THE NIGERIA FINANCIAL SYSTEM AND RESENT EVENTS PART 1

THE NIGERIA FINANCIAL SYSTEM AND RESENT EVENTS
PART I
INTRODUCTION
In an attempt to carry out a comprehensive study of the financial system in Nigeria, it is highly necessary to explain the meaning and qualities of a system. This will in no small measure support us understand the dynamics of the financial system. According to Nzotta (1999), a system can be defined as an organized group of components (subsystems) linked together according to a plan, to achieve specific objects. Another point of view posits that a system is a set or assemblage of things connected or interdependent with one another so as to form a complex unity. It could also be said to be a whole composed of parts in orderly arrangement according to some scheme or plan. A system can further be defined as An assemblage of objects arranged in regular subordination, or after some distinct method, usually logical or scientific; a complete whole of objects related by some common law, principle, or end; a complete exhibition of essential principles or facts, arranged in a rational dependence or connection; a regular union of principles or parts forming one entire thing; as, a system of philosophy; a system of government; a system of divinity; a system of botany or chemistry; a military system; the solar system. From the foregoing, a system has basic components which are in a functional relationship with each other and these have specific objectives. These components may be simple or complex units and are usually self-regulatory and self-adjusting. Thus, from this conceptual frame work, we may surmise that system that systems could range from complex types like the educational system, the economic system, the financial system, etc. to smaller system like banking system, the production system etc.


FINANCIAL SYSTEM DEFINED
The financial system consists of various financial institutions, operators and instruments that gives the system its character and uniqueness. According to the Central Bank of Nigeria research series (1993) the Nigerian financial system refers to a set of rules and regulations and the aggregation of financial arrangements, institutions, agents, that interact with each other and the rest of the world to foster economic growth and development of a nation. A national financial system differs from the global financial system (GFS). The global financial system (GFS) is a financial system consisting of institutions and regulations that act on the international level, as opposed to those that act on a national or regional level. The main players are the global institutions, such as International Monetary Fund and Bank for International etc. The financial system is a prime mover of economic development. It achieves this through the intermediation process, which entails providing a medium of exchange necessary for specialization and the mobilization of savings from surplus units to deficit units. Through this process, there is an enhanced productive activity and thus positively influences aggregate output and economic growth. It means the system ensures the efficient transfer of savings from those who generate them (savers) to those who ultimately use them (investors) for investment or consumption. Well-functioning financial markets are an essential part of any modern healthy economy. It is through these markets that funds are offered by the lenders/savers who have excess funds and purchased by the borrowers/spenders who need those funds. The financial system also provides avenue for organizing and managing the payments system, mechanisms for the collection and transfer of savings by banks and other depository institutions; arrangements covering the activities of capital markets with respect to the issue and trading of long term securities, arrangement covering the workings of the money market in respect of short-term financial instruments; and arrangements covering the activities of financial markets complementary to the money and capital markets for example the foreign exchange market, the arrangements for risk insurance; the futures market etc. Nzotta (1999)
Empirical evidence shows that the level of financial system development in any nation is the best indicator of general economic development potential. Goldsmith (1969), for instance posits that financial system development is of prime importance because the financial superstructure, in the form of both primary and secondary securities, accelerates economic growth and improves economic performance, to the extent that it facilitates the migration of funds to the best user i.e. to the place in the economic system where the funds will yield the highest social return. The implication here is that the financial system will discriminate against inefficient funds users.
In helping as a vehicle to economic development, the financial system tries to achieve the basic function of resource intermediation. Here, through various institutional structures, they vigorously seek out and attract the reservoir of idle funds and allocate same to entrepreneurs, businesses, households and governments, for investments and use in various projects and purposes, with a view of returns. Alternatively, they may listlessly exploit their quasi-monopolistic position and fritter away investment possibilities with unproductive loans (investments).Cameroon et al (1969).
It is therefore an axiom that with out financial wherewithal, no business enterprise (small, medium, or big) or government can perform its productive functions effectively and efficiently. Consequently, financial resources affect business development.

FUNCTIONS OF THE FINANCIAL SYSTEM
The financial system plays the vital role of improvement and sustains the efficient mobilization and allocation of financial resources in an economy. The also provide structures for the management of liquidity for financial assets and instruments The Report on the Nigeria system (1976) succinctly articulated the functions of the financial system. According to the report, the financial system should:

facilitate effective management of the economy;
provide non inflationary support to the economy;
achieve greater mobilization of savings and its efficient and effective channeling;
ensure that no viable project is frustrated simple for lack of funds;
insulate the economy as much as possible and as much as desirable from the vicissitudes of international economic scenes;
effectively sustain the indigenization (ownership, control and management) of the economy;
assist in achieving significant transformation of the rural sector; and
assist in achieving a greater integration and linkages in agriculture, commerce and industry.

