Financial System In Nigeria – Classification Of Nigerian Financial System
Financial system regulation in Nigeria is one of the most complicated sectors of the economy given the financial commitment in the sector. The financial system in Nigeria is controlled by various department and agencies of the federal government which are empowered to regulate the formation and operations of financial intermediaries and other operators in the system.
The structure of financial system in Nigeria was designed in a way that the control agencies also determine which financial instruments could be traded and at what rates. They help to monitor the entire system. The Nigerian financial system regulators has the task of controlling and managing the system rests primarily on the federal ministry of finance. The ministry plays a dual role.
The first is the financial management role, which involves acting as the financial manager of government. In that capacity the ministry controls government direct participation in the system.
The second role is the role which imposes ultimate responsibility for monetary and financial control on the ministry. The polity role involves political accountability for policies relating to money, banking and finance. It also implies jurisdictional authority over instructions that operate in those areas.
The structure of the financial system in Nigeria has enabled the operators of Nigeria financial system to be the financial managers and also the controllers whose function is operationally carried out by the central bank of Nigeria (CBN). Until recently, the bank was under the ministry but has now gained a large measure of autonomy and has been placed directly under the presidency. The central bank exerts a lot of influence on the financial system. Its influence is most pervasive on the banking subsector. It acts as the controller and regulator of the financial system. One medium through which the central bank of Nigeria exercise its control is the monetary policy circulars (MPC) issued from time to time by the bank.
Each monetary policy circular (MPC) is a check list regulations covering various aspects of banking operations like credit limits, sectoral allocation of credit, reserve requirements etc prescribed by the Central bank of Nigeria for banks over the specified period. The other important agencies in control of the financial system in Nigeria are the Securities and Exchange Commission, and the Nigeria Stock Exchange.
Securities And Exchange Commission (SEC)
According to the design of the financial system regulation in Nigeria, the security and exchange is the apex regulatory body for the Nigerian capital market. Among other functions, Securities and exchange commission determines the amount and approve the price and timing of all the public offers of securities.
In addition, its enabling act, the Nigerian securities and exchange commission act of 1979, empowers securities and exchange commission (SEC) to license stock brokers, investment advisers and to regulate merger and acquisition activities. The securities and exchange commission (SEC) is even empowered by the Act, to license stock exchange.
Furthermore the companies and Allied Matters Decree No 1 1990 also confers on the securities and exchange commission, under section 576(1), the power to authorize and regular unit trust schemes.
The Nigerian Stock Exchange (NSE)
The financial system in Nigeria has different agencies it has empowered to carry out the function of regulation, just like the stock exchange which is the other regulatory body which like the Security Exchange Commission, moderates operations in the capital market. But unlike Security And Exchange Commission, the control of authority of NSE is restricted to the operations of the stock exchange which is only a segment of the capital market.
The roles of Nigerian financial system in banking sector is to bring about a synergy between the deficit economic unit and the surplus economic unit. It is not far from what the stock exchange was established for, the stock exchange prescribes conditions for the listing and de-listing of securities on both its first tier and second tier exchanges. It regulates trading activities on the exchanges and moderates the activities of the dealing members.
Size | Components of Financial System In Nigeria
In the regulation of financial system in Nigeria there are three measures that could be adopted in analyzing the size of the financial system. These are the number of financial institutions as measured by their density rates, the amount of funds that flow through the system and the capitalization of the system. Each measure has both merits and demerits.
Institutional Density Rates – the institutionalized density rate indicates either the number of persons served (Population density) or the land area served (area density) by each outlet of the various intermediaries in the system. To illustrate the relative size of the commercial banking sector could be measured by the national average number of persons as served by each branch or the national average land area served by each such branch.
Similar calculations can be made for every other financial intermediary in the system thus, one can speak of banking density rates, insurance density rates, the density rate for stock brokers etc…
Available evidence indicates that both the population and land area density rates for banks, stock brokers, investment advisers etc are still too high in Nigeria relative to other countries in comparable stage of development.
