What is finance ?

The field of finance is broad and dynamic. It directly affects the lives of every person and every organisation. There are many areas for study and large number of career opportunities available in the field of finance. Finance has been defined in different ways. Each definition however reflects the perception of finance relative to its role and scope. However, it may not be possible to give a precise and very comprehensive definition to such a wide, complex and important subject which is of interest to everybody.

Webster’s third International Dictionary, for example, defines finance as “the system that includes the circulation of money, the granting of credit, the making of investments and the provision of banking facilities.” This definition gives an indication to the fact that finance is a system by itself and thus a broad field of activities at the centre of economic operations or social activities with economic implication.

The Shorter Oxford English Dictionary defines finance as “to lend, to settle debt, pay ransom, furnish, and procure, etc. [--- the management of money] --- [the science of levying revenue in a state, corporation] --- [the provision of capital.]” This definition looks at finance as a science which applies to both the public and private sectors.   

The Encyclopaedia of Banking and Finance has however given a broader definition of finance.  Its definition is classified into three categories as follows:

i) to raise money necessary to organise, re-organise or expand an enterprise whether by sales of stocks, bonds, notes, etc
.
ii) a general term to denote the theory and practice of monetary credit, banking and promotion of operations in the most comprehensive sense. It includes money, credit, banking, securities, investment, speculation, foreign exchange, promotion, underwriting brokerage trusts, etc.

iii) originally applied to raising money by taxes or bonds issues and the administration of revenues and expenditure by government.

Finance, as seen by the Encyclopaedia of Banking and Finance, is much more comprehensive than the concept of finance as reflected in earlier definitions. The above concepts of finance are synonymous with business finance, money and credit and public finance, international finance, investments, etc.

Lastly, Gitman (2000) defines finance as the art and science of managing money. In contrast with Christy and Roden (1973), money is mentioned here. Virtually all individuals and organisations earn or raise money and spend or invest money. Finance is the study of applying specific value to things we own, services we use, and decisions we make. Finance is concerned with the process, institutions, markets, and instruments involved in the transfer of money among and between individuals, businesses and governments.  

The Finance Functions
Finance pervades all disciplines and all facets of human, economic and social activities. It influences the psychological behaviour of individuals as well as the socio-cultural and economic environments of both natural and legal persons (Emerson, 1904).  Finance has therefore evolved to assume a very important position in the decision process of households, businesses, governments and other non-business organisations. Households, businesses, governments and non-governmental entities cannot escape the influence of finance on their daily decision activities.  

What is now known as finance evolved as a branch of economics in the later part of the 19th Century. Since then, finance has exerted the most important influence on technological and industrial development, the turnaround of depression or recession, consumer behaviour, administrative strategies and styles of governments and research and development etc. Finance can be classified into two broad categories, namely: micro and macro finance

a) Micro finance relates to financing decisions and practices of individual households, businesses and non-business organisations.

b) Macro finance relates to the financing decisions and practices of the entire economy.  Finance has as its area of concentration the use and impact of money and money substitutes.

Therefore, the principle of finance has brought about the concept of financial management which involves the management of instruments of finance. No decision involving finance can be efficiently and effectively implemented without financial management.  
The functions of finance include sourcing and application of funds, and demands that money is used in the firm wisely, that is, when and where it is desired. Money sourced, for example, to improve on the production base of a firm should be appropriated wisely. It will be most inappropriate to use such funds to acquire assets unrelated to the course of production

The concept of merger and acquisition

Corporate restructuring occurs when a company carries out a fundamental change in the structure of its operations or its financial position.. Its investments in the assets of the company and the way and manner those investments are financed. This may arise from either a change in the economic environment in which it operates or in the objectives it earlier set for itself. It should be noted that any form of restructuring that is carried out should seek to add value thereby maximising shareholders wealth.

Mergers and acquisitions (M&A) are a way of expanding and growing a business by purchasing another company in its entirety . Although used interchangeably there is a slight difference between the two. A merger occurs when two or more seperated companies come together to form a single one. The companies so mentioned go into liquidation and an entirely new one is formed to acquire their shares. And acquisition or take over occurs when one company buys shares in another company substantial enough to acquire enough to acquire controlling interest. The former is called the bidding company while the latter is  the target company.

Take over could either be friendly take over or hostile take over.  Friendly take over is when the target company is willing to be taken over and its management is in agreement with the management of the bidding company. While hostile take over is when the target company is resisting the bidding company from taking over the company. It is characterized by rancor and in some cases serious litigation.

The major objective of M&A is to maximize shareholders wealth through creation of what is known as "synergy ". This refers to the effect of combining resources instead of using them independently so as to give maximum benefits. Any merger should create synergy in order to add value. The concept usually expressed mathematically as 1+1=3 states that combination of inputs produces a greater output than the sum of the seperated individual inputs.

Types of mergers

Typically there are three main types of merger and they are as follow

Horizontal Merger
This involves combination of two companies engaged in similar line of activities. This type of merger usually results in removal of duplicate facilities and filling of the supply gap to meet increased demand for the companies products.

Vertical Merger
This occurs where bidding company decides to integrate forward to take advantage of the sales outlet of the target company or integrate backward to have access to the source of raw materials of the target company.

Conglomerate Merger
This is a combination of two companies that are totally different in activities. This type of merger is normally undertaken for diversification purposes.

