a medium of exchange which was of value
for its own sake. It was long before people accepted, as money, something that has
no intrinsic value by itself. Therefore, the bank note at that time was not, strictly
speaking, money but a substitute for money. The bank note is called token money
because the commodity worth of such money or its face value is greater than the
paper itself. Moreover, it is inconvertible. That is to say, no government or bank

12 
 
  
 

promises to change it to gold or silver or anything else. Yet, it serves its main
purpose very well. Everybody is willing to accept it because they know they can
use it to pay for goods and services or to settle debts.
  Bank Deposits: The final stage in the development of money is the use of
bank deposits. The bank deposit is the process whereby an individual deposits his
money in the bank and then uses cheques as a means of payment. In countries
where cheques are widely used, most large payments are made by cheque.
In the developed countries, similarly, most big transactions are settled by cheques.
However, cheques are more widely accepted and used in the more advanced
countries than in West African countries. For reasons we may not bother with here,
many people and institutions, including government agencies and departments, are
refusing private cheques as a means of making payment. For example, the West
African Examination Council (WAEC) insists on certified cheques (i.e. cheques
certified by the bank) for the payment of registration fees.
A certified cheque is the bank's own cheque which is rewritten to replace the
customer's cheque. It is a device to guarantee against fraud. It is important to note
that it is the bank deposit that is considered as money and not the cheque. The
cheque is merely "an order from the owner of a bank deposit to the banker to
transfer a certain sum, to the payee named on the cheque".
The validity of a cheque, therefore, depends on whether the drawer of the cheque
has sufficient money in his current/deposit account to meet the cheque. If he writes
a cheque for N10, when his bank account shows that he has only N2 left, the bank
will dishonor the cheque. That is, the bank will refuse to pay. If this happens, we
say the cheque has bounced. Cheques are, therefore, not legal tender and anybody
has a right to refuse to accept this method of payment.

13 
 
  
 

10. The Value of Money

People want money not for its sake but to enable them buy goods and services. The
value of money is the quantity of goods and services that money can buy. This is
what is called the "purchasing power" of money. If prices are high, a given
quantity of money will buy less than when prices are low. For example, it used to
cost 50 kobo to buy a big exercise book and 10 kobo to buy a biro pen. Now, an
exercise book costs about N20 and a biro pen N10. We can say that the value of
the naira has fallen.
Therefore, the value of money is inversely related to the price level. The higher the
price level, the smaller the quantity of goods and services that a given amount of
money can buy and, therefore, the lower the value of money. Conversely, [he
lower the general price level, the greater the quantity of goods and services money
can buy and the higher the value of money

14 
 
  
 

11.Effects of Changes in the Value of Money

Changes in the value of money have different effects on production and
'distribution of income. These effects include:
Effect on Level of Production: When prices are rising, business activities will be
stimulated. High prices would encourage expansion of business. Since all costs do
not generally increase immediately as prices begin to rise, profit would be greater
for businessmen. On the other hand, if prices are falling, although there might be
increased demand for some goods and services, the profit of entrepreneur is likely
to fall. This is so because not all costs will fall immediately. The entrepreneur will,
therefore, be less optimistic and may restrict production.
Effect on Distribution of Income: Price changes bring about changes in the value
of money which will have different effects on the incomes of different groups of
people. Now, let us examine three groups of people:
Those who derive their income from profit Salary and wages earners
Those who receive fixed income (e.g. Pensioners)

  Those who derive their income from profit. These are entrepreneurs/business
people. When prices are rising, they benefit most as profits become larger. When
prices are falling they suffer as profits decline.
  Salary and wage earners. Wages and salaries tend to lag behind prices. That
is, wages do not generally rise immediately following high prices. Therefore, when
prices are rising, wage and salary earners suffer as the value of their wages falls.
When prices are falling, wages and salaries again lag behind. We say wages are
downward strictly, meaning that it is difficult to reduce wages. In the period of
falling prices, wage and salary earners benefit although there may be a reduced
demand for labour.
  Those who receive fixed income. Typical examples of the group are the
pensioners. During periods of rising prices, all people on fixed incomes fine their
real income decline. They can buy less goods and services with their fixed income.
When prices are falling, the value of their income, increases. They will be able to
buy more goods and services with their income.

15 
 
  
 

It can be seen that those who gain when prices are rising are the ones who lose
when prices are falling and vice versa. On balance, the advantage lies with those
who gain when price are rising. This is so because the tendency has always been
for price increase rather than price falling. As a result, all debtors gain and all
creditors lose during the period of price increases. During the period of a declining
price level, the reverse so is the case. Therefore, changes in the value of money,
reflected by changes in the prices, lend to unequally redistribute income among
groups of people.

16 
 
  
 

12. DEMAND AND SUPPLY OF MONEY

  Definition of demand for money
Demand for money refers to the total amount of money balances that people want
to hold for certain purposes. Nominal money balances (MD ) are measured in
monetary units, while real
money balances (MD /P ) are measured in terms of the purchasing power of the
quantity of money
  Motives of Demand for Money
According to John Maynard Keynes there are 3 motives for demanding money: the
transaction, precautionary and speculative motives.
  The Transactions motive: Money is held tor the purchase of goods and
services because of the non-synchronization of the periods of income receipts and
their disbursements. This is determined directly by the level of income.
  Precautionary Motive: Money is also demanded to cater for emergencies and
contingencies or to provide for unexpected expenditures. This is also directly
dependent on the income level.
  Speculative Motive: This has to do with money held for the purpose of
avoiding capital losses in a declining securities market. This arises out of
uncertainty. Due to changing or fluctuating interest rates, the individual may
decide to hold money in cash or in bond or in equities, etc. this varies inversely
with the rate of interest.