Flow Of Fund Measure – fund flow analysis assess the size of the system on the basis of the volume of funds which passes through the system over a fiscal period. The flow could be measured gross or net; gross if the all the flows including intra-sectoral flows are added and net if intra-sectoral flows are excluded. Although the central bank of Nigeria has started to publish annual flow of funds analysis, the long time lag in publication makes it difficult to advance any reliable opinion on the current state of flow of funds for the country.
Capitalization Of The System – Under this method, the size of the financial system in Nigeria is measured by the aggregate value of assets controlled by the system at any given period. The capitalization figure mirrors the financing ability of the system and is therefore an important index of size.
Issue Of Efficiency – to round up this discussion it would be necessary to consider the extent to which the regulation of financial system in Nigeria could be judged as efficient or inefficient. But to appreciate the issues involved, on needs first to consider the basic functions of the system to be sufficient, it must be able to address the peculiar problems of the economy in all aspects of its operations. In particular, the financial system in Nigeria must meet the following conditions if it is to be deemed efficient;
- The regulatory system in Nigeria must have adequate facilities for effective mobilization of funds from potential fund suppliers in all sectors of the economy and in all geographical areas of the country.
- The payment system must be expeditions and suited to thte needs and stage of development of the economy.
- A wide range of financial intermediaries must be available in the system to cater for the peculiar needs of various interest and income group in the economy.
- The regulation of financial system in Nigeria must have an efficient mechanism for ensuring preferential allocation of available finds to deserving productive users.
- A measure of stability must be attained in the regulatory framework, in the price level and in the cost of funds to facilitate long range investment and financial planning.
- There must be an adequate flow of information through the system to ensure that the actions of the system participants are properly informed, in essence based on the full awareness and power appreciation of all relevant information.
Problem Faced By The Regulation Of Financial System In Nigeria
The Nigerian financial system is large relative to the size of the economy. Consequently the performance and growth of the economy is, to a very large extent, dependent on the performance and efficiency rating of the system. Indeed, the impact of the financial system regulation in Nigeria goes beyond the Nigerian economy. It is a major factor in the development of the economy of the entire West Africa sub region.
If the system is to attain balance growth and development in future, steps must be taken to address three key problem areas that currently afflict its overall performance. The problem include structural imbalance in the system, inadequate accessibility to financial services by some operations in the system and the issues of poor financial technology.
Structural Problems – the structural imbalance in the financial system manifests in various ways including;
- The regulation of financial system in Nigeria is mainly directed towards the banking sector, this is so because the financial system is dominated by the banking sector which accounts for about 70 per cent of the total assets and controls even a higher percentage of the total fund flows.
- There is dearth of specialized financial institutions that cater for the peculiar needs of vulnerable economic groups such as small and medium scale enterprise and the working poor. Similarly, there are very few institutions that specialize in the financing of projects with long term gestation periods or in the provision of venture capital.
- There is lack of adequate linkages among the various intermediaries in the system. For instance, the informal financial sector which controls the bulk of rural cash balance is not linked to the formal financial sector. Improper linkages impedes the smooth flow of funds and the even development of the sector.
Accessibility to many types of financial services in Nigeria is still very low. The number of banking offices, stock brokerage firm, issuing houses, risk adjusters etc relative to the population and size of the country is inadequate. Accessibility problems are most pronounced in rural areas as well as among vulnerable economic groups like small scale enterprise which extreme difficulty in accessing capital funds.
Poor accessibility manifest in the form of high population density rates for providers of providers of each key financial service and also in the form of high average walking distance to each type of such services provider.
Issue Of Financial technology
Financial technology refers to the whole range of knowledge artifacts and facilities that influence the pace and efficiency of financial service delivery. It is not just the issue of computer hardware or software however important that may be. The entire process of conceptualization, packaging, delivery and monitoring of financial services is involved.
The delivery of financial services by many operators in system is still driven by the outmoded technology as evidenced by the following;
- State of the art facilities for the data processing, data verification and information transmission are not available to most operators in the system. This leads to undue elongation of service delivery time, avoidable error and non timely of fund of fraud.
- The degree of securitization of the economy is still very low. Very few instruments for accessing funds have been developed. Indeed the bulk of long term credit operations are carried out through direct negotiation. Low securitization reduces the volume of long term credit flows. It removes the factor of impersonality which enhances financing operations.