Motives For Merger

The following factors have been advanced as reasons for mergers.

a). Access to the market

Merger may create greater access to the market for the bidding company thereby, continually increasing   sales.

b). Access to source of supply

The target company may be the supplier of a critical raw materials for the bidding company. The latter may  want to protect or control this source to ensure continued supply.

c). Reduction of competition

Where two companies compete in the same market for their output, a merger may bring a larger market share which may enable the enlarged company to raise prices without a cut in sales volume.

d). Economies of scale

These are advantages to be gained from operating on a large scale. They come in form of lower prices being paid for raw materials, lower set up costs from large production runs.

e). Better management

The assets of the target company may either be underutilized or untapped because of poor management. This will create an opportunity for the bidding company to inject better and skilled managers to enable the target company's potentials to be tapped and fully utilized.

f). Diversification

Here, the bidding company merges with another company in a totally different activity in order to make up for a fall in its traditional core business or to reduce the risk arising from cyclical savings in returns.

g) Show of serious intent

A merger announcement may be a positive signal that the company's future potential is big. Information about impending merger may jerk up the market price of its share.

h). Stronger asset base

A company in a high risk industry with high level of earnings in relation to its net assets, may want to mitigate its risk by acquiring another company with a lot of assets.

i). Enhance quality earning

Similarly, a company may improve its risk complexion by acquiring another company with a more stable earnings.

j). Improved liquidity

The acquiring company's liquidity might improve if the target company has substantial free cashflow, that is, cash lying idle and not intended to be used as dividends because of lack of profitable investments.

k). Lower cost

This occurs, if management believes that it is cheaper to achieve growth via merge.

l). Tax

This is a deliberate strategy to acquire tax losses that may be used as tax relief, with a view to paying lower tax.

BANKER-CUSTOMER RELATIONSHIP

According to Akrani, G. (2012), the relationship between banker and customer is mainly that of a debtor and creditor. However, they also share other relationships. The banker-customer relationship is that of a: Debtor and Creditor; Pledger and Pledgee; Licensor and Licensee; Bailor and Bailee; Hypothecator and Hypothecatee, Trustee and Beneficiary; Agent and Principal; and Advisor and Client, among other miscellaneous relationships. Discussed below are important banker-customer relationships.

1. Relationship of Debtor and Creditor

When a customer opens an account with a bank and if the account has a credit balance, then the relationship is that of debtor (banker / bank) and creditor (customer). In case of savings / fixed deposit / current account (with credit balance), the banker is the debtor, and the customer is the creditor.

This is because the banker owes money to the customer. The customer has the right to demand back his money whenever he wants it from the banker, and the banker must repay the balance to the customer. In case of loan / advance accounts, banker is the creditor, and the customer is the debtor because the customer owes money to the banker.

The banker can demand the repayment of loan / advance on the due d, and the customer has to repay the debt. A customer remains a creditor until there is credit balance in his account with the banker. A customer (creditor) does not get any charge over the assets of the banker (debtor).

The customer's status is that of an unsecured creditor of the banker. The debtor-creditor relationship of banker and customer differs from other commercial debts in the following ways:

a) The creditor (the customer) must demand payment  

On his own, the debtor (banker) will not repay the debt. However, in case of fixed deposits, the bank must inform a customer about maturity.

b)  The creditor must demand the payment at the right time and place

The depositor or creditor must demand the payment at the branch of the bank, where he has opened the account. However, today, some banks allow payment at all their branches and ATM centres. The depositor must demand the payment at the right time (during the working hours) and on the date of maturity in the case of fixed deposits. Today, banks also allow pre-mature withdrawals.

c)  The creditor must make the demand for payment in a proper manner

The demand must be in form of cheques; withdrawal slips, or pay order. Now-a-days, banks allow e-banking, ATM, mobile-banking, etc.

2. Relationship of Pledger and Pledgee

The relationship between customer and banker can be that of Pledger and Pledgee. This happens when customer pledges (promises) certain assets or security with the bank in order to get a loan. In this case, the customer becomes the Pledger, and the bank becomes the Pledgee. Under this agreement, the assets or security will remain with the bank until a customer repays the loan.

3. Relationship of Licensor and Licensee

The relationship between banker and customer can be that of a Licensor and Licensee. This happens when the banker gives a sale deposit locker to the customer. So, the banker will become the Licensor, and the customer will become the Licensee.

4. Relationship of Bailor and Bailee

The relationship between banker and customer can be that of Bailor and Bailee.

i) Bailment is a contract for delivering goods by one

party to another to be held in trust for a specific period and returned when the purpose is ended.

ii) Bailor is the party that delivers property to another.

iii) Bailee is the party to whom the property is delivered. Therefore, when a customer gives a sealed box to the bank for safe keeping, the customer became the bailor, and the bank became the bailee.

5. Relationship of Hypothecator and Hypothecatee

The relationship between customer and banker can be that of Hypothecator and Hypotheatee. This happens when the customer hypothecates (pledges) certain movable or non-movable property or assets with the banker in order to get a loan. In this case, the customer became the Hypothecator, and the Banker became the Hypothecatee.

6. Relationship of Trustee and Beneficiary

A trustee holds property for the beneficiary, and the profit earned from this property belongs to the beneficiary. If the customer deposits securities or valuables with the banker for safe custody, banker becomes a trustee of his customer. The customer is the beneficiary so the ownership remains with the customer.

7. Relationship of Agent and Principal

The banker acts as an agent of the customer (principal) by providing the following agency services:

i) Buying and selling securities on his behalf,

ii) Collection of cheques, dividends, bills or promissory notes on his behalf, and

iii) Acting as a trustee, attorney, executor, correspondent or representative of a customer.

Banker as an agent performs many other functions such as payment of insurance premium, electricity and gas bills, handling tax problems, etc.

8. Relationship of Advisor and Client

When a customer invests in securities the banker acts as an advisor. The advice can be given officially or unofficially. While giving advice the banker has to take maximum care and caution. Here, the banker is an Advisor, and the customer is a Client.

