ND2 BANKING AND FINANCE

FINANCIAL INSTITUTIONS LECTURE NOTE 2022/2023

Financial Institutions- they are business organisations that act as mobilisers and
depositories of savings, and as creators of credit and finance. Also provide various
financial services to the community. They differ from non-financial (industrial and
commercial) business organisations.
Classification of Financial Institutions
❖Banking and Non-Banking Institutions- differences are
Banking institutions-
a) They participate in economy‟s payment mechanisms i.e they provide transactions
services.
b) They can, as a whole, create deposits or credit, which is money.
c) Banks subject to legal reserve requirements can advance credit by creating claims
against themselves. - Commercial banks or co-operative banks.
Non - Banking- can lend only out of resources put at their disposal by their savers can be
called as purveyors or suppliers. Ex- LIC, IDBI, IFCI, SFC.
❖ Intermediaries and Non-intermediaries
Intermediaries intermediate between savers and investors. They lend money as well as
mobilise savings. Their liabilities are towards ultimate savers, while their assets are from
the investors or borrowers. All Banking institutions and LIC, GIC are non-banking
Intermediaries.
Non-Intermediaries- they do the loan business but their resources are not directly
obtained from the savers. Like IDBI, IFC and NABARD as government efforts to
provide assistance for specific purposes, sectors, and regions for regional, under
developed and backward area development –NBSFO non-banking statutory financial
organisation
Main role of financial institutions
Financial institutions provide financial transactions and play as a mediator in economic
activities. There are different financial institutions‟ roles which include monetary supply
regulation, pension fund services, and the economic growth of a nation, banking services,
and capital formation.

The following is the list of roles performed by financial institutions: –

Regulation of Monetary Supply
Financial institutions like the Central Bank help regulate the money supply in the
economy to maintain stability and control inflation. For example, the Central Bank
applies various measures like increasing or decreasing repo rate, cash reserve ratio,
and open market operations, i.e., buying and selling government securities, to
regulate liquidity in the economy.
2 – Banking Services
Financial institutions, like commercial banks, help their customers by providing savings
and deposit services. In addition, they offer credit facilities like overdraft facilities to
the customers to cater to the need for short-term funds. Commercial banks also extend
loans like personal loans, education loans, mortgages, or home loans to their customers.
3 – Insurance Services
Financial institutions, like insurance companies, help to mobilize savings and investment
in productive activities. In return, they assure investors against their life or some
particular asset at the time of need. In other words, they transfer their customer‟s risk of
loss to themselves.
4 – Capital Formation
Financial institutions help in capital formation, i.e., increase in capital stock like the
plant, machinery, tools and equipment, buildings, transport, communication, etc.
Moreover, they mobilize the idle savings from individuals in the economy to the investor
through various monetary services.
5 – Investment Advice
There are many investment options available at the disposal of individuals and
businesses. But it is not easy to choose the best option in the current swiftly changing
environment. Almost all financial institutions (banking or non-banking) have an
investment advisory desk that helps customers, investors, and businesses to select the best
investment option available in the market according to their risk appetite and other
factors.
6 – Brokerage Services
These institutions provide their investors access to several investment options available in
the market, ranging from stock bonds (common investment alternative) to hedge
funds and private equity investment (lesser-known alternative).
7 – Pension Fund Services
Through their various kinds of investment plans, financial institutions help individuals
plan their retirement. One such investment option is a pension fund. The individual
contributes to the investment pool by employers, banks, or other organizations and gets
the lump sum or monthly income after retirement.
8 – Trust Fund Services
Some financial organizations provide trust fund services to their clients. They manage
the client‟s assets, invest them in the best option available in the market, and take care of
its safekeeping.
9 – Financing the Small and Medium Scale Enterprises
Financial institutions help small and medium-scale enterprises set up themselves in their
initial business days. They provide long-term as well as short-term funds to these
companies. The long-term fund helps them form capital, and short-term funds fulfill their
day-to-day working capital needs.
