The Impact of Central Bank of Nigeria Financial Management on the Nigerian Economy

THE IMPACT OF CENTRAL BANK OF NIGERIA FINANCIAL MANAGEMENT ON THE NIGERIAN ECONOMY (A CASE STUDY OF UNION BANK OF NIGERIA).

Related literature, were reviewed in this chapter to find out their relevance to this problem. Among literatures reviewed were past projects on the topic in focus. However, visits to Libraries including Union Bank Enugu, library proved that none of the project found were exactly on the topic.

The researcher therefore was able to obtain information relevant to this study by reference to textbooks, journals, lecture nimeograph, report, government law and decrees.

However, the researcher read the previous projects on related topics to have an idea of the pattern and approach to a research work.

Union Bank Decree 1991 was used extensively.

2.2 HISTORICAL ORIGIN OF UNION BANKING

According to the law established the union of bank of Nigeria placed the bank at the Apex of the banking industry, the 1958 ordinance which established the bank stated and objective of the bank to be:

1. To issue legal tender currency in Nigeria.

2. To maintain external reserved in order to safeguard the international value of the currency

To promote monetary stability and a stability and a sound financial structure in Nigeria
To act as banker and financial adviser to the federal government.

Section A of the 1991 Union Bank Decree stated “ the bank shall have the sole right of issuing currency notes and loans throughout “ Nigeria and neither the federal government nor any state government nor local government nor any person or authority shall issue currency notes, bank notes or coins or any documents or tokens which are likely to pass as legal tender”.

Section 24 of the same decree also stated the bank shall at times maintain a reserve of external assets consisting of all or any of the following.

Gold coin or billion
Balance at any bank outside Nigeria where the currency is freely convertible and any bill of exchange bearing at least two valid and authorized signatures and having maturity not exceeding ninety days exclusive of days of grace.

(c) Treasury bill having a maturity not exceeding one year issued the government of any country outside Nigeria whose currency is freely convertible.

(d) Securities or guarantees by a government of any country outside Nigeria whose currency is freely convertible and the section 25 stated.

Section 26 stated, it shall be duty of the bank to facilitate the clearing of cheques and credit instruments for this purpose, the bank shall at any appropriate time and in conjunction with other banks establish clearing houses in premises provided by the bank in such place as the bank may consider necessary.

2.3 DIFFERENCE BETWEEN A UNION BANK AND A COMMERCIAL BANK.

Commercial banks aim at profit maximization whole union bank do not.
Commercial bank scenes as bankers to their customers to commercial banks, acting as lender of last resort to the banking system.

iii. Union Bank also plays a supervisory role over the commercial banks and other financial institutions.

The Union Bank regulates the supply of money by virtue of its power of control and issue of currency notes and coins.
By virtue of the statutory powers delegated to the Central Bank by the government, it controls the activities of the banks and other financial institutions.

2.4 FUNCTIONS OF UNION BANK

In order to achieve the objectives of the bank particularly that of promotion of monetary stability and a sound financial system, the union Bank undertakes certain funs among which are:

(a) Currency issue and distribution

– Printing of notes safe custody of stocks and management of orders.

(b) Banker to other banks.

– Banking supervision and examination.

– Cheque clearing and inter bank settlement.

– Lender of last resort.

– Undertakes government banking business within and outside Nigeria.

– Provides financial accommodation of 125% of estimated recruitment budget revenue as ways and means of advices.

(d) Debt management comprising of domestic debt.

– External debt in conjunction with the federal ministry of finance.

(e) Promotion of monetary stability through: –

– Evolution of effective monetary policy and its efficient management or implementation.

– Optimal liquidity management.

(f) Foreign exchange management.

– Trade and exchange control.

– Acquisition and development of foreign exchange to

ensure smooth economic operation.

– Management of Nigerian external reserves.

(g) Supervision of finance effects.

– To minimize malpractices.

– To enhance the quality of services provided.

– To increase public confidence in the financial system.

(h) Promotion of the growth of financial markets:

– Through development of money markets instruments.

– The insurance of development stocks

(i) Promotion of and Support for Specialized Institutions i.e.

– The Nigerian industrial development bank.

– The federal mortgage bank of Nigeria.

– The Nigerian Export Import Banker.

(j) Promotion of Agricultural and rural development through: –

– Promotion of small scale enterprises.

– Promotion of Agricultural manufacturing activities by

credit allocation.

(k) Promotion of Special Scheme and Funds: –

– The Agricultural credit guarantee scheme.

– The Re-financing and Re-dis-counting facility and the

foreign input facility.

– The small and medium scale enterprises. A pet unit loan scheme.

The above functions of the Union Bank could be grouped into three major classes: –

(a) Traditional functions.

(b) Monetary functions.

Item A to A above could be regarded as traditional functions. D to G could be regarded as monetary function while H to K could be classified as Development function.

