The Role of Non-Banking Financial Institutions in Nigeria

THE ROLE OF NON-BANKING FINANCIAL INSTITUTIONS IN NIGERIA

Non-banking financial institutions in Nigeria include insurance companies, discount house, Bureau de change, finance companies etc. they play a lot of comparative roles with banking institutions and with limited difference.

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2.1     DIFFERENCE BETWEEN BANK AND NON-BANKING FINANCIAL INSTITUTIONS:

The major distinguishing features between bank and non-banking financial institution are:

(a)     NBFIS tends to be characteristics of a sophisticated financial system which in turn an indicative of high income economy.

(b)     The changing reasons why people save as an economy develops have been offered as a primary reason for the growth of the non-banking financial institutions.

(c)      It has been noted that the financial instruments issued by the non-banks as they go about their businesses are not classified as money, for they are more money substitutes i.e. alternative forms of debt.

(d)     The growth of the non-banking financial institution is consistent with certain features of a high income economy as follows:

• Increase income alter the propensity to save of those fortunate to be in the high income category.
• As persons seek to hold assets, which combines income and certainty, intermediaries will develop financial innovation and the proliferation of financial instruments.

However, banks and non-banking financial institutions as intermediaries on the financial market play almost the same role hence have similarities in functions.

2.2     SIMILARITIES IN THE SERVICES RENDERED BY BANKS AND NON-BANKING FINANCIAL INSTITUTION:

These include:

(a)     The intermediaries provide an aggregation services i.e collection of saving of individuals and channel them towards ultimate user.

(b)     They both offer great accessibility in the borrowing of funds.

(c)      They reduce the risk that shows faces in trying to earn a return on their savings.

(d)     They are also specialists, providing a specific service in international transactions and economy as a whole.

Also Read: The Role Of Banks In Industrial Development Of Nigeria

2.3     TYPES OF NON-BANKING FINANCIAL INSTITUTION:

Because of the complexity of our national economy, it seems difficult or rather impossible to exhaust the list of all the non-banking financial institutions in Nigeria.  This is because our constitution are always undergoing alteration, and business acts are being erected and phased out many atimes without notice, and hence, we shall only list the most common ones that have lasted the test of time, unveiling its significance and importance in the life of people and daily national economic affairs.  They include:

1. The Nigerian Insurance Companies
2. The co-operative societies
3. The Nigerian investment companies
4. The Equity Finance Companies
5. The Nigerian Stock Exchange
6. The National Provident Fund.

2.3A  THE NIGERIAN INSURANCE COMPANIES:

These are companies that undertake to underwrite risks.  The insurance company (insurer) is one that undertakes to indemnify the insured or the policy holder against the occurrence of insured risk and on the part of the policy holder, he or she undertakes to pay his or her premium regularly.  The first insurance company came into inception during the colonial rule in Nigeria and was established in 1921 at Lagos.

TYPES OF INSURANCE:

1. MARINE INSURANCE:

This is taken to protect the ship and goods in the sea.

2. FIRE INSURANCE:

This covers any loss or damage that may occur as a result of fire.

3. MOTOR ACCIDENT INSURANCE:

This involves comprehensive and third party insurance.  It covers all loss as a result of accident including partial or total deformity.

4. LIFE ASSURANCE:

This is further splitted into two major types in practice, whole life policy and endowment policy.  It covers a financial loss that may arise at the death of the policy holder to the beneficiaries.

5. GROUP OR LOIYDS INSURANCE:

This covers the members of an organization with the same goal and objectives.

However, in as much as insurance companies covers several risk and indemnity as at when due, it maintains a stragent principle in which if infringed could cause or nullify the contract between the insurer and the insured.

Some of these principles are:

• UTMOST GOOD FAITH: This principle requires both parties to demonstrate a high degree of honesty and to say whole truth and nothing but the truth.
• INSURABLE INTEREST: this principle states that the insured must have financial interest in the goods insured.
• INDEMNITY: This states that the insurer must restore the insured to the position he was immediately before the loss or damage occurred.
• SUBROGATION: This states that the insured has no right to property over which he has received indemnity if the indemnity involves replacement or payment for total of goods.
• CONTRIBUTION: This states that the insured is only entitled to a proportion of any indemnity payable.  If he insures a particular property in two insurance companies, he will only receive a proportion of his loss from each company pro-rata.
• PREMIUM: This is the money (agreed sum) which the insured pays to the insurance company.  The payment interval depends on the treaty in the policy underwritten between the two parties.