17 
 
  
 

13.Money Supply
  Money Supply and Its Component
The problem of defining money supply is still associated with a considerable
degree of controversy. Generally, however, money supply is taken as the total
amount of money (e.g. currency and demand deposits) in circulation in a country at
any given time. Currency in circulation is made up of coins and notes, while
demand deposits or checking current account are those obligations which are not
associated with any interest payments (in Nigeria before January,
1990) and accepted by the public as a means of exchange drawn without notice by
means of cheques.
Money supply can be defined narrowly or broadly. Narrow money can be defined
as those assets which represent immediate purchasing power in the economy, and
hence function as a medium of exchange.
Narrow money supply can be defined as those assets which represent immediate
purchasing power in the economy, and hence function as a medium of exchange. In
Nigeria, the narrow money supply (M1) is defined as currency outside banks plus
demand deposit of commercial banks plus domestic deposit with the Central Bank,
less Federal Government deposit at commercial banks. In simple terms, M1 is
defined as M1 = C + D.
Where Ml = narrow money supply C = currency outside banks D = demand
deposits
Ajayi (1978) contends that M1 is the appropriate definition of money in Nigeria. In
the U.K, narrow money includes M0 M1 and M2 defined variously as: MO
includes only notes and coins' in circulation and in banks tills; MI includes notes
and coins in circulation and sight deposits with the bank; and M^ includes not only
notes and coins and bank current accounts, hut also 7 days bank deposits and some
building society deposits.
Broad money on the other hand includes narrow money assets but in addition,
includes those assets which have the quality of liquidity. They can be quickly and
readily converted to cash and the conversion is achieved with little or no less in
terms of either interest penalty or capital loss through forced sale. In the Nigeria
context, broad money (M2) is defined as M1 plus quasi- money. Quasi-money as

18 
 
  
 

used here is defined as the sum of savings and time deposits with the commercial
banks. Thus, M2 is symbolically shown as:
M2 = C + D + T + S
Where:
M2 = broad money
C = currency in circulation D = demand deposits
T = time deposits
S = savings deposits
Time deposits as used here are those obligations of the banks on which interest is
paid and which at least potentially or formally, can be made available to the
depositors after some delays and notice. In the U.K., broad money is primarily
represented by M3 plus M4 and M5 – M3 consists of M1 plus private sector,
sterling bank deposits and private sector holdings of sterling certificates of deposit;
M4 includes bank deposit accounts which may readily be used for transactional
purpose with minimal interest loss penalty but does not include building society
share accounts which are a very close substitute for bank deposit accounts, and
include national savings (other than National Savings Certificates, SAYE, and
long-term deposits).
It is important to note that narrow money could be preferred because they exclude
investment balance which distorts the usefulness of broad definitions, and they can
usually be calculated more quickly. But broad money has two main advantages
over narrow money. It includes funds which, while not themselves a medium of
exchange, can be rapidly converted to transactional money, and it is more stable
since increase in interest rates tend to cause people to manage their cash and
current account balance more carefully, causing a fall in the narrow money which
in no way may reflect a change in transactional balance.
We also have nominal and real money supply, Nominal money supply is measured
in monetary units and it is assumed that the monetary authorities control only the
nominal amount of money exogenous supply of money which will be available to
the community. This exogenous money supply curve is shown in figure below.

19 
 
  
 

14.The Elementary Quantity Theory of Money

In the seventeenth century, it was discovered that there was connection between
the quantity of money (M) and the general level of prices (P). This the connection
led to the formulation of the Quantity Theory of Money. In its simplest form, the
quantity theory of money stated that an increase in the quantity of money (M)
would bring about a proportionate rise in prices.
Later, Professor Irving Fisher introduced a new concept to describe the relationship
between M and P. This new concept is called the "velocity of circulation of
money" written as "V". Money circulates from hand to hand. Let us illustrate that
Musa, the farmer, spent N10 to buy ice cream, the ice cream boy spent the same
N10 to pay for the lunch in a nearby restaurant, while the restaurant attendant spent
the same N10 to buy vegetables from Musa. The N10 was returned to where it was
before the first transaction took place. In this case, the same currency has been
used for four separate transactions. That is to say that N10 did the work of N40. In
the course of a year, each unit of money is used many times. If one unit of money
is used to serve four transactions, as in our example, this is equivalent to four units
of money, each being used in only one transaction. Velocity of circulation of
money can, therefore, be defined as the rate at which the stock of money is turning
over per year to consummate income transactions.
If the stock of money is turning over very slowly so that its rate of naira income
spending per year is low, then V will be low. If people spend as quickly as they
earn, then V will be high. With the introduction of the velocity of circulation of
money, the quantity theory came to be expressed by a new identity called the
Quantity Equation of Exchange.
MV = PT
The symbol M represents the local amount of money in existence (i.e. coins, bank
notes and bank deposits). The symbol V represents the velocity of circulation. MV,
therefore, represents the amount of money used in a given period, P stands for the
general price level, that is, some kind of average of the prices of all kinds of
commodities. The symbol T represents the total of all the transactions that have
taken place with money during the period.

20 
 
  
 

The equation of exchange shows that the price level and the value of money can be
influenced not only by the quantity of money, M, but also by (i) the rate at which
money circulates, V, and (ii) the output of goods and services.
Therefore, prices could rise without any change in the quantity of money if a rise
occurs in the velocity of circulation. On the other hand prices might remain
unchanged even though there has been an increase in the quantity of money. This
is possible where there has been a corresponding increase in the output of goods
and services.
  Financial Institution
Financial institution is defined as an organized way or system of managing money.
Financial institutions can be classified into two broad headings:
  Traditional Financial Institutions, and
  Modern Financial Institutions
  Traditional Financial Institutions
The traditional financial institutions will include all arrangements for the
management of money before the development of the banking system. This was
the system of borrowing and lending that existed before the development of
modern financial institutions.
A typical example of a traditional financial institution in Nigeria is called Esusu. It
was devised as a means to encourage savings. Under this system, a group of people
agree to make regular contributions of some amount as some specified regular
intervals, sometimes daily, sometimes weekly and sometimes monthly. The
amount each participant agrees to contribute depends on his ability. Usually, an
officer is appointed called "collector". His primary function is to go round
members and collect their contributions. When contributions are made by several
individuals, the amount so generated could be quite large.
Varying arrangements exist for the distribution of the funds generated. The most
common arrangement is one in which the amount collected at the end of, say every
month, is given to the participants according to a previously agreed order.
However, the system is flexible enough to recognize people that are hard pressed
for funds, such as the death of a member's father or mother, which would require
unexpected expenses for burial.