CONCEPT OF FINANCIAL MANAGEMENT

The activities of organisations whether business or non-business, have finance as their centrepiece. The role of finance however reflects the objectives of an organisation. Therefore, financial management is a reflection of the nature and objectives of the organisation.  Financial management is thus a very important aspect of finance although it is not easy to separate financial management from the rest of other finance activities (Myres, 1976). However, an attempt to limit the areas of financial management can be made if one agrees with the fact that financial management itself requires the simultaneous consideration of three key financial decisions (Christy and Roden, 1973), namely:  

i) anticipation of financial needs of the organisation;

ii) acquisition of financial resources for the organisation;  

 
iii) allocation of financial resources within the organisation.

These three key financial decisions provide the basis for periodic financial analysis and interpretation of historical financial practices. The control measures which may be  contemplated by management or re-orientation of management strategies in turn depend on the analysis and interpretation of historical financial data.  

Financial management is, therefore, a dynamic and evolving art of making daily financial decisions and control in households, businesses, non-business organisations and government. It is a managerial activity which is concerned with planning, providing and controlling the financial resources at the disposal of an organisation. Thus, a financial manager continues to answer some basic questions like:   

√ What specific assets should the organisation    acquire?  

√ How much of funds should the organisation commit?   

√ How can such funds be acquired?  

Financial management system is, therefore, very important for adaptation in government, business and other organisations as it provides the theoretical concepts and analytical models and insights for making skillful financial decisions. However, the definition of financial management is influenced by its objectives. It can however, in general, be defined as the use of accounting knowledge, financial models, mathematical rules and some aspects of systems analysis and behavioural science for the specific purpose of assisting management in its function of financial planning, implementation and control.

The role of financial management in a simplified form is the synchronisation of receipts and payments flows. Thus, payments must be planned against receipts in order that the firm may remain liquid to the extent desired by management. In other words, financial management involves the management of funds inflows and outflows efficiently and effectively in order to guarantee the firm adequate liquidity. This implies effective management of financial resources in order to achieve a firm’s two most important objectives, namely: the maximisation of profits or maximisation of shareholder’s wealth and the maintenance of adequate liquidity level.

Functions of a Financial Manager

The financial manager assumes different names depending on the nature, size and organisational structure of the business. In some organisations, he is known as Finance Director or Director of Finance, in others, he is known as Finance Controller or General Manager (Finance).  Here, it will be assumed that the financial manager refers to the person in charge of the finance department of an organisation, whatever name he may be called. The financial manager is usually a member of the Board of Directors and he normally enlightens the board on financial implications of a firm’s decisions since most members of the Board are not usually adequately versed in financial terms and practices.

The functions of a financial manager pervade all the departments of an organisation in that he has to make key decisions affecting the operations of these departments as far as finances are concerned. And some of the functions are as follows,

1 Anticipation of the Financial Needs of an Organisation

Anticipation of the financial needs of an organisation involves the determination of how much the organisation would need within a certain period to run its activities.  This in essence is a forecasting activity. In other words, the financial manager has the responsibility of deciding how much funds his organisation would need within the short term, medium term and long term periods.  The short-term needs for funds are usually determined by considering series of cash inflows and outflows.  The financial manager can make a forecast of the firm’s financial requirements for a period of one month, one year or many years ahead. Forecasts are normally made in the form of budgets.

Forecast of the financial needs of an organisation should normally depend on the long term growth and profit plan of the organisation. By this, the financial manager will be able to determine the nature of funds needed by his organisation. This is because funds could be needed for expansion, in which case, such funds are of long-term nature.

2 Acquisition of Financial Resources  

Acquisition of financial resources is another important responsibility of the financial manager. This is based on the nature of funds needed by the organisation. The financial manager has to determine the time at which such funds could be acquired in order to make them available to his organisation when it most needs them. Thus, timing of funds acquisition is very important in financial management. Timing can equally help to reduce the cost of borrowing if the financial manager knows when to raise such funds from the market. The most important thing for the financial manager to do in terms of funds acquisition is to decide on where he is going to acquire such funds.

The nature and source of funds will determine the cost of borrowing. Funds could be raised from a bank, a non-bank financial  institution or from the capital market. The ability of a financial manager to raise funds from any of the sources would be determined by the size as well as the level of credit worthiness of the business organisation. The financial manager has to make the basic decision of whether funds should come from external or internal sources.  In the case of internal sources, he has to help in the formulation of appropriate dividend policy which will help him to achieve his objectives.

3 Allocation of Financial Resources  

Allocation of financial resources is the third important responsibility of the financial manager. Since the objectives of most businesses are profitability and liquidity, the financial manager has to allocate funds to assets that would help in the achievement of these objectives. The allocation of funds is normally done in a way that would minimise or eliminate over investment in fixed assets, or stock piling of inventory. In allocation of funds, the financial manager is normally conscious of maturity transformation in order to guarantee the firm its needed liquidity level.

4 Funds Management  

Funds management is highly related to allocation of funds. The financial manager can invest temporary surplus funds in securities to earn interest income for the company. He should know when to invest and when to divest. It is also the responsibility of the financial manager to prepare periodic reports on the finances of the organisation for the information of Management, Board of Directors, shareholders and the general public who may be interested in the affairs of the organisation.

5 Financial Analysis and Interpretation

The financial manager can also undertake the analysis of the historical financial data of the company in order to advise management on appropriate corporate and management strategies to adopt. An appropriate interpretation of financial analysis can always afford him to do this.  By his close association with the financial markets, the financial manager is in a position to determine the anticipated influence of fiscal and monetary policies on his company’s operations. It is his responsibility to pass informed judgement to management in order to adopt appropriate management strategies which can minimise such effects on the company’s operations.

