Theories of Banking

Introduction

In this post you are going to learn about the various theories of banking. These theories which are propounded by scholars who, bearing in mind the banks unique type of business, sought to provide solutions on how can the unique business survive. These theories include the Real Bills Doctrine, the shiftability theory, the anticipated income theory, and the liability management theory.

The Real Bills Doctrine         
The Real Bills Doctrine or the commercial loan theory states that a commercial bank shoyuld advance only short-term self-liquidating loans to business firms. In other words, this theory holds that banks should lend only on “short-term, self-liquidating commercial papers. This is for the simple reason that a bank has liabilities payable on demand, and it cannot meet these obligations if its assets are tied up for long periods of time. Rather, a bank needs a continual and substantial flow of cash moving through it in order to maintain its own liquidity, and this cash flow can be achieved only if the bank limits its lending activities to short-term maturities. Self-liquidating loans are those which are meant to finance the production, and movement of goods through the successive stages of production, storage, transportation and distribution. When such goods are ultimately sold, the loans are considered to liquidate themselves automatically.

The theory states that when commercial banks make only short-term self-liquidating productive loans, the central bank, in turn should only lend to the banks on the security of such short-term loans. This principle would ensure the proper degree of liquidity of each bank and the proper money supply for the whole economy. This in essence aim at the stabilization of the banking system. The weakness of this theory stems from the failure to realize that the loans are made, given the value of the goods and not the good itself; and also the value of goods itself is subject to variations, given the state of the economy.  

The Shiftability Theory  
The Central thesis of this theory holds that the liquidity of a bank depends on its ability to shift its assets to someone else without any material or capital loss when the need for liquidity arises. This theory asserted that if the commercial banks maintain a substantial amount of assets that can be shifted on to the other banks for cash without material loss in case of necessity, then there is no need to rely on maturities.

According to this view, an asset to be perfectly shiftable must be immediately transferable without capital loss when the need for liquidity arises. This is particularly applicable to short-term markets investments, such as treasury bills and bills of exchange which can be immediately sold whenever it is necessary to raise funds by banks. For example, it is quite acceptable for a bank to hold short-term open market investments in its portfolio of assets, and if a large number of depositors decide to withdraw their money, the bank need only sell these investments, take the money thus required and pay off its depositors.

Therefore, the theory tried to broaden the list of assets demand legitimate for bank ownership, and hence redirected the attention of banks and the banking authorities from loans to investments as a source of bank liquidity that is; the fundamental source of liquidity is the banks secondary resources.  

The flaw of this theory does not lie on the theory itself, but on the bank management practices to which the theory led. One bank could obtain the needed liquidity by shifting its assets but not so possible when all members of the bank behave the same way (Fallacy of composition). Hence, the problem of liquidity of the whole banking system is simply not solvable by commercial banks alone. This is where a central bank that is prepared to act quickly and decisively is an absolute necessity.

The Anticipated Income Theory  
According to this theory, regardless of the nature and character of a borrower’s business, the bank plans the liquidation of the loan from the anticipated income of the borrower. This theory opines that a bank should make long-term and non-business loans since even a “real bill” is repaid out of the future earnings of the borrower; i.e out of anticipated income. At the time of granting a loan, the banks take into consideration not only the security, but the anticipated earnings of the borrower. Thus a loan by the bank gets repaid out of the future income of the borrower in installments, instead of in lump sum at the maturity of the loan.  

The Liability Management Theory
According to this theory, there is no need for banks to grant self-liquidating loans and keep liquid assets because they can borrow reserve money in the money market in case of need. A bank can acquire reserves by creating additional liabilities against itself from different sources.

These sources include the issuing of time certificates of deposits, borrowing from other commercial banks, borrowing from the central bank, raising of capital funds by issuing shares, and by ploughing back of profits. Arguing that a bank can use its liabilities for liquidity purposes, the theory opines that it  can manage its liabilities so that they actually become a source of liquidity by going out to by money when it needs it (for paying its demand deposits and meeting loan requests). That is, liability management suggests that the bank borrow the funds it needs by means of various bank-related money market instruments. 

Disruptive Financial Technology (Fintech): What is the way forward for traditional banking institutions ?

Disruptive Financial Technology (Fintech): What is the way forward for traditional banking institutions  ? 

Mobile money in Nigeria, prospects and possible challenges.

Mobile transfers allow people to send money instantaneously via text messages and it is one form of mobile money. Mobile Money is a payment solution that enables users pay for goods and services with their mobile phones. Mobile Money is one of the e- payment solutions available to Nigerians in a cashless Nigeria. It is at the core of the CBN’s cashless or cashlite Nigeria policy. Mobile Money transforms your mobile phone into an electronic wallet (e-wallet). You can store funds in your mobile e-wallet for making electronic payment for goods and services, to transfer funds to family and friends. This reduces your need for cash when shopping and might help you handle cash with the daily limits of the CBN. You can also receive money on your mobile money e-wallet.

Based on the GSMA 2014 economic report , Mobile money is now available in most developing and emerging markets. At the end of 2013, there were 219 mobile money services in 84 countries. While the majority of services remain in SubSaharan Africa, mobile money has significantly expanded outside of the region in 2013. With 19 planned mobile money launches, Latin America has the second largest number of planned services after Sub-Saharan Africa. The question is no longer whether mobile money services are available, but how to ensure that the  continues to grow sustainably.

Kenyan telecom company Safaricom in 2007, launched M-Pesa -- the M is for "mobile"; pesa is Swahili for "money" -- one of the first mobile money transfer services in the region. Today, it has more than 17 million customers, about two-thirds of the adult population, and roughly a quarter of Kenya’s gross domestic product flowed through it in 2013. The company's success inspired providers around the African region to try and replicate the service, but it’s still a work in progress.

In Nigeria, the largest economy and the most populous country in Africa, the economic potentials of mobile money is limitless and still untapped. And according to Mike Ogbalu (MD Firstmonie) in an interview with punch newspaper in 2014 when he said

"If you look at a recent study where it says that about 40 per cent of the total population has financial services within reach (that is within five kilometers radius) you find out that that 40 per cent is such a low number and it considers factors like post offices, motor parks, microfinance institutions and banks, credit unions, and everything that one can consider as financial services. Now, with all of that, we have only been able to achieve a 40 per cent penetration and what this also means is that there is still a lot of room to cover. Now, if you look at the mobile, that is the GSM network, they have been able to achieve much higher coverage, and the good thing about the mobile is that it doesn’t require so much infrastructure on the consumer side in order to be able to sell that financial service. