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LESSON NOTE:
SS2    LESSON 1
WEEK 1
BANKING SYSTEM, CENTRAL BANK & SPECIALIZED INSTITUTIONS
Notes:
BANKING: Is all activities involved in the collection of deposits and providing loans for business dealings.
BANK: Is an institution that provides safety to money and valuables, and loans for business dealings.
BANKING TERMS:
·         ASSET: Resources of a bank. Ex. Land, buildings, vehicles, equipments, money etc
·         LIABILITY: What the bank is responsible for. Ex. Customers’ deposit, bills, reserves, debts etc.
·         CREDIT: Money.
·         LOAN: Arrangement for borrowing from a bank and paying back after a fixed time with interest.
·         OVERDRAFT: A way of borrowing from a bank, applicable to current account holders only, which implies drawing more than one’s balance and paying back after a fixed period, with a higher interest.
·         INTEREST: Extra money a borrower pays to a bank together with the amount he borrowed. It is determined by the agreed interest rate.
·         CHEQUE: A written order requiring a bank to pay certain sum to a specified person on the cheque.

TYPES OF BANK ACCOUNTS

1.    CURRENT ACCOUNT: When a customer wishes to make payment by cheque, they open current account. Here, there is no interest for the customer, rather, he pays commission to the bank and can enjoy overdraft and loan facilities.
2.    SAVINGS ACCOUNT: This type of account allows the holder to make regular deposit to accumulate savings. Here, only the holder can withdraw money but other people can deposit on his behalf. The holder receives interest from the bank, does not pay commission and there is no overdraft.
3.    FIXED DEPOSIT ACCOUNT: Also called Time Deposit. Here, money is deposited for a fixed period of time without withdrawal until at the expiration of the agreed duration where the holder gives the bank a 7-day notice of withdrawal. This account attracts a higher rate of interest to the holder.

TYPES OF BANK

1.    Central Bank
2.    Commercial bank
3.    Development bank
4.    Merchant bank
5.    Mortgage bank

1.   CENTRAL BANK
This is the apex bank in a country established by an act of parliament to keep the country’s financial system under control and supervision.
FUNTIONS OF CENTRAL BANK:
1.    Controls commercial banks and other financial institutions.
2.    Issues currency
3.    Serves as a banker’s bank
4.    Manages national debt
5.    Serves as bank to central government.

INSTRUMENTS OF CENTRAL BANK’S MONETARY POLICY
1.   Open Market Operation (OMO): The selling or buying of government securities in the open market to increase or decrease the volume of money in circulation.
2.   Liquidity or Cash Ratio: All commercial banks are required to keep a certain percentage of their total deposit in the central bank. The ratio is either high or low depending on central bank’s aim at the time.
3.   Moral Suasion: The central bank can make an appeal to commercial banks to restrict or expand their lending policy to respectively reduce or increase circulation.
4.   Special Deposit: Central bank sometimes can order commercial banks to make special deposit of the percentage of the bank’s deposit to restrict lending.
5.   Bank Rate: Central bank charges commercial banks a certain rate for discounting bills of exchange. A higher rate will decrease circulation and a lower rate makes loans more available.
2.   COMMERCIAL BANK
These are financial institutions which provide banking services for profit maximization.
Features of Commercial Bank:
1.    They are limited liability companies
2.    Motivated by profit
3.    Members of the money market
4.    Accept deposits and other valuables
5.    Registered as Joint Stock Company and has legal existence.

Functions of Commercial Bank
1.    Accept deposits and valuables
2.    Advances loans and overdraft
3.    Create credit
4.    Transfer money
5.    Discounts bills of exchange
6.    Issue cheques, traveler’s cheques etc.
Roles of Commercial Banks in Economic Development
1.    Grants loans and advances for borrowers
2.    Invests in productive sectors
3.    Encourages savings for capital formation
4.    Finances trade and agriculture
5.    Help implement monetary policies
6.    Acts as referees to customers.
3.   DEVELOPMENT BANK
These are banks established to provide long term loans for developmental projects. Example, African Development Bank (ADB), Bank of commerce and industry, Agricultural Cooperative Bank etc.
4.   MORTGAGE BANK
These are bank which provides long term housing loans to individuals and organizations to buy or build houses. Example, Federal Mortgage Bank.
5.    MERCHANT BANK
These are wholesale banks who make large deposits and grants long term loans in large amount. The introduction of universal banking has since grants commercial bank access to operate and perform all the functions of merchant banks.