6 Financial Planning and Control

The responsibility of the financial manager includes participation in product pricing. The determination of unit cost of production is done by accounting method and is under the control of the financial manager. Thus, pricing of products also attracts his attention since his objective is to maximise the difference between revenues and costs. Long-range planning, financial planning and control and budget preparation are very closely related.

Who are the bankers of tomorrow and how could the problem of leadership and moral question be solved in the banking industry through these leaders of tomorrow ?

Bankers of tomorrow are students scattered all over the  institutions of higher learning receiving educational instructions in banking and finance and other allied courses. These crops of young men and women are the people on whose shoulder the crest of leadership in the sector will fall and who will also ensurie that standards and professional ethics are not compromised. To achieve these lofty aims there is need to imbibe in them leadership qualities, and moral values such as honesty, integrity, selflessness and professional competence, as all these will set them in good stead in facing the complex challenges in the real world.

The size and complexity of challenges facing bankers are high and numerous. In fact corporate banking world are characterized by bribery, corruption fraud, facilitation payments, harassments, cut throat competition, discrimination issues among others. These forms of unethical practices if not checked and managed effectively could bring the banking industry into disrepute and erode what is left of public trust and confidence in the banking industry. Therefore the need to address moral and leadership question is pertinent in view of the past crises in the financial world popularly known as financial melt down where leading corporate businesses such as Enron, Arthur Anderson among others all failed as a result of a failed leadership for a variety of reasons which may include pressure to achieve, perform and win at all cost.

Coming closer home in Nigeria there were reported cases of bank failure which were attributed to unethical practices by the leadership of such banks. In fact, the Nigerian banking sub-sector was at the point of collapse in 1997, when twenty six commercial bankers failed due to financial irregularities. Also in August 2011, three Nigerian banks namely Spring bank, plc, Afribank plc and Bank PHB all failed due to financial irregularities of their respective corporate managers.

In view of all these development there is need to instill moral discipline and ethical leadership in bankers of tomorrow who will help in bringing growth and stability to the industry. Banking industry need young and vibrant people that can connect well with others and are able to build relationship and effectively communicate as they help in creating best customer relationship build on trust. These bankers of tomorrow when integrated into the industry must not shrink from their obligation. They will need to lead by example by defining their corporate norms and values, live up to expectation, and encourage their followers to adopt same.

At this  moment there is need  for all stakeholders in the industry to come together and formulate educational policies that will see to the inclusion of ethical and leadership development in the curriculum of the academic institutions. Also, The Chartered Institute of Bankers of Nigeria (CIBN) should extend their working relationship with more academic institutions through their linkage programmes as this will ensure that all the institution work towards CIBN standards. And finally there should be speedy implementation of the Act that prevent banks from employing people without CIBN qualification as only professional bankers grounded in practice, law and ethics of banking will be able to navigate the problematic and murky water of leadership and moral terrain. We should not forget that addressing the problems of leadership and moral values is tantamount to enhancing sound practices and professional competence which should be the hall mark of the banking industry.                              

                                                                 

Banker's Right of Set-Off

The term Set-off mean the same thing as combination of accounts, it also means the same thing as consolidation account. This suggests that there is existence of two or more accounts before this right becomes exercisable. The law on combination of account generally is that a bank unless precluded by agreement express or implied, from the cause of business is entitled to combine the account opened for the customer in his own right and in the same bank and treat the balance as that only amount in customer's credit.

Set-off is a legal right which entitles a debtor to take into account the sum immediately to him by a creditor when determining the net sum due to the creditor. It is based on the general commercial principle that says when debt are mutual, only the net balances is payable. According to the case of Ibrahim Alabi V Standard Bank of Nigeria, in which it was defined as the right which entitles the banker to retain a credit balance in customer's account against a debt owed to the bank or to treat the fund in customer's account as not available to meet drawings.  

As far as the banker's right of set-off is concerned, there is a conflict of judicial opinions. In Garnett Vs Mckervan, it was held that in the absence of a special agreement to the contrary, a banker might set-off a customer's credit balance against a debt due to him from the customer, and that there was no legal obligation on a bank to give notice to a customer about its intention to combine accounts.  

Nevertheless, in Greenhalgh and Sons Vs Union Bank of Manchester, the Learned Judge observed: “If the banker agrees with his customer to open two accounts or more; he has not in my opinion, without the assent of the customer, any right to move either assets or liabilities from one account to the other; the very basis of his agreement with his customer is that the two accounts shall be kept separate".

In view of these disagreeing judicial pronouncements, the banker can be on the safer side by entering into an agreement with the customer authorizing the banker to combine the accounts at any time without notice and to return cheques which, as a result of such an action, would overdraw the combined account.

Nonetheless, in cases such as the death or bankruptcy of the customer, in order to recover the net amount owing to him, the banker can exercise the right of set-off without notice even in the absence of an agreement.

At the same time, it may be noted that the right of set-off cannot be exercised by the banker if he has made some agreement, express or implied, to keep the accounts separate. This has been laid down in Halesovven Presswork and Assemblies Ltd. Vs Westminster Bank Ltd. Another point to be noted in this connection is that the banker cannot exercise his right of set-off if the accounts are not in the same right. For instance, the banker cannot setoff the credit balance on a partner's account against a debt due on the partnership firm's account and vice versa. Further, the banker cannot combine a trust account with the personal account of the customer.

Again, the right of set-off applies only to existing debts and not to contingent liabilities. Thus in Jefftyes Vs Agra and Masterman's Bank Ltd., the Learned Judge observed "You cannot retain a sum of money which is actually due against a sum of money which is only becoming due at a future date".