10 – Act as a Government Agent for Economic Growth
The government regulates financial institutions on a national level. They act as a
government agent and help grow the nation‟s economy. For example, to help out an
ailing sector, financial institutions, as per the guidelines from the government, issue a
 selective credit line with lower interest rates to help the industry overcome the issues it is
facing.
Laws that regulate the banking sector
The primary legislation governing banking activities in Nigeria are the Banks and other
Financial Institution Act (BOFIA) and the Central Bank of Nigeria Act.
Other laws include the Companies and Allied Matters Act 2020, the Nigerian Deposit
Insurance Corporation Act and the Foreign Exchange Act.
1. Banks And Other Financial Institutions Act, 2020
Before the BOFIA 2020, the BOFIA 1991 existed for over 20 years until November 12,
2020, when President Muhammadu Buhari assented to new legislation termed BOFIA
2020 which is currently in use.
 While the New Act reviews the penalty for operating without a banking licence and
introduces additional protections for account holders, the old Act stipulates that anyone
operating without a licence is liable on conviction to imprisonment not exceeding 10
years or a fine of N2 Million or both.
 This Act empowers the Central Bank of Nigeria (CBN) to supervise and regulate all
banks and other financial institutions in Nigeria.
 On the application for the grant of a banking licence, section 3(3) of the BOFIA 2020
gives the CBN Governor absolute powers to refuse to grant a banking licence without
giving any reasons whatsoever.
 The section states that “The Governor may, with the approval of the board issue a licence
with or without conditions or refuse to issue a licence and the Governor need not give
any reason for such refusal”
 On the operation of unlicensed foreign banks, Section 3 (5) & (6) stipulates that “Any
foreign bank or other entity which does not have a physical presence in its country of
incorporation, or is unlicensed in its country of incorporation and is not affiliated to any
financial services group that is subject to effective consolidated supervision, shall not be
permitted to operate in Nigeria and no Nigerian bank shall establish or continue any
relationship with such a bank.”
 On revoking or varying conditions of a licence, Section 5 stipulates the penalty for failing
to comply with the conditions of a licence.
 The section also imposes additional penalties on the officers or directors of a bank that
failed to take reasonable steps to ensure compliance with the conditions.
 According to the Act, Such a director or officer shall be liable to imprisonment for a term
not less than 3 years or a fine, not less than N2 million, or for both such imprisonment
and fine.
 On revocation of banking licence, section 12 introduced circumstances that may result in
the revocation of a banking licence by the CBN Governor.
2. The Central Bank Of Nigeria Act 2007
Before this Act existed the CBN Act of 1958 established the Central Bank of Nigeria.
However, The current legal framework within which the CBN operates is the CBN Act of
2007 which repealed the previous CBN Acts and all their amendments.
The CBN is the lead regulator of the banking sector in Nigeria under the provisions of the
CBN Act and BOFIA.
The CBN is charged with the overall control and administration of the monetary and
financial sector policies of the Federal Government in Nigeria as stipulated by the CBN
Act of 2007.
 Section 2 of the Act stipulates the objectives of the CBN which includes: To ensure
monetary and price stability, Issuing legal tender currency, Maintaining external reserves
to safeguard the international value of the legal tender currency, Promoting a sound
financial system in Nigeria; and Act as a bank and provide economic and financial advice
to the Federal Government.
 The Act also empowers CBN to issue guidelines and circulars relating to its
responsibility to banks, foreign exchange market, and other financial institutions.
3. The Companies and Allied Matters Act, 2020
This Act establishes the Corporate Affairs Commission (CAC), which is charged with the
regulatory powers over all registered companies in Nigeria, including banks and other
financial institutions.
 Under CAMA, certain corporate governance principles were introduced which require a
public company to have at least three independent directors and prohibit a person from
being a director in more than five public companies and these provisions apply to a bank
that is a public company.
 The Act governs banking activities because to operate a financial institution or banking
business in Nigeria, one has to be duly registered and incorporated under the CAMA.
 CAMA also provides various regulations and compliances that banks must follow from
issuance of shares to meetings of companies, among others.
 CAMA stipulates that Every registered company must file annual returns with the CAC
as a mandatory requirement to which the Banks must adhere.