Among the three categories the monetary functions of the bank appears to be more prominent than the others.

At the beginning of each year, the bank issue out monetary policy guidelines to commercial banks and other banks stating credit guide lines for the banking industry.

These guidelines relate to: –

Sectional distribution of Loans and advance.
Structure of banks assets.

iii. Liquidity requirements.

Credit minima and maxima.
Lending and borrowing conditions.

These guidelines are normally issued in line with the policy objectives of the years budget from time, within the year, the bank carries out a review of its activities in order to appraise its performance and make necessary amendments.

The union bank is able to perform its monetary policy instruments.

Open market operations.
Discount rate system.
Direct regulation of interest rate.
Reserve requirements.
Direct control.
OPEN MARKET OPERATION

This means the buying and selling of short and long term government securities in the money and capital markets by this Union Bank of Nigeria in order to increase or restrict bank lending. When the Union Bank buys securities on the market payment are made to individuals and companies from when they have been purchased. When this payment cheques issued by the Union Bank are credited to the Sellers account in various commercial banks, additional deposits and are made in the banking system and the banks are then a position to create more money by increasing their lending.

DISCOUNT RATE SYSTEM

Using this instrument by the union banks means the bank lending to other banks by granting them short term direct advances or by rediscounting eligible bills presented by them. The bank takes into full consideration the economic condition of the country in performing this function.

In order words, the rate at which the Union Bank depends on the prevailing economic policy at the time. At the beginning of each financial year, the union bank fixes a minimum discount rate. This is usually a penal rate as banks are expected to use it only as last resort

Furthermore, such borrowings by banks must adequately secured by treasury bills or other government stocks.

DIRECT REGULATION OF INTEREST RATES

This interest rate structure in Nigeria is directly controlled and managed by the union bank unlike the economics of developed countries where interest rates are only indirectly influenced by official policy action.

The union bank fixes both the lending and borrowing rates for the following reasons:

(a) To promote orderly growth of the financial market.

(b) To combat inflation.

MORAL SUASSION.

Here, the government of the Union Bank tries in a friendly Manner to persuade banks to reduce their lending activities where there is need for such restraint. Bank generally corporate realizing that the Union Bank has wide statutory powers to regulate the banking system.

Moral suassion has been found to be a very effective instrument of monetary control

ARREARS REQUIREMENTS

All banks in Nigeria are required to maintain two major reserve ratios:

(a) Last ratio securities shall mature in a period not exceeding ten years from the date of acquisition. Are required to maintain a certain percentage of their deposits in cash or approved securities.

Apart from this statutory requirement a bank must retain in liquid readily realize form, sufficient funds to meet an abnormal or unforeseen demand by depositing funds to meet an abnormal or unforeseen demand by depositors for the repayment of their deposits. The current liquidity ratio is 30%.

Some of the specified liquid assets include:

(a) Vault cash

(b) Balance with the Union Bank

(d) Money at Cau.

(e) Treasury bill / certificates.

(f) Bills discounted.

(g) Eligible development stock.

(h) Bankers unit fund.

(i) Negotiated certificated of deposit.

The union bank can also on the banks to make special deposits which have the effect of reducing their liquidity such deposits are usually frozen and to turn part of their eligible liquid assets. Finally union bank can issue stabilization securities to banks in order to mop-up exceeds liquidity.

DIRECT CONTROL

This is confirmed to be the most effective control instrument and the one which is most effective instrument which is most compatible with the economic goals and attainment of government objectives. This covers: –

Sectoral distribution of loans and advances
Loans to indigenous borrowers.

iii. Loans to rural areas.

Reserves requirements.
Interest rate structure.
Prudential ratio and statistic.

2.5 THE CONCEPT OF MANAGEMENT

Management is defined as the process of designing and maintaining an environment in which individual working together in groups accomplish effectively selected aims.

This can further be broken down as follows:

Managers carry out the managerial functions of planning organizing, staffing, lending and controlling.
Management applies to all kinds of organization

iii. It applies to managers at all levels.

All managers aim at creating a surplus
Managing is concerned with productivity. That implies effectiveness and efficiency. This concept principles theory and techniques of management are organized around the five functions of managements.

PLANNING: – Planning involves selecting missions and objectives and the action to achieve them, it requires decision making, that is choosing future courses of action from among alternatives.

Planning bridges the gap from where we are to where we want to be in a desired future implies not only the introduction of new things but also sensible and workable implementation.

It makes it possible for things to occur that would not otherwise happen.

ORGANIZING: – “Organizing is that part of managing that involves establishing an intentional structure of roles for people to fill in an organization.

It is intentional in the sense of making sure that all the tasks necessary to accomplish goals are assigned and it is hoped, assigned to people who can do them best.