Furthermore, the right of set-off does not apply where the customer has deposited an amount taking a loan from a third party on condition that the money is repayable if not used for a particular purpose, the bank having been notified of this condition and where the customer is unable to utilize the loan due to liquidation, as was decided in Quistclose Investments Ltd. Vs Rolls Razar Ltd. (involuntary liquidation) and Other.

Conditions before right of Set-off can be exercised

i. The amount must be ascertained sum.

ii The debt must be due to and from the same person and in the same bank.

iii. The debt must be due for payment either immediately or on demand.

Negative Pledge

This is a form of security usually given by blue chip companies. There is no formal charge over company's assets, but rather a written undertaking by the borrowing company that it will not charge any of its assets to any other lender without the bank's consent.

Advantages of Negative pledge to the bank

i.  It can be easily taken
ii.  It is not expensive to perfect.
iii. If the borrower's external financing         is much lower than the worth of its         assets, the risk is reduced since there       will be enough for all the creditors.
iv. The higher the repayments, the                 lower the lender's risk.
v. If the terms and conditions of the              security are complied with, the                  borrower's penchant to borrow and        pick up debts is reduced.
vi. The higher the borrower's hidden              /secret reserve, the stronger the                security.

Disadvantages/risks to the bank

i.  It is a weak security.
ii. The security does not attach any                specific assets.
iii. In the event of the borrower's                   liquidation, the unattached assets             could be seized and disposed off by         the liquidator.
iv. In effect of winding up of the                     company, the bank can only prove           as an unsecured creditor.
v. If the company's unattached assets         are insufficient to cover it's liabilities,     the bank might be unable to recover       its total exposure.
vi. Any legal charge subsequently                  created by the borrower in regard to      the existing negative pledge takes            precedence over the bank's security.

Loan Syndication

Loan syndication is an arrangement where more than one financial institutions come together and pool resources to jointly finance a customer's project, utilising common documentation, common security and being bound by a common agreement. The lead bank is usually the bank to the debtor and it will be the one inviting other banks to participate. The lead bank is respossible for ensuring that the conditions precedent and covenants through out the life of the loan are strictly adhered to.

Parties to loan syndication 

i.  The lead bank
ii.  The managing bank (which could still be the lead bank )
iii.  The participating banks and
iv.  The borrower.

Advantages of loan syndication

i. Through this method, viable projects that are highly capital-intensive are financed with benefits to the economy.
ii. Banks are able to finance viable projects while still complying with single obligor limits.
iii. There is the benefit of more expert/professional advice.
iv. The customer is saved from the problem of raising the funds in bits.
v. Since there is only one joint security, no bank has any priority over the others.
vi. The customer is also saved from the problem of signing different agreements.
vii. There is uniformity of pricing.
viii. There is better appraisal of the project by participating banks.
ix. It ensures the spread of risks among all the participants.
x. It may lead to growth in banker-customer relationship.

Disadvantages of loan syndication

i. The process of raising funds through syndication can be very slow.
ii. It could also be more expensive as it could involve other charges like management charges.

Duties of the lead bank 

Typically the lead bank or underwriter of the loan, also known as the arranger, agent, or lead lender, apart from possibly putting up a proprtionally bigger share of the loan,  it perform other duties such as,
i. Lead bank prepares the information memorandum about the customer and the project.
ii. It gets the mandate of the customer to invite other banks to participate.
iii. It arranges consortium meetings between all participating banks.
iv. It ensures the perfection of securities.
v. All participating banks channel their contribution through the lead bank.
vi. All participating banks channel their contributions through the lead bank.
vii. The lead bank ensures, through proper supervision, that the customer does not divert the loan to other uses.
viii. The lead bank must disclose all information necessary to other participating banks.

Nigeria Bourse Seeks to Start Trading Local Currency Futures

Nigeria Bourse Seeks to Start Trading
Nigeria Bourse Seeks to Start Trading Local Currency Futures

INTERNATIONAL FINANCIAL SYSTEM

Sometimes referred to as the global
financial system, this is the collective
name for the various official and legal
arrangements that govern international financial flows in the form of loan investment, payments for goods and services, interest and profit remittances.

The international financial system consists of institutions, their customers, and financial regulators that interact and operate act on a global stage. The term is regarded in an all-bracing to constitute the various official and legal arrangements that govern international financial flows in the form of loans, investment, payments for goods and services, interest and profit remittances.

In basic terms, the main elements of international financial system are the surveillance and monitoring of economic and financial stability, and provision of multilateral finance to countries with balance of payments difficulties. Therefore, the organization at the nerve-centre of the system is the International Monetary Fund (IMF). This is because IMF, in line with its charter, is bequeathed with the responsibility of ensuring its effective running. In another perspective, there is the view that international financial system holds that the system involves the interplay of financial companies, regulators and institutions operating on a supranational level.

The global financial system can be divided into regulated entities (international banks and insurance companies), regulators, supervisors and institutions like the European Central Bank or the International Monetary Fund. The system also includes the lightly regulated or non-regulated bodies, which collectively is known as the “shadow banking” system. Essentially, this covers hedge funds, private equity and bank sponsored entities such as off-balance-sheet vehicles that banks use to invest in the financial markets.

In evolutionary terms, the history of financial institutions can be traceable to the first commodities exchange in Europe, the Burges Bourse in 1309 and the first financiers and banks in the 15th–17th centuries in Central and Western Europe. The first global financiers were the Fuggers (1487) in Germany; the first stock company in England (Russian Company 1553); the first foreign exchange market (The Royal Exchange 1566, England); the first stock exchange (the Amsterdam Stock Exchange 1602).

The remarkable developments in the history of global financial system include the establishment of the Gold Standard (1871–1932), the founding of the International Monetary Fund (IMF) and the World Bank at Bretton Woods 1944. Others include the abandonment of the US dollar as reserve currency in 1971, the abandonment of fixed exchange rates in 1973 and China pegging its currency, the Yuan, to the US Dollar in 1994, which led to their accumulation of more than $1trillion of international reserves.