4. The Nigerian Deposit Insurance Corporation Act 2006
This Act is responsible for ensuring all deposit liabilities of licensed banks.t the Act
seeks to ensure that liquidation proceeds carried out by banks are orderly.
 This Act established the Nigerian Deposit Insurance Corporation (NDIC).
 The NDIC is responsible for ensuring all deposit liabilities of licenced banks operating in
Nigeria, Giving assistance to insured institutions in the interest of depositors,
Guaranteeing payment to depositors and assisting monetary authorities in the formulation
and implementation of banking policies.
 With a directive from the CBN, The NDIC takes over the management and control of a
failing bank and ensures the efficient closure of the failed bank and financial institutions
without any disruption of the banking system.
 It also ensures the cost-effective realisation of assets and settlement of claims to
depositors, creditors, and shareholders.
5. Foreign Exchange (Monitoring and Miscellaneous Provisions) Act, 1995 (FEMM
Act)
This Act provides the regulatory framework for foreign exchange transactions and
controls.
 As provided under the Act, transactions in the foreign exchange market are to be
conducted in convertible foreign currency.
 Section 2 (2) of the Act listed specific money instruments that can be used in the market
These include: Foreign banknotes, Foreign coins, Travelers‟ cheques, Bank drafts, Mail
or telegraph transfers and any other money market instruments that the Central Bank may
with the approval of the finance Minister determine
CONSUMPTION, SAVINGS AND INVESTMENT
Consumption
The main hypothesis of Keynes suggested that our disposable income which can be arrived
at by deducing tax liabilities from gross income influences our level of real consumption.
Further explanation on this is
C = f (Y) where C stands for consumption and Y stands for disposable income.
Keynes also held the view that people tend to enhance their consumption level along with a
rise in their disposable income.
However, the increase in disposable income is greater than the increase in consumption.
This hypothesis can be termed as our marginal propensity to consume and indicates a
positive correlation between these two variables.
This, if our income increases by one unit, our marginal propensity to consume increases by
0.8 units. Hence the remaining 0.2 units are used for savings.
Y = C + S where Y stands for disposable income, C stands for consumption and S stands for
savings.
It is also imperative to note here that propensity to consume and desire to consume are not
similar in nature as the former means effective consumption.
Both objective and subjective factors influence our consumption function. Tax policy,
interest rate, windfall profit or loss and holding of assets are some objective functions
whereas subjective ones relate to motives of foresight, precaution, avarice, and
improvement amongst individuals.
Savings
In plain words, savings refer to the excess of disposable income over consumption
expenditure.
From a national level, the unconsumed part of the entire nation‟s income comprising of all
its members can be termed as National Savings.
Total domestic savings, on the other hand, can be defined as the summation of savings of
the government, the business sector, and households.
Some of the biggest determinants of savings are
 Income, as saving income ratio holds a proportionate relation with the rise in income.
People also have a tendency of saving the excess part of their income but not the
entire bulk.
 Distribution of income as the savings process is helped to a great extent by inequality
of income distribution. Our desire to showcase a superior standard of living in
comparison to our neighbors often steers us towards purchasing expensive goods
which in turn declines the level of savings.
 Psychological or subjective factors such as savings to safeguard ourselves from future
insecurity and uncertainty. The ultimate attitude of people is driven towards savings
by their farsightedness. This, in turn, boosts them up to enjoy a better standard of
living both for themselves and their loved ones.
 Prevalent financial instruments and rate of interest as a higher rate motivates greater
savings.
Pros and Cons of Saving
Pros
 Builds up an emergency fund
 Funds short-term goals like buying groceries, a new phone, or going on a
vacation.
 Minimal risk of loss. Savings held at banks are protected by FDIC.
Cons
 Much lower yields
 May lose out to inflation
 Opportunity costs when not invested in riskier but higher yielding assets
Investment
Definition of Investment is:
 Change in capital stocks or inventories pertaining to a business venture between two
different periods or
 Production of fresh capital goods such as plants and equipment.