21 
 
  
 

Apart from the system of Esusu, there is another traditional financial institution
that was common in Africa before the development of the banking system. The
system is often referred to as "money lender". A money lender is one who has
lendable funds. He operates these funds on purely commercial basis. In this case,
he usually charges very high interest rates; in some cases, close to a hundred
percent. The factors that influence the interest rates include:
  The degree of need: When the degree is high, in which case the borrower is
in dire need, the rate is usually very high.
  The timing of repayment: The longer the timing of repayment, the higher the
interest rate.
  Creditworthiness of the borrower: When is creditworthy, that is, he has some
property which could be confiscated, the rates are usually higher than when he is a
poor stuff.
Advantages of Traditional Financial Institutions
  The institutions make funds available for various purposes.
  Arrangements, for borrowing are simple. It is not a complicated system (iii).
  System encourages thrift and saving habit.
Disadvantages of Traditional Financial Institutions
Among the various problems arising from the operation of the traditional financial
institutions are:
  The system involves some elements of trade by barter. It is not easy to find
people who have money and willing to lend out money.
  There is no protection against the loss of money contributed into Esusu. For
example, if a member who has collected the contributions made by others dies,
there is no way of recovering the money he has collected.
  The fixing of interest rate, in the case of a money lender, is arbitrary and
sometimes inhuman.
  Sometimes, the inability to repay loan leads to an arrangement whereby the
son or daughter of the loan defaulter is handed over to the creditor. The son or
daughter would continue to work for the creditor until the debtor settles his debt.
The arrangement is like sending those children into slavery.

22 
 
  
 

15.Modern Financial Institutions

In the earlier chapter, an institution for buying and selling things, either
commodities or labour, was called a market. Since financial institutions deal with
the lending and borrowing of money, they are generally called financial markets.
Banks, which we examined in the last chapter, are financial markets and, therefore,
one of the modern financial institutions. Also included under financial markets are
development banks, insurance companies, building societies and the stock
exchange.
Modern financial markets can be classified into two:
(i).  Money Market, and (ii).  Capital Market.

16.The Money Market

Money market refers to a collection or group of financial institutions or exchange
system set up for dealing in short-term credit instruments of high quality, such as
treasury bills, treasury certificates, call money, commercial paper, Bankers' Unit
Fund, certificates, ways and means advances, as well as the dealing in gold and
foreign exchange. These short-term instrument involve a small risk due to loss,
because they are issued by obligors of the highest credit rating and they mature
within one year.
While denoting trading in money and other short-term financial assets, the money
they money market comprises all the facilities of the country for the purchase and
sale of money for intermediate and deferred delivery and for the borrowing and
lending of money for short periods of time it is manifestation of dealing in short-
term financial instruments (their sale and purchase, as also borrowing and lending
for short periods) on the one hand, and a collection of the dealers in these assets on
the other. H is thus a collection of financial institutions set up for granting of short-
term loans and dealing in short-term loans and dealing in short-term securities,
gold and foreign exchange.

23 
 
  
 

17.Advantages of & Well-Developed Money Market:

The existence of a well-developed and a sensitive money market is necessary for
the smooth operation of monetary policy of the Central Bank. This is because,
through the money market the Central Bank can influence the short and long term
structure of interest rates, and thus make an impact on other rates as well.
The existence of an efficient money market enables commercial banks to conduct
their operations with smaller cash reserve ratios. That is, the money market imparts
an element of efficiency to the working of the banks.
With the existence of a bill market, the money market helps in financial trade and
business activities and hence promotes competition and trade generally.
Thus the money market is able to provide genuine trade activities and meet their
varying financial needs, while providing a lever in the hands of the authorities to
implement their credit controls more effectively
Also, the money market serves the business and trade by providing huge sums of
money according to its requirements and changing the supply there of as need be
In addition, the money market provides a mechanism whereby huge sums of
money can change quickly and safely.
Features of a Developed Money Market:
A developed money market refers to one which is comparatively efficient in the
sense that it is responsive to changes in demand for and supply of funds in any of
its segments, and effects initiated in any part of it quickly spread to others without
significant time lags. To meet this definition, a money market should possess these
features:
  Presence of a Central Bank:
A Central Bank with adequate legal powers, sufficient relevant information and
expertise, must exist as a lender of last resort and as the initiator and executor of
monetary policy in a whole
  Presence of a developed Commercial Banking System:
A well-developed money-market should be characterized by the presence of a
developed commercial banking system, along with a wide-spread banking habit on
the part of the public.

24 
 
  
 

  Adequate Supply of a Variety and quantity of financial assets:

In a well-developed money market, there should be an adequate supply of a variety
and quantity of short-term financial assets or instruments such as trade bills,
treasury bills, etc.
  Presence of well-developed sub-markets:

The existence of a well-developed sub-markets and their adequate responsiveness

to small changes in interest and discount rates make room for a well-developed
money market. If the demand and supply of certain instruments dominate, the
interaction between different interest rates will be limited.
  Existence of Specialized institutions:
For competitiveness and efficiency, there must exist specialized institutions in
particular types of assets, e.g. specialized discount houses, acceptance houses
specializing in accepting bills, or specialized dealers in government securities.
  Existence of Contributory Legal and Economic Factors:
For the money market to well-developed, there must exist appropriate legal
provisions to reduce transaction costs, protect against default in payment, while
prerequisite economic forces such as speedy and cheap transmission of
information, cheap fund remittance, and adequate volume of trade and commerce,
must exist.

25 
 
  
 

18. Reasons for the establishment of the Nigerian money market:

  To provide the machinery needed for government short-term financing
requirement,
  As an essential step on the path to independent nationhood, it was part of a
modem financial and monetary system to enable a nation to establish the monetary
autonomy as a part and parcel of the workings of an independent, modern state.
  To nationalize the credit base by providing local investment outlet for the
retention of funds in Nigeria and for the investment of funds repatriated from
abroad as a result of government persuasions to that effect.
  To perform for the country all the functions which money market
traditionally performs, such as the provision of the basis for operating and
executing an effective monetary policy.
  To effectively mobilize resources for investment purposes.
Functions of the money market:
  It provides the basis for operating and executing an effective monetary
policy.
  To promote an orderly flow of short-term funds.
  To ensure supply of the necessary means of expanding and contracting
credits.
  It is a central pool of liquid financial resources upon which the banking
system can drew when it is in need of additional funds, and into which it can make
payment when it holds funds surplus to its needs.
  It provides the mechanism through which the liquidity of banking system is
maintained at the desired level.
  To provide banks to basic financial instruments for effective management of
their resources. Thus helps them to diversify their assets holdings by providing a
forum for investment of their surplus case.
  To provide the machinery needed for government short-term financing
requirement, hence achieving even seasonal variation in the normal flow of
revenue.