PERSPECTIVES ON INTERNATIONAL FINANCIAL SYSTEM 
There are three primary approaches to viewing and understanding the global financial system.

1. Liberal Perspective The liberal view holds that the exchange of currencies should be determined not by state institutions but instead individual players at a market level. This view has been labeled as the Washington Consensus.

2. Social Democratic Perspective 
The social democratic view advocates the tempering of market mechanisms, and instituting economic safeguards in an attempt to ensure financial stability and redistribution. Examples include slowing down the rate of financial transactions, or enforcing regulations on the behavior of private firms.

3. Neo Marxists Perspective
Neo Marxists Perspective holds the view that the political North comprising the developed countries abuses the financial system to exercise control over developing countries' economies, which promotes inequality between the advanced economies and the less developed nations.

Main Players of International Financial System 

1) International Financial institutions  
These include important financial institutions such as banks, hedge funds whose failure may cause a global financial crisis, the International Monetary Fund and the Bank for International Settlements.

2) Customers of Global financial system
These include multinational corporations, as well as countries, with their economies and government entities, for instance, the central banks of the G20 major economies, finance ministries, EU, NAFTA, and OPEC, among others.

3) Regulators of Global Financial System
Many of these regulators play dual roles because they operate as financial organizations at the same time. These include International Monetary Fund, Bank for International Settlements, particularly its Global Economy Meeting (GEM), in which all emerging economies’ Central Bank governors are fully participating, has become the prime group for global governance among central banks.

Such apex banks’ governors include President of the European Central Bank, financial regulators of the U.S.A (the US agency quintet of Federal Reserve, Office of Comptroller of the Currency, Federal Deposit Insurance Corporation, Commodity Futures Trading Commission, Federal Reserve Board, Securities and Exchange Commission, Europe (European Central Bank) and the Bank of China, besides others.

Security For Bank Advances/Lending

                           

A security is an interest or a right in property given to the creditor to convert it into cash in case the debtor fails to meet the principal and interest on loan . It is an insurance against unforeseen development and the last avenue through which the bank can get its money recouped should things turn sour. It provides bankers with succour if every other things fails. Apparently, good security does not guarantee that loans will not be bad and neither does its absence impair the chance of success of the investment.

Bankers hold various kinds of securities as a cover of advances to their customers. The securities offered to the banks vary in rating.Securities which can be converted into cash without loss of value are ranked higher than that whose value fluctuate widely and tends to become frozen under adverse economic conditions . The main types of security offered against the loans are stocks and shares, title deeds, life policies, bills of exchange, bills of sale, and promissory notes. The banks also sometimes extend credit to their trusted customers on their personal securities or on the guarantees of responsible parties. The guiding principles of accepting securities are that they should be adequate, stable easily realizable e. t. c

Virtues of a good banking security

A good banking securities therefore must have the following essential attributes, viz,

1. Sufficiency
A good security must be adequate to cover the bank's entire exposure. To be on a safer side, the value of the pledge security should be 100% or more of the loan seek.

2. Objective and Stable value
A good banking security must be capable of being valued in a relatively objective rather than sentimental way. And apart from this,  its value must not be volatile but stable in the market.

3. Easily realizable
This attribute has to do with high marketability of the security. This implies that the pledged assets must be in high demand and easy to be sold off without loss in value.

4. Ease of assignment
The security must be capable of having its title legally passed to the bank with little problem. It must also be easy for the bank to re-transfer it back to the customer on liquidation of the debt.

5. Not Onerous
The security must not pose undue liabilities or inconvenience on the bank. For example, a basket of tomatoes.

6. Prime Asset
At best, security must be the borrower's prime asset  i. e an asset that the borrower hold in high esteem and would not like to lose. Borrowers normally have psychological attachment to their prime assets hence they will have the urge to liquidate their debt and take back the asset.

7. Legal binding
The security must be legally water tight so as to make it legally binding and enforceable.

8.Good Title
A good security must have unquestionable title. Registered land without encroachment and encumbrances obviously have good title.

Why Banks Must Strike a Balance Between Profitability and Liquidity

Profitability and Liquidity are two basic concepts that attract the attention of all banks. Given the position of banks as catalyst to economic development, they cannot afford to fail their customers nor the public in any of these two issues.Banks want to make profits but at the same time they are concerned about liquidity and safety. Banks have to earn profits because if they don’t, they would not work at all, as the shareholders would withdraw their invested capital in the business if proper and adequate dividends are not earned. Hence they have to earn profits for their shareholders and at the same time satisfy the withdrawal needs of its customer

A commercial bank should be liquid enough to meet the daily cash need for customers. Even at that, the keeping of idle raw cash in a bank’s strong room is unproductive and creates great loss to a bank. Apart from the inherent risk of keeping cash, there is the cost of insurance on a daily basis. There is also the need not to exceed the cash on premises (COP) limit approval for the branch, which default has a penalty attached to it . Since idle cash in the branches earn no interest, banks deposit this cash with CBN and earn interest or better still sale the cash to other banks that may need them. They trade the cash with other banks through their treasury departments as ''call money", "placement", "treasury bills", "treasury certificate", or other near liquids,  which they can easily convert when needed.

A prudent bank tries to make some profit from every One Naira(#1.00)  deposit made into account by a customer. And mindful of the cost of these deposits (interest paid to the customers or lenders), a bank must turn these liabilities to assets that can earn enough to take care of running cost. In the bid to make more profits a bank may trade on very risky ventures. However the regulatory  authorities through rules and policies may prohibit a bank from over trading or creating excess credits.