Pros and Cons of Investing
Pros
 Potential for higher returns than savings
 Can help achieve long-term financial goals
 Diversification can reduce risk
Cons
 Risk of loss, especially in the short-run
 Requires discipline and commitment
 May require longer time horizons
Relation Between Savings and Investment In Classical System
According to this theory, Savings (S) gets equated with Investment (I) automatically which
otherwise alters the interest rate. If savings exceeds investment, the excess supply of funds
brings down the rate of interest.
This, in turn, reduces savings and increases investment for maintaining equilibrium.
However, this law of the market holds good when the entire amount of savings is invested.
There are two aspects of saving and investments:
(i) Ex-Ante Saving and Ex-Ante Investment
(ii) Ex-Post Saving and Ex-Post Investment
i. Ex-Ante Saving and Ex-Ante Investment:
Ex-ante saving refers to amount of saving which households (or savers) plans to save at
different levels of income in the economy. The amount of ex-ante or planned saving is
given by the saving function (or propensity to save).
Ex-ante investment refers to amount of investment which firms plans to invest at
different levels of income in the economy. The amount of ex-ante or planned investment
is determined by the relation between investment demand and rate of interest, i.e. by
investment demand function.
Ex-ante can also be termed as:
(i) Intended;
(ii) Planned;
(iii) Voluntary; and
(iv) Desired.
Equilibrium occurs when Ex-ante saving = Ex-ante investment:
In an economy, equilibrium is determined when planned saving is equal to planned
investment. However, both these concepts are equal only at equilibrium level of income.
It happens because of three reasons:
(i) Generally, saving is done by households and investment is done by firms. So, savers
and investors are different people with different priorities.
(ii) Saving is made in small amount and investment is made in big amounts.
(iii) Saving is made for meeting future uncertain events or contingencies, whereas,
investment is made for profit motive.
As a result, ex-ante saving and ex-ante investment are not always equal to each other.
They are equal only at the equilibrium level.
When ex-ante (planned) saving is not equal to ex-ante (planned) investment, then output
will tend to adjust itself till both of them become equal again.
ii. Ex-Post Saving and Ex-Post Investment:
Ex-post saving refer to the actual or realised saving in an economy during a year. Ex-post
or actual saving is the sum total of planned saving and unplanned saving. Ex-post
investment refers to the realised or actual investment in an economy during a year. Ex-
post or actual investment is the sum total of planned investment and unplanned
investment. It must be noted that ex-post saving and ex-post investment are equal at all
levels of income. This equality between the two is brought by fluctuations in income.
Economic Significance of Saving and Investment
Saving and investing are both important components of a healthy financial plan. Saving
provides a safety net and a way to achieve short-term goals, while investing has the
potential for higher long-term returns and can help achieve long-term financial goals.
However, investing also comes with the risk of losing money. Each approach has its own
pros and cons, and it's important to find the right balance that works for your financial
situation and goals.
The Relationship between Central and Commercial Banks!
The following concept of relationship below are;
Central Banks:
A central bank, reserve bank, or monetary authority is an institution that manages a
state‟s currency, money supply, and interest rates. Central banks also usually oversee the
commercial banking system of their respective countries. In contrast to a commercial
bank, a central bank possesses a monopoly on increasing the monetary base in the state,
and usually also prints the national currency, which usually serves as the state‟s legal
tender.
Central banks also act as a “lender of last resort” to the banking sector during times of
financial crisis. Most central banks usually also have supervisory and regulatory powers
to ensure the solvency of member institutions, prevent bank runs, and prevent reckless or
fraudulent behavior by member banks.
Commercial Banks:
A commercial bank is an institution that provides services such as accepting deposits,
providing business loans, and offering basic investment products. The commercial bank
can also refer to a bank, or a division of a large bank, which more specifically deals with
deposit and loan services provided to corporations or large/middle-sized business – as
opposed to individual members of the public/small business.
In developing economies, however, this is not so simple. Here a case is often made for
entry of the central bank in some selected fields to promote the development of the
economy; besides ensuring the growth of a sound banking structure to cope with the
increasing needs of credit. Commercial bankers take this as an encroachment on their
field.