OTHER NON-BANK FINANCIAL INSTITUTIONS
1.    INSURANCE COMPANY: Insurance is a means of indemnity against a future occurrence of an uncertain event. Indemnity is a legal obligation upon an individual or entity to incur the losses of another individual or entity upon an agreement that the insured will pay premium to the insurer before lose occurred.
2.    MONEY MARKET: This is a market or an arrangement for lending and borrowing money for a short term. Here, sellers are borrowers and buyers are lenders and the product is short term loan.
Instruments of loan in the money market:
Ø  Treasury bills: Government sells this bill to lenders for a period of 3-months
Ø  Commercial papers: Bank issues this on behalf of a first class company and sells it for a period of 180-days to raise short term loan for the company.
Ø  Others are bill of exchange, bank deposit etc.
3.    CAPITAL MARKET: This is an arrangement for lending and borrowing long term loans for investment.
Instruments of loan in the capital market:
Ø  Shares
Ø  Debentures        Securities
Ø  Bonds
Members of the capital market:
1.    Stock Exchange
2.    Investment banks
3.    Central Bank.
TEST 1
THEORY 70MARKS
A’ ONE 25-26: BANKING SYSTEM, CENTRAL BANK & SPECIALIZED INSTITUTIONS
1.       Write short notes on
(a) Liquidity ratio
(b) Fixed Deposits
(c) Money Market (1988 Q7)

2.       How does the central bank exercise control over commercial banks? (1993 Q9)

3.       (a) Explain the term ‘Capital Market’
(b) How is the capital market different from the stock exchange?
(c) What are the advantages of the capital market? (1994 Q9)

4.       Describe any five functions of the Central Bank of Nigeria (CBN) (1998 Q8)

5.       What are the instruments used by the Central Bank to control the supply of money in any economy?
(1998 Q6)

6.       Write short notes on the following:
(a) Saving account
(b) Current account
(c) Fixed deposit account.  (2003 Q9)

7.       Distinguish between:
(i) A mortgage bank and a merchant bank
(ii) A commercial bank and a development bank.
(iii) Explain any four functions of commercial bank. (2004 Q9)
8.      Outline the roles of development banks in the economic development of West African Countries.
(2005 Q8)

9.       (a) What is a capital market?
(b) Describe any three instruments used in the capital market?
(2005 Q8)

10.     (a) What is a commercial bank?
(b) Describe any four ways by which the Central Bank controls the amount of credit given by the commercial banks.          (2010 Q11)

11.     (a) Distinguish between cash ratio and special deposits.
(b) Explain how cash ratio and special deposits are used as instruments of monetary policy
(c) Describe any two instruments of fiscal policy in West Africa.
(2013 Q11)

12.     (a) Define:
(i) Building society
(ii) Central bank
(b) Highlight any five instruments of the central bank in regulating the supply of money.
(2016 