To avoid ugly "cash run’’, banks must be adequately liquid. They may resort to withdrawing cash from cash from their accounts with CBN; or even from some windows like the Special Drawing Fund (SDF), provided by the apex bank. It is worth noting that banks are required statutorily to keep certain percentages (legal reserve ratio) of their deposit liabilities with CBN, and other special deposits as control and confidence building measures.

However, profitability is a key word in commercial banking. And to remain profitable in business, banks must give out loans facilities from their deposit liabilities, at a reasonable interest charges. Banks therefore make the buck of their declared profits through financial intermediation. The proper use of liquidity brings about profitability. A bank must be socially responsible in the pursuit of profit to create goodwill for itself, hence repeat purchases of its products by confident customers and prospects alike. There must therefore be a balancing of profitability with customer satisfaction through excellent services delivery strategies.


In order to make the best out of these conflicting corporate objectives, there is need to strike a balance between profitability and liquidity is through ALM

ALM (Asset - Liability Management) is  the process of planning, organizing,and controlling asset and liability volumes,
maturities, rates, and yields in order to balance interest rate risk and maintain acceptable profit and liquidity levels.

One of the main ways in which this is
done is by adjusting the interest rates on loans and deposits in line with their respective maturities in an aim to reduce interest rate risk and maximise profitability. Banks also achieve this by placing guidelines on the types of loans and deposits the sales and marketing departments have to sell at a moment in time.

Apart from ALM, liquidity buffer which describes minimal levels of cash that are deposited within central banks (i.e. Central Bank of Nigeria, Bank of England for UK, Federal Reserve for
U.S.A. etc.) could aid bank's liquidity. This buffer is required to ensure that a bank’s liquidity remains at a sufficient level to protect the bank if a run on the bank were to occur.

Also, Loan-Deposit Ratio (LTD) which is utilised to assess the liquidity and profit earning potential of a bank at any instant and is given by the formula:

if the ratio is greater than 1, the bank does not have enough deposits to fund its outgoing loans. This is a risky position to be in. If a run on the bank were to occur in these circumstances, the bank would not have enough money in stock to cover the deposits made by its customers. The bank would therefore have to rely on wholesale markets that may or may not be prepared to help the bank at its time of need.

If, on the other hand, the ratio is less
than 1, the bank is utilising its own
customer’s deposits to finance its
loans. This is a better position to be
in as there is a surplus of customer
deposits which in turn would be held
in liquid Central Bank of Nigeria deposits.

All in all, striking a balance between the two corporate objectives, gives a win win situation for all parties as shareholders interest will be protected by earning returns on invested funds which add up to profit to be declared at the end of the year  and customers (most especially demand deposit customers, ) will have access to their deposit at any time.

‘Demutualisation central to NSE, stockbrokers’ value creation’

‘Demutualisation central to NSE, stockbrokers’ value creation’

Agent Banking: Penetrating Markets, Rural Communities For Financial Inclusion

Agent Banking: Penetrating Markets, Rural Communities For Financial Inclusion

What are Financial Assets ?

The financial assets are the financial instruments that are traded in the financial markets such as money market and capital market. These financial assets constitute the documentary evidence of the funds raised from the investors and savers who have surplus to part with for the use of corporate entities and government. The financial assets are inherently products of transactions in both the money market and the capital market. Such markets are well established in some economies while they are just being entrenched in some other economies.

The financial assets as products of transactions in the financial markets can be denominated in various currencies particularly the local currencies of various economies around the world. There are those financial instruments that are traded across international boundaries in some countries especially in highly developed capital markets in US, UK, Japan, France, and South Africa, just to mention but a few. Such financial assets are usually denominated mainly in American dollars and any other international money that is acceptable around the world.

Financial assets are normally issued in units such that the number of subscribers can be in threshold of thousands. For instance, a State Government Bond can be a total sum of N30 billion but in the denomination of N1,000 per unit of subscription. Therefore, the total amount of the amount has to be subscribed by many if not numerous investors at the end of the subscription period. This arrangement of raising funds through the financial markets is applicable to all financial instruments (e.g., Federal Government Loan Stock, shares, debentures, treasury bills, treasury certificates, etc) being used in such markets.

TYPES OF FINANCIAL ASSETS
The financial assets can be grouped into two main categories such as debt instruments and equity instruments. These are explained below.

i) Debt Instruments 
These are the financial instruments that are normally used by corporate entities and government to raise funds on the basis of debt obligations. This implies that such financial instruments are repayable by the organizations issuing them for raising funds from the financial markets from their operations.   The holders, therefore, are entitled to the funds at maturity dates in addition to the regular income accruing to them on them on the basis of interest payments by the corporate entities and government. Some of such instruments can be redeemed before their maturity dates as agreed to by the parties involved in the transactions. Such financial assets or instruments are also negotiable, being capable of being traded for cash before their maturity date. The various debt instruments being used for financial transactions in money market include the following:


> Treasury Bills;
> Treasury Certificates;
> Trade Bills; Commercial Papers; and
> Certificate of Deposits.

The above list is not exhaustive since there are new ones which are being developed and there are various ones that are peculiar to some specific economies that may not be available in some other economies.  The various debt instruments being used for financial transactions in capital market include the following:

> Development Loan Stocks;
> Debenture Stocks;
> Bonds;
> Mortgage Loan Stocks;
> Leases;
> Preference Shares; and
> Hire Purchase Contracts.

The above list is not exhaustive since there are variations in various world economies while there are new ones that are being developed. There are various ones that are peculiar to some specific economies that may not be available in some other economies.

ii) Equity Instruments
There are some financial instruments that are being used in the financial markets to raise equity funds by corporate entities. Such financial instruments are essentially Ordinary or Common Shares being used to raise funds to enhance the capital base of corporate organizations.