The functions above convey the enormous role the system plays in economic development. In addition to the above, the system provides adequate hedge to risk averse investors to hold a diversified portfolio of financial assets, as a protection against the premature liquidation of the firms in which they invested. See Oyejide (1994).
The financial system guarantees that there is a sufficient stock of money to enhance the productive process in the economy. An adequate stock of money ensures that there is monetary balance and stability. Also, Oyejide further contends that the financial intermediation roles of the system (especially banks) entail significant contributions to the process and magnitude of economic growth in several ways:
They improve efficiency in resource mobilization by pooling a myriad of individual savings of various persons;
They provide efficient allocation of savings into investment outlets,
They increase the fraction of societal resources devoted to interest yielding assets and long run investments, which in turn augments economic growth;
They reduce risk faced by firms in their production processes by providing liquidity to various financial assets;
They enable investors improve their portfolio diversification providing insurance and project monitoring information; and
They induce enterprises to operate more efficiently by monitoring loan projects by offering financial protection against premature liquidation of their capital.
Also, another point of view posits that the financial system in addition to the above issues, provides the necessary environment for the implementation of various economic policies of the government intended to achieve non-inflationary growth, exchange rate stability, balance of payment equilibrium, foreign exchange management, high levels of employment etc.
The system also encourages a high level of specialization, expertise and efficiency. The factor of specialization and expertise ensures that the financial system reduces and in fact eliminates inefficiency, to the benefit of both the fund providers and fund users. The financial system should also be in a position to transform a primary security of a given maturity to a number of secondary securities of different maturities. Thus, the system must influence the maturities of financial assets in the system.
Generally, the financial institutions in the system are continuously purchasing primary securities in large numbers during the intermediation process. Thus in an efficient system there is the presence of economies of scale available to both borrowers and savers of funds.
Also, it should be more attractive to deal with the formal intermediaries in the financial system than the informal fund providers. This is because an ideal financial system should afford a high level of safety of funds, ease of marketability of instruments, cost efficiency, low risk of default and low transaction time.
Financial, the system should also be a good mechanism for risk diversification. This is achieved because financial intermediaries are able to purchase a number of different primary securities from various fund providers. Thus risk is diversified in the process. Nzotta (1999).

BASIC CHARACTERISTIC OF AN EFFICIENT FINANCIAL SYSTEM
An efficient financial system is characterized by some closely inter connected attributes.
a. A high level of confidence must be in place in the system.
b. An efficient financial system must be able to sustain the intermediation process.
c. An efficient financial system must have in place a large number of intermediaries and participants who must stand ready to engage in healthy competition amongst themselves and within confines and boundaries specified by law and the various professional standards in place for the participants.
d. There should be a high degree of flexibility in the market. Also, the instruments (financial assets) employed and the methods of operation should be market based, so that the market can respond and adapt to changes in the economic and financial structure, no matter how small the change may be.
e. An efficient financial system must allow for balance in operations of the market. It requires that there should be an optimal mix of various types of financial institutions with respect to both the transfer of current savings and the stock the past savings.

STRUCTURE OF THE NIGERIAN FINANCIAL SYSTEM
The structure of the Nigerian financial system could be viewed from the side of institutions and structures planted for the realization of basic goals of financial intermediation. The institutions in question operate in the financial market. Here their ultimate role is to facilitate the mobilization of funds from the surplus units (savers) to the deficit units (investors).The sweetener is interest income that makes the surplus units (savers) to transfer their purchasing power to the deficit units (investors).This what is called actual resources flow from lenders to borrowers Through this the production of goods and services is improved which also reflects on the aggregate output of our Nation.
The institutions in the Nigerian financial system are as shown below:

The monetary authorities or regulators,
∙ The Presidency
∙ Federal Ministry of Finance
∙ The Central Bank of Nigeria (CBN) as the apex regulatory body in the financial system.
Institutions that provide long term funds or capital market operators,
∙ Securities and Exchange Commission as the apex regulatory body
∙ The stock exchange as the facilitator of trading in various listed securities
Development or Specialized financial institutions:
I. Bank of Industry
II. Nigerian Agricultural and cooperative Bank.
III. Nigerian Bank for Commerce and Industry.
IV. Federal Mortgage Bank of Nigeria.
Market operators
I. Brokers.
II. Jobbers.
Market facilitators
I. Issuing houses.
II. Registrars.
III. Investment managers.

Institutions that provide short term funds or money market operators.
∙ Commercial Banks (universal banks).
∙ Mortgage Financial Institutions.
∙ Community Banks and Micro Finance Banks
∙ Non Bank Financial Institutions.
∙ Discount Houses