STAFFING: – Staffing involves filling and keeping filled the positions in the organization structure. This is done by identifying work force requirements, inventoring the people available recruiting, selecting placing, promoting, planning the career, compensating and training or otherwise developing both candidate and current job holders to accomplish their task effectively and efficiently.

LEADING: – “Leading is influencing people so that they will contribute to organization and group goals. It has to do predominantly with the interpersonal aspect of managing.

Since leadership implies followership and people intend to follow those who offer means of satisfying their own needs.

Wishes and desires, it is understandable that leading involves motivation leadership styles and approaches, and communication.

CONTROLLING: – Controlling is the measuring and correcting of activities of subordinate to ensure that ensure conform plans.
It measures performances against goals and plans, shows where negative deviations exist and by putting in motion actions to correct deviations helps ensure accomplishment of plans.

THE MEANING OF CAPITAL FORMATION, INFLATION, EXACHANGING RATE, BALANCES OF PAYMENT POSITION AND MORE SUPPLY (CREDIT CREATION).

Capital information in a nutshell means the accumulation

of capital for investment purposes. The classical economist saw capital as one of the crucial accumulation is difficult for low income countries whose people line choose starvation level who find it painful to increase savings.

Capital information is necessary for a country derious of development, the more capital a country has the greater the value of goods and services. She will be able to produce. Capital formation involves sacrifice; the level of consumption must be produced if capital is to be accumulated.

INFLATION: – Is a situation of general and continued increase in the prices of all goods and services in the country.

It is said to be an increase in the value of money and credit relative to available goods thereby resulting to a substantial and continuing rise in general price level.
Inflation can there occur if: –

(a) There is an increase in the volume of money and credit.

(b) The increase exceeds any rise in the available goods and services.

EXCHANGE RATE

This is the rate at which banks sell or buy one currency in exchange for another. It is also known as the relationship between one currency and another

BALANCE OF PAYMENT

The balance of payment can be defined roughly as the difference between what a country earns and what it spends, together with the different between the amount of overseas investment it attracts and the amount of investment that it’s own residents make in other countries.

The balance of payment records for the accounting period.

(a) Total income

(b) Total expenditure

MONEY SUPPLY /CREDIT CREATION

Money supply includes all those things that are generally acceptable in payment of depts. And as payment for goods and services.

Presently in Nigeria, money stock or money supply comprises of two major categories.

MI: Defined as currency in circulation (note and loans )plus private sector demand deposits bank.

M2: This comprises of MI plus deposit with non-bank financial intermediaries and investment in government stocks such as treasury bills and treasury certificate development stocks and savings bonds etc.

CREDIT CREATION

The principal process by which the banking system creates deposit is the granting of loans and over drafts. Every loan and overdraft approved by a bank created a new deposit upon the granting of a bank facility the customer can draw a cheque to effect a payment usually the cheque will be paid to another bank account. After the cheque has been cleared, there is an increase in the total deposits in the banking system as a new deposits has been created.

2.7 OPERATION OF THE UNION BANK OF NIGERIA PUBLIC DEPT MANAGEMENT.

Management of Nigeria as public debt is done by the Union Bank a one of the functions of the bank of acting as banker to the government, public debt is an amount of money owed by government and other bodies either resident in Nigeria or outside Nigeria. This gives rise to the two basic classification of debt.

Domestic debt and
External debt.

Management of domestic debt involves: –

(i) Advertising the government as to the timing of floatation of debt instruments and terms of issue.

(ii) Advertising for public subscription to the issue.

(iii) Collecting the proceeds of issues on behalf of the government, supervising the issue of certificate warrants and maintaining proper books of accounts in respect of receipts and disbursements and

(iv) Payment of interest and principal or due debt and managing the sinking fund set-up to facilitate its redemption.

EXTERNAL DEBT MANAGEMENT: –

“ External debt management is conscious and carefully planned schedule of the acquisition development and retirement of loans acquired either for development purpose or to support the balance of payments. It incorporates estimates of foreign exchange earnings, sources of finance, the projected returns from the investment and the repayment schedule.

It also includes assessments of the countries capacity, to services existing debts and a judgment of the desirability of contracting further loans”.

AGRICULTURAL CREDIT GUARANTEES SCHEME

This scheme was introduced in 1978 to provide 75 percent collateral to the banks for any agric credit granted. It was designed to make the banks to lend to agriculture without insistence on the provision of tangible.

Security for farmers as a pre condition for accusing formal credit. A recent amendment to the ACES decree make provision for 100 percentage guarantee for any demand is below 10,000.

DISTRESSED BANKS MANAGEMENT

This is primarily done by NDIC (Nigeria Deposit Insurance Corporation).

The NDIC was established by Decree No. 22 of June 1988 to complement the supervisory role of the Union Bank and provide insurance cover for depositors funds. They use various options to take problem banks.