The Financial system

                       

The domestic financial system of any country refers to a set of instructional and other arrangements that transfer savings from those who generate them to those who ultimately use them for investment or consumption. It is made up of a mechanism for organizing and managing the payments for current and capital transactions; a mechanism 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 marketable and transferable  long-term securities; arrangements covering the workings of money and credit markets dealing with short-term financial instruments; and arrangements covering the activities of financial market complementary to the capital market, credit and money markets, which in essence  provide hedging (or risk insurance) facilities, such as the new futures markets.

The financial system is complex, comprising many different types of private-sector financial institutions, including banks, insurance companies, mutual funds, finance companies, and investment banks- all of which are heavily regulated by the government. The Nigerian banking industry which is regulated by the Central Bank of Nigeria, is made up of; deposit money banks referred to as commercial banks, development finance institutions and other financial institutions which include; micro-finance banks, finance companies, bureau de changes, discount houses and primary mortgage institutions.

At international level, world financial system consists of a set of institutional and other arrangements governing the transfer of savings from those generating them to those wishing to use them, across national frontiers.

 Attributes of an Ideal Financial System

An ideal financial system is characterized by the following closely inter-connected attributes: it should be stable, efficient, competitive, flexible and balanced.

a. Stability  

It is imperative for confidence to be maintained in the financial system, especially in times of financial panic. It must be able to absorb shocks arising from the greater-than-anticipated and allowed for risks, and hence to contain a contractionary impact on activity, and trade, as well as any inflationary effect on prices.

 b. Efficiency
An efficient financial system directs savings to investments with the highest rate of return, allowing for risk. This consists of allocative, operating, and dynamic efficiency.

c. Competitiveness
A good financial system must have an adequate number of participants.

d. Flexibility  
The instruments employed and the methods of operation must be able to adapt to changes in the economic and financial structure.

e. Balanced
A balanced financial system requires that there should be an optimal mix of various types of financial system with respect to both transfer of current savings and the stock of past savings. The optimal mix would be such that changes in any one component could be absorbed by changes in another without having excessive impact on the providers and users of saving, while allowing both and adequate period of adjustment. It is important to note that the ideal combination of these closely inter-connected attributes will change as the process of economic growth proceeds.  

 The Nature of Financial Institutions 

A financial institution is an establishment that conducts financial transactions such as investments, loans and deposits. Almost everyone deals with financial institutions on a regular basis. Everything from depositing money to taking out loans and exchanging currencies must be done through financial institutions. According to Mishkin and Eakins (2012:46), “Financial institutions are what make financial markets work. Without them, financial markets would not be able to move funds from people who save to people who have productive investment opportunities. They thus play a crucial role in improving the efficiency of the economy.”

In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries.
They are responsible for transferring funds from investors to companies in need of those funds. Financial institutions facilitate the flow of money through the economy. Most financial institutions are regulated by the government.

 Types of Financial Institutions

There are three major types of financial institutions (Siklos, 2001, Robert, E. W. and Quadrini, V. (2012)

1. Depositary Institutions : Deposit-taking institutions that accept and manage deposits and make loans, including banks, building societies, credit unions, trust companies, and mortgage loan companies

2. Contractual Institutions : Insurance companies and pension funds; and

3. Investment Institutions : Banks, underwriters, brokerage firms.


However, financial institutions can be broadly classified into two: banks or bank financial institutions, and non- bank financial institutions. Commercial bank, Central bank, Merchant bank and Development bank are institutions in the banking sector while building societies, hire purchase companies, insurance companies, pension funds, and investment trusts are non-bank financial institutions. Whilst liabilities of banks form part of the money supply, the liabilities of non-bank financial institutions do not; for they are referred to as near money.
In Nigeria, the following types of financial institutions can be classified:

a. Traditional financial institutions
b. Commercial Banks
c. Central Bank
d. Development Banks
e. Merchant Banks
f. Insurance Companies

Meaning of Financial Markets

Financial markets (money and capital markets) consist of institutions, agents, brokers and intermediaries (banks, insurance companies, pension funds) transacting purchases and sales of securities. Financial markets facilitate the movement of funds from those who save to those who invest in capital markets. The persons and institutions operate in the friendships, contracts and communications networks which form an external visible financial structure. Financial markets are divided into two: investors and financial institutions. These financial institutions are organizations which act as intermediaries, agents and brokers in financial transactions. Financial intermediates purchase securities for their own account and sell their own liabilities and ordinary shares etc, agents’ and brokers’ contract on behalf of others.

  Financial markets are made up of:

 i. Financial intermediaries

ii. Agents and brokers

iii. Investors and borrowers.

Financial intermediaries, agents and brokers make up financial institutions. Thus one can say that financial markets are made up of financial institutions, investors and borrowers.

Lines of defence in the financial system to avert crisis 

Banks, insurance companies and
other financial institutions form the
first line of defence against financial
crises. It is their responsibility to
remain viable and solvent, checking
the creditworthiness of borrowers and
thereby managing the risks that they
take on.

Measures adopted by public
authorities in order to prevent or
mitigate financial crises constitute a
second line of defence. These
measures include:

1. prudential regulation (i.e. rules
that financial institutions have
to comply with in order to
ensure effective risk
management and the safety of
depositors’ funds),
accompanied by the disclosure
of information so as to promote
market discipline;

2. prudential supervision (i.e.
ensuring that financial
institutions follow these rules);

3. monitoring and assessment
activities, which identify
vulnerabilities and risks in the
financial system as a whole.

If, despite all of these measures,
financial institutions run into trouble,
public authorities may need to
intervene.