26 
 
  
 

  Mobilization of funds from savers (lenders) and the transmission of such

funds to borrowers (investors).
  It provides channel for the injection of Central Bank cash into the system r
the economy.
  To maintain stable cash and liquidity ratios as a base for the operation.
  It helps commercial banks to lower cash reserves through the provision of a
first line of defence for cash in the form of call money, while providing second line
of defence for cash shortages through bills. If banks are threatened with cash
shortages and if their cash

balances at the central Bank falls below the statutory minimum, the can draw on
call money and if need be they discount bill, for cash, including balances at the
Central Bank.

27 
 
  
 

19.The Instruments of the Nigeria Money Market:

  Treasury Bills (TBS)
These are money-market (short-term) securities issued by the federal government
of Nigeria. They are sold at a discount (rather than paying coupon interest), mature
within 90 days of the date of issue. They provide the government with a highly
flexible and relatively cheap means of borrowing cash. Thus. TBS and IOUs, are
used by the federal government to borrow for short periods of about three months
pending the collection of its revenue. Their issue for the first time in Nigeria (in
April l960) was provided for under the Treasury Ordinance of I 959, It was issued
in Nigeria in multiples of N2000 later reduced to N100 in order to expand the
coverage of holders for 91 days and at fixed discount. TBS outstanding average
N34.421.8 million in 1989 with N10.879.5 million issued between 1992, and 1995,
it averaged N2585.05 million.
  Treasury Certificate (TCS)
These are similar to TBS but are issued at par or face value and pay fixed interest
rates. These fixed interest rates are called coupon rates. Thus, each issue promises
to pay a coupon rate of interest and the investor collects this interest by tearing
coupons off the edge of the certificate and cashing the coupon at a bank; post
office, or other specified federal office. Each coupon is imprinted a year from the
date of issue. In the Nigeria context, their rates became market- determined like TB
rates following interest rates deregulation. Thus, treasury certificates are medium-
term government securities which mature after a period of one to two tears and are
intended to bridge the gap between the Treasury bill and long term government
securities. They were first issued in 1968 at a discount of 45/8 percent for one-year
certificates and 41/2 percent for two year certificates. At the end of 1990, treasury
certificates outstanding had risen to N34214.6 million. This further rose to
N36554.32 in 1993. N37342.7 million in 1994 but declined to N23596.5 million in
1995. Thus, between 1990 and 1995 it averaged N39230.2 million. The main
holders of treasury certificates are the commercial banks with the CBN ranking
second.
  Call Money Fund Scheme- Money at call or Short Notice
This refers to money lent by the banks on the understanding that it is repayable at
the bank's demand or at short notice (e.g. 24 hours or over-night). Overnight loans
are simply bank reserves that are loaned from banks with excess reserves to banks

28 
 
  
 

with insufficient reserves. One bank borrows money and pays the overnight
interest rate to another bank in order and obtains the lending bank's excess reserves
to hold as one-day deposits. The borrowing bank needs these one day deposits in
order to acquire the legal reserves the CBN examiners require banks to maintain.
They act as a cushion which absorbs the immediate shock of liquidity pressures in
the market. The scheme was introduced in 1962 in Nigeria. Under the scheme,
fund was created at the CBN and the participating banks had to agree to maintain a
minimum balance at the CBN. Any surplus above the minimum balance was then
lint to the fund. The CBN administered the fund on behalf of the banks and paid
interest at a fixed rate somewhere below the Treasury bill rate. The CBN then
invented the funds in the treasury bills.
The scheme was abolished in 1974 due to buoyant oil revenue of the federal
government consequent upon the oil boom. While the scheme lasted, it had a
beneficial impact on the efficiency with which the banks managed their cash
balances while helping to reduce the degree of dependence of the banks on
overseas money market facilities.

  Commercial Papers or Commercial Bills

These are short-term promissory notes issued by the CBN and their maturities vary
from 50 to 270 days, with varying denominations (sometimes N50.000 or more).
They are debts that arise in the course of commerce. Commercial papers may also
be sold by major companies (blue- chips-large, old, sale, well-known, national
companies) to obtain a loan. Here, such notes are not backed by any collateral;
rather, they rely on the high credit rating of the issuing companies. Normally,
issuers of commercial papers maintain open lines of credit (i.e. unused borrowing
power at banks) sufficient to pay back all of their commercial papers outstanding.
Issuers operate in this form since this type of credit can be obtained more quickly
and easily than can bank loans.
This instalment was introduced in 1962 to finance the export-marketing operations
of the then Northern Marketing Board, under the arrangement, the marketing
boards meet their cash requirements by drawing ninety-day bills of exchange on
the marketing boards. The bills are then discounted with the commercial banks and
acceptance houses participating in the scheme. The role of the CBN is that to
provide rediscounting facilities for the bills. In 1968, CBN took over the
responsibility for the marketing Board crop finance and hence, the demise of the
29 
 
  
 

bill market. What remains today of the commercial paper market, following the
disappearance of produce bills are import and domestic trade bills. By 1968,
commercial paper outstanding way N5.1 million falling from N36.4 million in
1967. However, in 1989, commercial paper outstanding averaged N868.8 million.
Between 1990 and 1995, it averaged N2219.05 million recorded in 1990.
  Certificates of Deposits (CDS)
Negotiable (NCO) or Non-negotiable (NNCO) deposits are inter-bank debt
instruments designed mainly to channel commercial banks surplus funds into the
merchant banks NCOs are re-discountable with the CBN and those with more than
18 months tenure are eligible as liquid assets in computing a bank's liquidity ratio.
These attributes make the instruments attractive to banks. It was introduced in
Nigeria by the CBN in 1975. They are issued to fellow-bankers within that
maturity period, as one of the deposits they accept.
  Bankers Unit Fund (BUF)
This was introduced by CBN in 1975 and initially meant to mop up excess
liquidity in the banking system. It was also designed for sweeten the market for
Federal Government Stock. To this end commercial bank holding of the stock are
accepted as a part of their specified liquid assets and are repayable on demand,
under the BUF, Federal Government stocks of not more than three years to
maturity were thus designated eligible development stock (HDS) For the purpose
of meeting the banks’ specified liquid assets requirements. This placed the banks in
a position to earn long-term rates of interest on what is essentially a short-term
investment. Though, initially designed to mop up excess liquidity in the banking
system by conferring on instruments cash- substitute status repayable on demand
or acceptable in meeting reserve requirements, the capability of the bank for credit
expansion was unaffected.
In effect, the BUF was intended to provide avenue for the commercial and
merchant banks and other financial institutions to invest part of their liquid fund in
a money market asset linked to Federal Government Stocks, Participants in the
scheme invested in multiples of N10,000 and the fund is in turn invested in
available Government stocks of various maturities. The operation of the scheme
was subject to the availability of stocks. Interest is payable every 12 months from
the date of initial investment of funds in the scheme (Oyido, 1986). At the end of