The Relationship between the commercial banks and the central banks:
The relationship between the commercial banks and the central bank has to be based on
reciprocity. The commercial banks should conform to the spirit of central bank directives
rather than letters. On the other side, the central bank should invariably satisfy the
genuine needs of the commercial banks in times of stresses and strains. A moral code of
conduct between the two will have to be evolved, accepted and followed.
They argue that the major part of the Central Bank‟s funds comprise the reserves of the
commercial banks meant for safeguarding their safety (liquidity). It would be immoral on
the part of the central bank to compete in business with the commercial banks with their
money. In view of the co-operation that the central bank often seeks from commercial
banks for carrying out its policies, the central bank should not invite hostility from them
by giving them unjust competition through its special privileges as the bankers‟ bank and
the banker of the government.
In spite of these arguments, opinion has gone in favor of the undertaking of some
commercial business by the central bank, especially in underdeveloped economies. A
small amount of business can hardly affect the liquidity position of the „creator of
liquidity‟. It is not at all necessary that the central bank uses the commercial banks‟ funds
for this. It can set up a separate department for commercial business and create resources
also.
In fact, it may organize a special agent bank as its favored child for doing the arduous
business necessary for economic development often avoided by commercial banks.
Further, if the central bank feels that the steering wheel of credit control in its banks is
loose and not functioning satisfactory, it may gain an edge of maneuverability by keeping
in touch with the market through a limited amount of business.
Besides, in an agriculturally depressed economy like India, the central bank may take up
the onus of developing a bill market, granting direct loans, or discounting good bills of
exchange. As regards direct loans, it may be a bit difficult to democrat clearly the central
bank‟s field vis-a-vis that of the commercial banks.
The difficulty is removed if the central bank while doing ordinary commercial business
keeps in mind that in its operations, the public interest and not profit-earning motive,
prevails; what it can get done through commercial banks it never undertakes to do itself.
The various quantitative and qualitative instruments of credit control should be
judiciously used by the central bank. No doubt, the bank has the drastic weapons of
reserve ratio requirements, open market operations or changes in the bank rate, etc. but
none of them is fool-proof.
After all, it is bank official on the spot who can judge between the credits asked for
socially desirable productive purposes or credit being taken in the name of bonafide
purposes, but to be used for some anti-social actions. Unless the commercial bank and the
central bank provide willing co-operation, the one will be weakened and the other will be
frustrated. This is why moral persuasion must be preferred now to direct action.
Regulatory Role Performed By the Central Bank
Deposit Insurance
Financial stability is of paramount importance for any economy to be able to prosper.
Thus, it is essential that people park their excess funds in banks and that banks are able to
lend this money out to businesses which plan to use it productively. This process gets
hindered when the average person loses trust in the solvency of the bank. This is where
central banks step in.
Central banks all over the world guarantee the deposits held by commercial banks up to a
certain amount. They may do so directly or they may create a separate body backed by
them, thereby insuring the deposits indirectly.
This is called deposit insurance and it indirectly helps in ensuring that the commercial
banks use their deposits judiciously.
Since the central bank is guaranteeing the deposits, the central bank keeps a keen eye on
the utilization of the proceeds in order to minimize their own liability.
Granting Charter to New Banks
The central bank also plays an important part in the regulatory role as it decides whether
or not to grant charters to new banks. In most countries around the world, charters are
granted by judicial bodies and not by central banks.
For instance, in the United States a banking charter can be granted either by federal
authorities or by state authorities. However, the Federal Reserve cannot grant a
banking charter on its own.
The central banks do play an important role in advising the judicial bodies while such
charters are being granted. Therefore, indirectly central banks can have an influence over
the number of new banks entering the market. This puts them in a position to ensure
healthy competition that is beneficial to the consumers but not detrimental to the banks
themselves.
Reserve Requirements
The most important regulatory power that a central bank has is that it can modify the
reserve requirements. “Reserves” is the percentage of deposits that any commercial bank
has to maintain with the central bank. Thus if this percentage is increased, commercial
banks have to deposit a larger portion of their money with the central bank and have a
smaller percentage to lend out to the market.