 2.3B  CO-OEPRATIVE SOCIETIES:

This means an association of group of people with common interest who agrees to come together to promote their welfare and benefits.  A co-operative may be defined as association of persons who have voluntarily joined together to achieve a common goal and through the formation of a democratically controlled organization, making equitable contributions to the capital required and benefits of the undertaking in which members actively participate.

TYPES OF CO-OPERATIVE SOCIETIES:

1. WHOLESALE CO-OPERATIVE SOCIETIES:

These groups buy goods from the manufacturer and sale in bulk to the retailers.  It is formed by retailers who pool their resources together to buy direct from the producers.

2. RETAIL CONSUMERS’ CO-OPERATIVE SOCIETIES:

These groups buy in large quantity from the whole salers and sale in small quantities.  The profit is made mostly by patronage.

3. PRODUCERS’ CO-OPERATIVE:

These are common in agricultural sector.  They are mostly sponsored by Ministry of Agriculture and concerned co-operative bodies to produce raw materials for industries and employment opportunity in the economy.  Profits are however shared among the producers.

4. THRIFT AND CREDIT CO-OPERATIVE SOCIETIES:

Members contribute money monthly or weekly, the money so collected is given out to non-members as loan with little interest.  At the end of the year, the money will be shared back in cash or in purchasing commodity that suit the members in the season.

PRINCIPLES OF CO-OPERATIVE SOCIETIES:

While operating, the co-operative should be guided by the following principles:

• Open and Voluntary membership
• Democratic management and control
• Equitable distribution of surpluses
• Co-operation education
• Limited on interest on share.

2.3C  INVESTMENT COMPANIES:

These are financial agent owned by the States.  They are majority responsible for the provision of finance for project development in state owned investment companies do not finance projects outside the state that own them.  They provide wide range of investment and financial outlet such as:

• The valuation of project and analysis
• Project supervision
• Feasibility survey
• Equity financing of the project owned by the state government.

2.3D  EQUITY FINANCE COMPANIES:

There is another non-bank financial institution that provides medium term installment credit facilities to industries and individual customers.  The finance companies are authorized to provide equity finance and long term loans as well as medium term ones.

SOURCES OF FUNDS:

The financial companies do not accept deposits, they are therefore non-deposit taking institutions.  They mostly raise fund by borrowing from individuals and banks like bonds and debentures.

2.3E  THE NIGERIAN STOCK EXCHANGE:

A stock exchange is a market which facilitates buying and selling of shares, stocks, bonds, debentures and securities.  It is essentially a secondary market for buying and selling of already existing securities to the members or among the members of the exchange.  However, some new securities may be trade in the stock exchange.

The Nigerian Stock Exchange was incorporated as a limited liability on the 5^th September 1960 as Lagos Stock exchange.  It gained government recognition in the year 1961 when the Lagos Stock Exchange 4 Act of 1961 was passed into law.

The purse of this commission were made for:

• The encouragement of facilities for dealing in shares
• The introduction of necessary facilities to encourage savings in the economy.
• Provision of regulatory framework relating to transfer of share.
• The introduction of necessary facilities for the insurance of financial instrument by both the government and the private organization.

There are three types of the members of the Nigerian Stock Exchange namely:

• Ordinary members
• Dealing members
• Founding members

The members of the Stock Exchange market are:

• BROKERS: They are agents responsible for bringing people wishing ot buy and people wishing to sell stocks together, with the aim of getting commission based on the fixed scale called Brokerage.
• JOBBERS: They sell shares to the brokers and buy from the brokers also. They normally quote double price in both the buying and selling price.  They are the whole dealers on securities.  Normally, they deal with only one type of security and their profit is called Jobber’s return.
• CLERKS: They are employed by the jobbers and the brokers to assist them.  They are not members of the Stock Exchange Market.  There are two types of clerk, Authorised Clerk can make bargains on behalf of his employer.
• SPECULATORS: They are people that buy and sell share with the aim of making profit based on changes in stock exchange market.  They include the bill bears and the states.

2.3F  NATIONAL PROVIDENT FUND:

This is a financial institution that accepts deposits from workers, which it makes available to them when they retire for active service.  It was established in the year 1961 by the Federal Government of Nigeria.  Industries and commercial establishments operating in the country are permitted to deduct from their staff earnings certain percentage periodically.  There periodic deductions are deposited with the National Provident Fund for effective management on behalf of the employees.

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