30 
 
  
 

1975, total CDs, BUF and EDS outstanding stood at N49.8 million constituting
only 5.1 per unit of the total money
Market assets then. This went up to N258.2 million in 1985. However, in 1989
BUF alone outstanding averaged N3.9 million while EDS outstanding averaged
N23 million.
  Stabilisation securities
These were issued since 1976 by the CBN ideally to mop up idle cash balances of
participating banks. Participation was mandatory for banks with savings deposits
of N50 million and above. The amount they are required to invest in stabilization
securities is fixed at 50 percent of the increase in saving deposits over the level of
the preceding year. The savings deposit relates to individual accounts not
exceeding N20,000 each. In 1976 when the scheme was introduced interest rate
paid was 4 percent annum and revised to 5 percent by 1979.
  Ways And Means Advances
Section 34 of the CBN Act 1998 (Cap 30 as amended I962-1969) empowers the
CBN to grant temporary advances in the form of ‘Ways and Means’ to the federal
government up to 25 percent of estimated recurrent budget revenue. Ways and
Means advances averaged about N1 million yearly between I960 and 1962. The
Federal Government did not use this facility from 1963 to 1966 except on two
occasions only. December 1961 and January 1966 when relatively small amounts
of N400,000 and N240,000 respectively were borrowed.
However, the financial pressures arising from the prosecution of the civil war led
to increased set of the instrument by the Government. Therefore, from N1.9
million in 1967 ways and means advances rose to a monthly average of N54.5
million in 1969, falling marginally to N44.5 million at the end of the war in 1970.
The instrument was not used between 1971 and 1976 following Government’s
unprecedented revenue from oil. However, the reemergence of financial pressures
in 1977 led to the rise in Ways and Means to a hard-core level of over N1 billion in
1977 and 1978. By 1979, Ways and Means advances outstanding was N65.4
million while the average monthly amount outstanding in 1987 was N739.9
million, rising to N5,278.0 million in 1988 and to N5,794.4 in 1989.
Conclusively, we may state that these money market instruments (readily
marketable or convertible into cash, with maturities ranging between a few days
and one or two or three years) are the evidences of debt originating in financial
31 
 
  
 

transactions in which purchasing power is transferred from surplus spending units

(buyers) to deficit spending units (sellers) while the claims contribute a liability to
those units issuing them an asset to the holders who can dispose of them before or
at maturity in order finance consumable goods.

32 
 
  
 

20. Capital Market

The capital market is the arm of the financial markets for rising long-term funds to
finance productive investments. The market comprises the primary segment, for
rising new capital, and the secondary market, otherwise known as the stock
exchange, in which existing securities are traded.
The Nigerian Stock Exchange (NSE) is the prime operational institution in the
Nigerian capital market. The NSE was originality established in 1961 as the Lagos
Stock Exchange. It was reconstituted as the Nigerian Stock Exchange in 1977. It
has presently six trading floors in Lagos, Port Harcourt, Kaduna, Kano, Onitsha
and Ibadan.
The Securities and Exchange Commission, formally called Capital Issues
Commission, is the apex regulatory organ of the market, it has responsibility for
ensuring orderliness, fair play and transparency in market operation. The Central
Bank of Nigeria (CBN), as the apex institution in the Nigeria financial system,
monitors activities and developments in the market.
The capital market as we have said earlier, involves only individuals and
institutions dealing with medium and long-term loans. Some of the institutions
such as commercial banks, which deal mainly with short-term loans, also deal with
the capital market because they provide finance for investment. However, some
institutions are specifically established to provide long- term investment capital.
Typical examples of institutions for capital market in Nigeria are the Nigerian
Industrial Development Bank (NIDB) and the Nigerian Bank for Commerce and
Industry (NBCI), now merged to become the new Bank for industry, and the
Nigerian Agricultural and Cooperative Bank merged with the Peoples Bank to
become the Nigerian Agricultural Cooperative and Rural Development Bank
(NACRDB). In Ghana, it would include the National Bank of Ghana. The main
business of the capital market is to provide industry with permanent capital.

33 
 
  
 

21.Development of Capital Market Institutions in West Africa

The demand for long-term loans is a function of bankable investment
opportunities. The greater the opportunities for investment, the greater the demand
for long-term loans. Investors need capital for investments, particularly for new
investments. These investors could be individuals, groups of individuals,
institutions or government. An individual may want to build an industry; a
government may want to build an inter-state express road or a dam. Such
investment requires large sum of money and a longer period over which the loan is
repayable. The best source of such fund is the capital market which specializes in
such long-term loans.
The development of the capital market in West Africa has been relatively recent.
The developments of certain institutions have influenced the rapid development of
the capital market in Africa, in general, and Nigeria in particular.
  The Recent Development of the Central Banks: In most West Africa
countries, central banks were established only after each country's independence.
Therefore, bonds, which are a type of security with a fixed interest rate, could only
come into use after the establishment of central banks. Although these bonds are
usually sold to the public, they are bought mainly by institutional investors like the
development banks and insurance companies.
  Savings Certificates and Savings Stamps: the development of these
institutions enables the smaller saver to save. Pulling together smaller savings by
large number of savers could provide large capital which could be used for long-
term investment. The most typical of such savings in Nigeria is the post office
savings which provides an important source of long-term finance for government.
  Development banks: Development Banks are established specifically to
provide capital for long-term investments, usually in identified priority areas. Such
banks are the Nigerian Industrial Development Banks (NIDB) in Nigeria; the
National Development Bank of Sierra Leone and the Ghana National Investment
Bank. Usually, the operating capital of these banks is provided by government. The
banks use such capital to provide revolving loans to corporate and individual
investors.
  Building Societies: building societies accept savings from customers. From
the savings made, they provide long-term loans to build or buy houses and in some
cases to buy land. In Nigeria such specialized institutions includes the Nigeria