Hence, a scarcity of funds is created and interest rates begin to rise. On the other hand, if
this reserve requirement is relaxed, banks will have more funds to lend and as a result the
interest rates will go down given the abundance of funds.
Since the central bank sets the reserve requirements, it is in a position to have a
significant influence on the operations and profits of member commercial banks. The
central bank can simply regulate the behavior of the commercial banks to suit the national
interests by modifying the reserve requirement rates.
Monitoring Risk
It is the duty of central banks to monitor the risks that the commercial banks under their
purview are taking. Therefore, central banks have the power to conduct audits at regular
intervals.
These audits consist of a thorough investigation of the assets, liabilities and even the
treasury operations of any bank. Risk is measured using complex models like Value at
Risk (VaR) which have been specifically designed for this purpose.
Commercial banks have to ensure that their risk profile is within the limits prescribed by
the central banks. They also have to ensure that they have enough capital on hand to meet
the needs of the depositors, if required. Without central banks regulating commercial
banks, competition would drive them to excessive risk taking. It is the central banks that
help maintain the balance between risk and reward even in highly competitive markets.
Anti Discrimination Laws
Central banks also enforce anti-discrimination laws to ensure that the access to money
and credit is not affected by communal and racist agendas. Central banks enforce laws
which make it impossible for the banks to exclude communities from the banking system.
For instance, in the United States, there were allegations that banks were “redlining”
certain neighborhoods. This meant that banks would not make loans to residents of
certain neighborhoods.
Since the majority of the residents in these neighborhoods were Hispanics or African
Americans, it was considered to be discrimination.
Hence, the Fed i.e. the central bank of the United States had to intervene to ensure that
the credit was not being apportioned based on the racial profile of the creditors. It is the
job of the central banks to ensure that money and credit are equally available to anyone
worthy of it.
Conflict Of Interest
The central bank carefully monitors the activities of commercial banks and scans them
for conflict of interest. This means that if the senior officials on the boards of commercial
banks are making loans to themselves or to entities controlled by them, then the central
bank can and must take action to control such embezzlement.
Loans which have an inherent conflict of interest have been a major reason behind the
existence of non-performing assets (NPA‟s) and central banks, through their regulatory
functions, ensure that depositors‟ money is not jeopardized by such risky and biased
loans.
Functions of Central Bank
Monopoly over Issue of Currency Notes
Prior to the introduction of central banking, every bank could issue its own notes. As
such, the economy would be flooded with thousands of different types of notes. The
people accepting these notes would have very little idea of what the notes were worth or
could be redeemed for. As such, there was less trust in the banking system as a whole.
This is when the central banks took over. Central banks, in modern times have been
granted the sole rights to print and distribute currency notes. The notes that they print are
considered to be legal tender. This means that they are the only legally accepted form of
money and the courts will only enforce debts if they are denominated in terms of the
established legal tender.
Therefore, modern day central banks have monopoly over the issue of currency notes.
They are in a position to ensure its acceptability and maintain its value without the
intervention of competing market forces.
Control over Monetary Policy
Central banks in today‟s world, not only issue the currency notes but they also determine
the amount and timings of such currency issue. The modern day monetary policy has
virtually moved out of the realm of the government and into the realm of central banks.
Central banks are supposed to be free of political influence. In theory this means that they
would not inflate or deflate the currency of the nation to meet political objectives. It is for
this reason that governments all across the world have minimal influence on monetary
policy. Rather, it is the central banks that decide the quantum of money and credit that
circulates within the economy at any time.
Banker’s Bank
The central bank provides stability to the financial system by controlling the actions of
the commercial banks. The central bank does so by making it mandatory for commercial
banks to have a certain percentage of their deposits maintained with itself.
By controlling the amount of loans that the commercial banks can make and the way in
which they manage their deposits, central banks can prevent mismanagement of funds by
their subordinates. This puts them in a position to guarantee a portion of these deposits to
the general public which creates confidence in the banking system.