(a) It makes pay-off depositors up to maximum of N500.00

(b) It may transfer insured depositors to another bank or other banks, such that the customers continue normal banking business with the new bank.

(c) It may arrange for another bank to assume all of a falling bank assets in return for each payment by the NDIC in a purchase and assumption transaction.

There is a standing committee consisting of both Union Bank and NDIC officials for resolving the difficulties of problem banks.

FOREIGN EXCHANGE MANAGEMENT

The major tool adopted by the Union Bank of Nigeria for the management of our foreign exchange resources includes the following: –

(a) EXCHANGE CONTROL: This is a mechanism by which a country seeks to mobilize and centralize its foreign exchange resources and ratio such resources for the settlement of international transactions in accordance with the priorities of high priority are favoured for the purpose of disbursement where as those of low priority are either discouraged or denied foreign exchange facilities.

(b) ADMINISTRATIVE CONTROLS:

When Quantitative import control measures (import licensing arrangement) failed, it became necessary to switch over to administrative control.

This has been effectively used and has helped the country to avert some trade difficulties.

(c) DIVERSIFICATION POLICY:

The objective of diversification policy is to have a careful portfolio selection of assets of different currencies, securities, yield etc. In order to meet the needs of liquidity, profitability and safety.

BANKING SUPERVISION AND EXAMINATION

The major reasons for supervision and examination of bank includes:

(a) To minimize the risk of bank distress.

(b) To provide a means of enforcing the direction of monitor authorities.

(c) To ascertain that the proportion of man – performing loans in a bank loan portfolio, internal control system and management practices.

This supervisory powers in respect of banks vested in the director of banking of supervision department and the director of bank examination department and other officials so appointed on – site function is carried out by bank examination department while the offsite function is performed by the banking supervision department.

BANKING SUPERVISION (OFF – SITE)

This involves analysis of banks return to the Union Bank as statutory required.

The Union Bank established rules to ensure that depositors are adequately informed and treated fairly in certain credit transactions.

To ensure that a banks operation and activities are reported as accurately as possible.

The Union Bank directs that every bank should appoint an auditor approved by the Union Bank. Each bank shall seek the termination and resignation of the banks external auditor giving reasons for such action. It is also possible that the bank may require the auditor to disclose information obtain in the course of the audit, provided such disclosure is made in good faith and in relevant to the banks supervision.

BANKING EXAMINATION (ON-SITE)

Bank examination provides the means for appraising management on a continuous basis and for suggesting improvement in performance standards. The Union Bank Decree of 1991 gives the bank statutory authority to examine licensed commercial and merchant banks and to over see their books and affairs.

BANK EXAMINATION ENTAILS:

(a) An appraisal of the Soundness of the institution assets.

(b) An evaluation of the adequacy of internal operations policies and management.

Such as capital, earnings, liquidity and interest rate sensitivity.

(d) A review to ascertain the correctness or otherwise of bank returns on their operating books of account, in order to ensure compliance with all banking laws and regulations, as well as monetary policy circulars.

(e) An overall determination of the institutions solevency and

(f) Ensuring that banking operations especially external transactions are being carried out in accordance with standard accounting practices.

LICENSING OF NEW BANKS

Individuals who propose to undertake banking business in Nigeria are required to obtain expressed permission from the Governor of the Union Bank. The bank has the sole authority for issuing valid licenses under the bank and other financial institutions decree of 1991. Application writing are required to be accompanied with a feasibility reports a draft copy of the memorandum and articles of Association on list of Shareholders, directors and principal officers and their particulars, information, documents and reports which the bank may require and a prescribed application fee.

Shareholders of the proposed bank have deposit with the Union Bank a minimum paid up share capital that is applicable to the category of the proposed bank. The Governor may issue the license without any condition or refuse to issue the license without giving reasons for the refusal.

BANKERS CLEARING HOUSE ACTIVITIES

Section 26 of the Union Bank Decree of 1991 stated it shall be the duty of the bank to facilitate clearing of cheques and credit instruments for banks carrying on business in Nigeria and for this purpose the bank shall at all times and in conjunction with other banks may consider necessary.

A clearing house is where bank exchange cheques, each commercial banks sends a representative to the clearing house to deliver cheques drawn on other banks and to receive the cheques drawn on it. If the drawer and payer of a cheque have accounts in the same branch of a bank or even at different branch of the same bank, there is no clearing house involvement in the clearing of their cheques.

The system adopted in the clearing of cheques in the same all over the country. Each clearing house is managed by clearing house committee comprising of a Chairman appointed by the union bank (usually the director of domestic department or his representative in the case of Lagos clearing house or the branch controller or his representative in the case of up country clearing house) and representative of all member banks.

The Impact of Central Bank of Nigeria Financial Management on the Nigerian Economy