34 
 
  
 

Building society and several state-owned Housing Corporations. In Ghana there is

First Ghana Building Society.
  Insurance Companies: Insurance companies accumulate a large volume of
money by collecting premium from individuals, institutions and government that
have taken up a variety of insurance policies with the companies. Such policies
may include life, accident,
fire, theft and educational endowment of children. The large sum of premium so
collected is available for investment in the capital market.
  Merchant Banks: Merchant Banks are also called investment banks because
they provide finance to the capital market. They obtain charges for discounting
hills and by underwriting and issuing of shares, i.e. by guaranteeing to buy unsold
shares. Examples of merchant banks are ICON limited, in Nigeria and the National
Finance and Merchant Bank of Ghana.
  Provident Funds: To provide social security, especially for employees in the
private sector of the economy, many countries in West Africa provide what they
call Provident funds. The arrangement requires the contribution by the employees
of specified amount into the pool. The funds have been in existence for several
years and have accumulated considerable amount of money which the
governments of the various countries have invested.
  The Stock Exchange: The establishment of the stock exchange has provided
one of the most important institutions for long-term investment. The issue of new
security for sale, by joint-stock companies, is the most important source of long-
term capital.
The objectives for establishing the Nigerian capital market are:
  To mobilize long-term funds from surplus units for on-lending; -  •
  .  • ii,
  To ensure efficient allocation of scarce financial resources;
  To reduce over-reliance on the money market for industrial financing;
  To provide a solvent, efficient and competitive financial sector; and
  To provide long-term finance and promote a healthy stock market culture.

35 
 
  
 

The instruments available in the market includes: (i) equity or ordinary shares and
(ii) government stocks and company bonds/debentures.
Participating institutions in the capital market include:
  Issuing houses;
  Commercial (deposit money banks) and Merchant banks;
  Development banks;
  Stockbrokers
  Insurance companies;
  Pension fund; and
  Other financial intermediaries.
Growth of the Nigerian Capital Market
The Nigerian stock market has experienced remarkable growth over the years. The
numbers of quoted securities as well as the number of stock brokerage firms have
increased tremendously. Market capitalization has also risen.
The growth of the stock market has been made possibly by a number of factors,
namely;
 The income Tax Management Act, 1961 required Pension and Provident
Funds to invest a substantial proportion of their funds in government stocks.
  The Trustee Investment Act, 1962 required trustees to invest in government
stocks and industrial securities.
  The insurance (Miscellaneous Provisions) Act, 1964 required insurance
companies to invest a stipulated percentage of their premium in government
securities.
The Nigerian Enterprises Promotion Decree of 1970 required foreigners to
 
relinquish sizable proportions of their equity interest in local enterprises to
members of the Nigerian public.
  The deregulation of interest rates.
  The privatization and commercialization policy of government.

36 
 
  
 

22.Problems Facing the Capital Market

Despite the observed growth of the Nigerian capital market, the growth has been
described as unsatisfactory when compared with contemporary markets elsewhere.
The following factors have been said to be responsible for the unsatisfactory
situation of the market.
  Inadequate securities for trading.
  Low level of market automation and awareness
  Lack of timely and easy access to information
  Poor infrastructural facilities
  Restriction on foreign ownership of assets.
Second-Tier Securities Market (SSM)
Second-Tier Securities Market (SSM) was established in April 1985 to encourage
small and medium-scale enterprises to avail themselves of the resources of the
stock market by making listing requirements and conditions less stringent for this
category of enterprises. The aim is to increase the volume of securities in the
market.
As part of capital market reforms, the Nigerian Stock Exchange (NSE) introduced
the central Securities Clearing System (CSCS). The CSCS is an automated
clearing, settling and delivery system aimed at easing transactions and fostering
investors' confidence in the market.
Other reform measures include the repeal of the indigenization legislation of the
1970s, which limited foreign participation in the capital market, and the
promulgation of the Nigerian Investment Promotion Commission (NIPC) Decree
in 1995 to liberalize the investment climate in Nigeria. The decree allows
unrestricted foreigner and residents the same rights, privileges and opportunities of
investment in the Nigerian capital market.
In 1996, the Federal Government set up the Dennis Odife Panel to review the
structure, conduct and performance of the capital market. The panel discovered
that the market was operating within many outdated laws regulations and that there
was no basis for retaining the "monopoly" status of the NSE.

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The panel recommended, among other things, the establishment in Abuja, which
would set the standard against which other stock exchange in the country should
compete.
Comparison of Money Market and Capital Market
The money market and capital market can be conveniently compared under three
items:
  Purpose or objectives;
  Types of instrument used; and
  Types of institutions involved.

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23.CENTRAL BANK
Central Banks: Each country has a central bank such as the Central Bank of
Nigeria, the Bank of Ghana, the bank of Sierra Leone and the Central of Gambia.
  Development of Central Banking
A central bank is the apex of all banking institutions in a country. It controls the
activities of all the commercial banks. Before the independence of most English-
speaking West African countries, there was only one coordinating authority for the
whole territory on currency matters. This was called the West African Currency
Board. Since it was the creation of the colonial authorities, it had its headquarters
in London. However, its functions of the central banks are much more than the
issuing of notes.
As soon as each country gained or approached political independence, it
established its own central bank. A central bank was established in Ghana in 1957,
in Nigeria in 1959, in Sierra Leone in 1964 and in the Gambia 1971. At these
periods, the countries wanted to have control over the activities of their
commercial banks.