TEST ONE OBJECTIVES 30MARKS         
A’ ONE 25-26: BANKING SYSTEM, CENTRAL BANK & SPECIALIZED INSTITUTIONS
1.    Which of the following is the most liquid asset to a commercial bank?        A. money at call and short notice B. treasury bills C. commercial bills D. stocks and shares E. cash
2.    The drawer of a cheque is the A. the person who is to be paid the sum of money as written on the cheque B. the person who takes the cheque to the bank C. the bank on which the cheque is drawn D. the person who writes out the cheque E. the bank official who certifies the payment.
3.    Time deposit has the same meaning as A. current account. B. demand deposit.    C. deposit account.   D. bank deposit.      E. bank rate
4.    Which of these statements is not true of cheque? They A. provide an alternative to carrying large sum of money around. B. can be written out for any amount needed. C. are legal tender. D. provides a form of receipt. E. provide a record of payment
5.    The amount of money to be created by commercial banks is actually influenced by the A. legal reserve ratio. B. external reserve. C. external borrowing. D. availability of money and capital market. E. bank deposit
6.    Which of the following is not a function of central bank? A. banker to the government. B. banker’s bank. C. acceptance of deposit from the public. D. responsibility for monetary policies. E. lender of last resort.
7.    Which of the following is not the function of a commercial bank? A. accepting deposit from the public. B. banker to the government. C. lending to the public. D. safekeeping of valuables. E. undertaking foreign exchange transaction of customers.
8.    All the following are assets of a commercial bank except A. cash. B. bills discounted. C. bank deposit. D. investment. E. advances to customers.
9.    The central bank controls commercial banks through all these measures except A. the use of directives. B. use of bank rate. C. open market operations. D. accepting deposits. E. demanding special deposits.
10. One of the functions of commercial banks is that it A. is responsible for formulating monetary policies. B. accepts demand and time deposits from customers. C. is the lender of last resort. D. is a banker to the government. E. is responsible for issuing currency notes.
11. Foreign exchange control in Nigeria is enforced by the A.      commercial banks. B. merchant bank. C. mortgage bank. D. central bank. E. agricultural development bank.
12. Credit creation by commercial banks is limited by A. an increase in bank deposit. B. the establishment of specialized banks. C. the non-availability of collateral security. D. the use of cheque for all transaction of the bank. E. abolishing the reserve ratio
13. Which of the following is not a function of an insurance company? A. mobilization of funds through premiums collected. B. encouragement of saving habit through life assurances. C. collection of deposits from the public. D. granting loans on long-term basis for investment. E. encouragement of investment by security of capital.
14. Development banks mainly provide A. savings account facilities for developing economies. B. foreign exchange facilities for importers and exporters. C. capital for development of specific sectors. D. capital for hire purchase of machineries. E. capital for the development of special banks.
15. Which of the following is a function of commercial banks? A. issue currencies. B. accepts deposit. C. are the banker’s bank. D. determines the rate of interest. E. lender of last resort.
16. The development banks are essentially different from commercial banks because they A. give medium and long term loans. B. open current accounts for their customers. C. discounts bills of exchange. D. are lenders of last resort. E. carryout open market operations.
17. Banks create money by A. giving drafts to customers. B. printing more money. C. lending out deposits to borrowers. D. issuing cheques. E. depositing excess cash in the tills.
18. One of the major objectives of African Development Bank (ADB) is the mobilization of A. blacks in developed countries to assist Africa. B. qualified man-power for member states. C. foreigners to assist Africa. D. women for economic development. E. Africans towards economic progress.
19. Mortgage banks give loans to investors on long term basis to A. finance agriculture. B. establish bank. C. acquire machineries. D. build houses.
20. Shares and stocks can be bought in the A. commodity markets. B. stock exchange. C. money market. D. open market.
21. Foreign exchange control in most West African countries is enforced by the A. development banks. B. merchant banks. C. ministry of economic planning. D. central bank.
22. Commercial banks settle their inter-bank indebtedness through A. merchant banks. B. central bank. C. development bank. D. stock exchange.
23. Which of the following banks grants credit facilities to individuals wishing to build house? A. central bank of Nigeria. B. Nigerian Industrial Development Bank. C. agricultural credit bank. D. Federal Mortgage Bank of Nigeria.
24. Commercial banks settle their inter-bank indebtedness through A. money market. B. finance houses. C. acceptance houses. D. clearing house.
25. Short term loans can be sourced from A. the central bank. B. development banks. C. mortgage banks. D. commercial banks.
26. Which of the following is a liability of commercial banks? A. deposits. B. money at call. C. loans to customers. D. overdrafts
27. Which of the following is a function of the central bank of Nigeria? A. serving as custodian of important valuables. B. giving advice to customers. C. serving as banker’s bank. D. creating credit
28. Which of the following is a function of merchant bank? A. minting of coins. B. preparation of government budget. C. keeping watch on external reserves of the country. D. acting as acceptance houses.
29. Which of the following is a function of the central bank? A. accepting deposit from the public. B. lending to the commercial bank. C. discounting bills of exchange. D. agent of payment for individuals.
30. Buying and selling of shares is a function performed mostly by the  A. insurance companies. B. stock exchange. C. merchant banks. D. discount houses.


















































Banking hall

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