Lender of Last Resort
The central bank is considered to be the lender of last resort for all commercial banks
under its domain. Many times banks face liquidity issues and in such scenarios a run on
the bank becomes inevitable. Without the help of a central bank, an individual bank will
collapse in the event of a bank run. However, a central bank quickly pumps money as and
when demanded by the depositors, reinforcing their confidence, averting the run and
keeping the system alive.
Payment Mechanism
Central banks have also made it possible to have a quick and efficient payment
mechanism in the economy. This is because central banks have the ability to ensure that
the payments made are irrevocable and guaranteed.
Thus, when a bank makes a payment to another bank, it is the central bank that debits one
bank‟s account and credits another bank‟s account. Since the central bank performs the
intermediary function, it frees the commercial banks from counterparty risks. Any
commercial bank does not have to worry about not receiving promised payments from
another bank. If it is due, the central bank will ensure it is paid. Therefore, the swift
functioning of the fast payment system that we have today is implicitly guaranteed by the
Central Bank.
Financier to the Government
The Central Bank also acts as financier to the government. When the government runs a
budget deficit i.e. spends more than it has, the central bank manages the deficits. Thus the
government does not have to depend on the mercy of the bond markets in the short run.
However, in the long run the central bank cannot cover all of the government‟s
overspending. Central bank provides valuable support which enables functioning of the
all of the welfare schemes which require government intervention in the form of money.
Forex Management
The central bank also manages foreign exchange reserves on behalf of the government
and the common population. Thus, it is the central bank‟s duty to ensure that the country
always has enough foreign exchange on hand to import essential commodities from the
international markets. It also has the power and the financial muscle required to maintain
the value of its currency in the Foreign exchange markets. If the central bank senses a
speculative attack on its currency, they resort to open market operations thereby
maintaining the value at a stable level.
The central bank is therefore considered to be a central institution in the modern financial
system. A modern financial system without a central bank is virtually unthinkable.
Therefore, to understand banking, we must first understand the central bank.
West African Currency Board (WACB
The West African Currency Board (WACB) was founded in November, 1912
following the recommendations of Lord Emmitts Committee which was appointed by
then Colonial Secretary, Mr. Lewis Harcourt to look into the currency situations
of British West Africa in 1910.
The WACB committee was set up by the colonial administration to solve two basic
needs:
1. Financing the exports trade of the expatriate firms operating in English Speaking
West African Countries.
2. Improving through standardization the unsatisfactory and misleading currency system
in West Africa. The Board was vested with the following functions;

 Issuing of West African Currency;

 Exchange of existing currency with the board‟s currency;
 To sell abroad (repatriate) existing currency;
 Investment of its reserves. In the execution of these functions the board activities were
characterised by:
1. Fixed parity of the local currency with sterling.
2. Automatic issues and futl coverage with amount that is able to be obtained from
exports.

Advantages of the West African Currency Board (WACB)

 For the first time West African Countries were provided with a readily acceptable
currency in World Market is unified system that commanded confidence. This was
assured through the sterling link, which made it possible to convert the West African
currency notes into other currencies.
 It preserves at all times a stable value of the West African Currency in terms of
sterling.
 The reserves accumulated in London where invested land interest payments were
repatriated to the countries concerned.
 It provided necessary network for the easy transfer of the West Africa Currency to
the British currency.
 It ensured easy transfer facilities between the West African Countries.

Disadvantages of the West African Currency Board (WACB)

 The Board‟s currency lacks fiduciary issue because it depended on British sterling.
 The amount of money supplied fluctuated with receiptable and payments of the board
in starling. This made monetary management difficult.
 It lacked the ability and power to control and supervise the financial institutions that
were existing in West Africa.
 It did not train West Africans in the art of monetary management and it did not
encourage the development of indigenous financial institutions.
 The board did not attempt to foster the development of local investments instead it
focused its attention on the development of London money and capital market.
 It did not provide a national currency such as an independent country might expect to
have.
 Since it served four countries, it could not and did not take into consideration the
peculiar conditions of anyone of them, but engaged in a common exchange of
currencies exercise.