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24. Functions of Central Bank

  The Government's Bank: The central bank is the government's own bank, it
keeps the account of the government. It keeps all revenues from taxation and
makes all payment out of it on behalf of the government. Just as a commercial
bank lends to its customers, the central bank lends to the government. More
importantly, it manages the national debt, i.e. the government's external and
internal borrowings.
  The Issue of Currency: The central bank is the only authority empowered by
law to issue all paper money and coins, usually called currency in any country.
  Bankers Bank: The central bank serves as a bank to commercial banks. This
means that the commercial banks keep accounts with the central bank. The
deposits which the commercial banks keep with the central bank are treated as cash
and are regarded as part of the proportion of the deposits that commercial banks
should, by law, keep as cash. The central bank serves as the clearing house for the
settlement of inter-bank cheques.
  Lender of Last Resort: The central bank lends money to the commercial
banks in serious need. For example, the central banks make advances available to
commercial banks and
acceptance houses to enable them, particularly, commercial banks, satisfy their
customers' demand for cash and thus avoid cash crisis in the country.
  Adviser to the Government: The central bank is an adviser to the
government on monetary matters. It advises government on the methods of raising
loans, particularly foreign loans. It manages the national debt by servicing it as
well as arranging for its repayment.
  Foreign Monetary Transactions: The central bank holds and manages the
foreign exchange reserves and advises government on the trends. It establishes
contacts with the central banks of other countries of the world, as well as
international financial institutions such as the International Monetary Fund (IMF)
and the International Bank for Reconstruction and Development (IBRD) which is
also known as the World Bank.
  Promoting Economic Development: The central bank also has responsibility
of promoting development. It does this in several ways. It controls the activities of
the commercial banks to promote industrial, agricultural and commercial growth. It

40 
 
  
 

promotes the establishment and development of institutions essential for rapid

economic growth such as the Nigerian Ban for Commerce and Industry (NBCI)
and the Nigerian Industrial Development Bank (NIDB).

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25.COMMERCIAL (DEPOSIT MONEY BANK) BANKS

In each of the West African countries, there are several commercial banks. Most of
these banks are jointly owned by the government and private investors. In Nigeria,
such banks include Access Bank, First Bank of Nigeria, Guaranty Trust Bank,
Union Bank, United Bank for Africa, Wema Bank, Zenith Bank, and a host of
others.
  Functions of Commercial Banks
  Acceptance of Deposits: Acceptance of deposits from customers is the oldest
function of commercial banks. In the early, commercial banks used to charge
customers some amount for the safe-keeping of their money. Nowadays, the banks
pay some interest to customers for saving their money in the bank. These are the
different types of account that can be kept at a bank.
  Current account: This is also called demand deposit. Money saved or
deposited in this account can be withdrawn any time only by means of a cheque
without giving any noticed to the bank. Current account holders do not receive any
interest on their deposits; rather, the bank makes some charges for the safe-keeping
of the money.
  Fixed deposit account: Money saved in this account is for a stated period of
time, say nine months, one year etc. It is therefore not subject to withdrawal by
cheque because it cannot be withdrawn just any time. It earns some interests. These
interests are usually higher than the interest payable on savings accounts.
  Savings account: Savings account makes it possible for smaller savers to
keep money without the need of cheque. The savings that are made are recorded in
a "passbook" which is generally taken to the bank, either to deposit or to withdraw.
Because savings cannot be withdrawn by cheques, a small interest is earned on the
balance in the account.
  Acting as Agents far Payments: Commercial banks honour cheques and
effect payments. The cheques have become the principal method of payment and it
has the following advantages:
  There is no need to carry large sums of money around,
  They are generally safer to carry than cash,
  They can be written for any amount needed,

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They provide a form of receipts. A cleared cheque is an evidence that

 
payment has been made and it cannot be denied.
  Money can be paid over long distances without the need for personal
contact; and
  Cheque stubs provide a record of payments made.
  Currying Out Standing Orders: Sometimes a bank is given a standing order
to make regular payments, such as payment of school fees and monthly payment of
insurance premiums.
  Lending to Customers: The most profitable business of the commercial bank
is lending. Lending to customers is also one of the most important functions. The
commercial bank performs its lending functions to customers in the following
ways.
  By means of Loans: This is done by crediting the account of the borrower
with the amount of the loan. The account is usually a current account. An
arrangement is made for the borrower to repay the loan in fixed installments over
an agreed period of time. The borrower pays interest on the full amount borrowed.
  By means of Overdrafts: An overdraft is the credit facility that is extended
by bank to a customer who operates a current account to overdraw his account up
to an agreed maximum amount. If a customer is given an overdraft, he is allowed
to withdraw more than he has in his account up to the limit of the overdraft. He
pays interest only on the amount he has actually overdrawn in his account.
Overdraft is the easiest and most convenient method of borrowing money from the
banks opened to businessmen.
  By discounting bill of Exchange: Discounting a bill of exchange literally
means payment on behalf of the customer. Thus, when bank discounts a bill of
exchange for a customer, it means the bank makes payment to someone (creditor)
who sells some goods to his customer on the promise that the customer will later
repay the bank. This system thus enables the creditor to receive immediate
payment. At the same time, it provides the debtor (the bank's customer) credit over
a given period of time, it is therefore, other types of bank lending,
  By buying Treasury bills: Commercial banks regularly buy treasury bills. By
government treasury bills, we mean a form of public short-term, usually 90 days,
and loans. It is a legal document or instrument expressing the promise of the

43 
 
  
 

treasury to pay to the holder of such a document a stated principal sum and the
interest that is specified on the principal.
  Agent of Government: Commercial banks, either through the Central Bank
or through direct directives from the Ministry of Finance, serve as agents for
implementing government monetary policy, such as assisting identified sectors of
the economy. Such a policy may be to promote agricultural production or to
stimulate export products.
  Other Services: Many other services of a general nature are performed by
commercial banks. They serve as trustees or executors of wills. They transact
foreign exchange business, i.e. buy foreign exchange from the Central Bank and
sell to customers. They issue bank drafts and traveler's cheques. They also provide
safe places for the keeping of valuables, such as jewelries and documents.
Differences between a Commercial Bank and a Central Bank
One main difference between a commercial bank and a central bank is that
commercial bank is usually joint-stock companies, i.e. owned by shareholders. As
commercial ventures, they aim at making profit. A central bank, on the other hand,
is owned entirely by the central government.
While individuals, group of individuals federal and state governments can and do
own commercial banks, only the national or federal government can own a central
bank.

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26. Other Liquidity Financial Institutions

  Savings and loan Associations: They are operated by individuals by
collecting their savings in mutual association. They covert their savings funds into
mortgage loans.
  Mutual Savings Banks: They operate like savings and loan associations. The
only difference is that they are established on the basis of co-operation by
employees of some company, trade unions or other institutions.
  Co-operative credit Societies: The members of credit societies purchases
shares of co- operative societies, deposit their savings with them and borrow from
them.
  Mutual Funds: Mutual funds sell their shares to individuals and firms and
invest their proceeds in various types of assets. Some mutual funds, known as
money market mutual funds, invest in short-term safe assets such as Treasury Bills,
Certificates of deposit of banks etc.
  Insurance Companies: Insurance companies protect individuals and firms
against risks. The premium they receive from individuals by insuring their lives,
they invest the same in advancing loans for long-term assets, mortgages,
construction of houses, etc. on the other hand, the premium received by them for
insuring against loss from fire, theft, accident, etc. of trucks, cars, buildings etc. is
invested in short-term assets.
  Pension Funds: Private and government corporate, and central, state and
local governments deposit some amount in pension funds by deducting a certain
amount from the salaries of their employees. Pension funds, institutions or
corporate invest these funds in long-term assets.
  Brokerage Firms: Brokerage firms link buyers and seller of financial assets.
As such, they function as intermediaries and earn a fee for each transaction, known
as brokerage. They operate only in the secondary debt market and equity market.
  Mortgage Banks: A mortgage bank is a type of bank specifically established
to provide long- term loans for the development of houses. An example of a
mortgage bank is the Federal Mortgage Bank of Nigeria. The initial capital of the
bank is usually provided by government. The bank provides long-term loans, for
the purpose of building houses, called mortgage. Loans are granted for viable
housing projects after inspection by the bank's staff. The size of loans granted to

45 
 
  
 

any applicant depends on the estimated cost of such houses. Mortgage loans are
usually available for private houses, but it not unusual to obtain mortgage loans for
the building of estates.
The repayment of mortgage loans is made over a longer period, depending on
agreement. The rate of interest on such loans depends on whether the building is
for private lodging or for commercial purposes, like letting to tenants. Government
can also reduce or increase the rate of interest in accordance with its monetary
policy.

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27. INTEREST RATE

Interest is the price paid for the use of money. It is the price that borrowers need to
pay lenders for transferring purchasing power from the present to the future. It can
be thought of as the amount of money that must be paid for the use of N1 for 1
year.
Interest is stated as a percentage. Interest is paid in kind, meaning that the borrower
pays for the loan of money with money (interest). For that reason, interest is
typically stated as a percentage of the amount of money borrowed rather than as a
dollar amount. It is less clumsy to say that interest is “12 percent annually” than to
say that interest is “N120 per year per N1000.” Also, stating interest as a
percentage makes comparison of the interest paid on loans of different amounts
easier.
By expressing interest as a percentage, we can immediately compare an interest
payment of, say, N432 per year per N2880 with one of N1800 per year per
N12,000. Both interest payments are 15 percent per year, which is not obvious
from the actual dollar figures. This interest of 15 percent per year is referred to as a
15 percent interest rate.
  Types of Interest Rate Nominal and Real Interest Rates
The nominal interest rate is the rate of interest expressed in dollars of current
value.
The real interest rate is the rate of interest expressed in purchasing power minus
Naira of inflation- adjusted value.
For example: Suppose the nominal interest rate and the rates of inflation are both
10 percent. If you borrow N100, you must pay back N110 a year from now.
However, because of 10 percent inflation, each of these 110 Naira will be worth 10
percent less. Thus, the real value or purchasing power of your N110 at the end of
the year is only N100. In inflation-adjusted dollars you are borrowing N100 and at
year's end you are paying back N100. While the nominal interest rate is 10 percent,
the real interest rate is zero. We determine the real interest rate by subtracting the
10 percent inflation rate from the 10 percent nominal interest rate. It is the real
interest rate, not the nominal rate that affects investment and R&D decisions.

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28. Factors that Influences Interest Rate

  Amount of Loan: Interest rate has a negative relationship with loan. A higher
loan attracts lower Interest rate and vice versa.
  Duration of the Loan: Long term loans attract higher interest rate since they
won't be repaid immediately and vice versa.
  Nature of Security: The movable collateral like gold attracts lower interest
rate while immovable securities like land attract high interest rates.
  Credit Worthiness of borrowers: Being credit worthy also affects the rates of
interest and also the ability to pay one's loan as at when due attracts lower interest
rate and vice versa.
  Market Imperfection: Banks vary in their own interest rate. Not only banks
give out loans, other financial institutions like insurance companies give out loans.
Thus rates could be higher or low depending on the instruction.

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CONCLUSION

Money is the backbone of any country's economy.It is the main source of

exchanging nowadays.

For the savings and other economical aspects banks are the most reliable option for
us where we can save,invest or borrow money by a given terms and conditions.

That's why we can easily say that money and banking are the most important
segment the economic circumstances.

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Bibliography
yumpu.com
go
YUMPU
Bibliography
Books
• Giriappa Somu (2002). "Impact of Information Technology on Banks". Mohit
Publication.
• Cooper D. R., Schindler P. S. (2003), "Business Research Methods". Tata
McGraw
• Gupta S. P. (1969), "Statistical Methods". Sultan Chand and Sons. Levin R. L.
Rubin D. S. (2002), "Statistics for Management, Pearson Education
Asia • Information Technology. Data communications & electronic banking, 2
edition,
2007, Banking Course Book, Indian Institute of Banking and Finance, Macmillan
• Design, Development & Implementation of Information systems 2 edition, 2007,
Banking Course Book, Indian Institute of Banking and Finance, Macmillan
• Security in Electronic Banking, 2 edition, 2007, Banking Course Book, Indian
Institute of Banking and Finance, Macmillan
Reports
• Reserve Bank of India (1984). Report of the Committee on Mechanisation in
Banking Industry
• RBI (1989) Report of the committee on computerization in banks (The
Rangarajan
committee) Mumbai: Reserve Bank of India RBI (1998) Report of the committee
on Banking sector reforms (The Narsimham committee) Mumbai: reserve bank of
India

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Websites

. www.zbi.org.in
www.Banknetindia.com
hitpen.wikipedia.org/wiki Hank History

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