What is Financial Institutions?
Financial Institutions are business organizations which deal in money, though some may deal in other financial assets such as shaves, letters of credit, bills of exchange etc. With the exception of the Central Bank, they make profits by trading in money; that is, through the process of accepting deposits in several ways e.g. offering technical advice etc.
Banks and other financial institutions are providers of liquidity, and payment services and therefore represent an important nerve centre of the economy that facilitates the intennediation of financial resources through the promotion of the saving and investment process.
They also constitute the institutional framework for the conduct of sound monetary policy and transmission mechanism.
Historical Development of Financial Institutions in Nigeria
The development of modern financial institutions in Nigeria is fairly recent when compared with the traditional ones. Traditional financial institution were in existence long before the coming of the Europeans.
The first commercial bank (British Bank of West Africa was established in 1894. It is now known in Nigeria as First Bank of Nigeria PLC. After its establishment, other foreign banks such as Union Bank PLC, United Bank for Africa, etc. came into existence.
Before independence, only a few financial institutions (Insurance Companies, Commercial Banks, Merchant Banks etc) were indigenous ones The first servicing indigenous bank (National Bank of Nigeria) was established in I933.
The Central Bank of Nigeria was established in 1959. Before the establishment of Central Banks in British West Africa, what exnsted then was the West African Currency Board (established in 1912). Its main function was the issuing of the West African Pound converting it to the pound sterling as the need arose.
The setting up of Central Banks in West African countries was done for a number of reasons: to effectively control the activities of commercial banks and other financial institutions, to have a body to formulate and implement government monetary and financial policies, and to foster the development of the money and capital markets in West Africa.
The setting up of the central Bank of Nigeria acted as a booster for the establishment of indigenous commercial banks and other modern financial institution.
The need for rapid economic development. the provision of necessary incentives by government and the Central Bank and the high profit making tendency of financial institutions (especially in the wake of deregulation of credit control in the early 1990s) saw an astronomical increase in the number of financial institutions in Nigeria.
The Nigeria’s Enterprises Promotion Decree (1977) led to the death of fully foreign-awmd hnancial institutions. In commercial banks, for example Nigerians now have atleast 60% equity interest in such banks as First Bank, Union Bank etc which were previously completely foreign-owned.
What are the Major Problems of Financial Institutions in Nigeria
- Concentration in urban centres: Most modern financial institutions are located in urban centres leading to inadequate mobilization of savings in rural areas.
- Inadequate collateral securities and poor necords of business activities by individuals and firms. These limit the ability of the financial institutions to make loans.
- High incidence of fraud by officials and customers: There have been many reported cases of fraud by officials and customers of the financial institutions.
- Strict government control: The government through the Central Bank, may impose a number of stringent controls which may reduce the ability of financial institutions to make loans.
- Unnecessary political interference: The government sometimes interferes with the decision-making process in some of the financial institutions through its appointment of Board members.
- Inadequate mobilization of savings and capital: They do not mobilize adequate deposits due to illiteracy and lack of confidence.
- Limited use of cheques and other financial instruments: The use of cheques, bank draft, bills of exchange, etc. are still limited thereby reducing transactions.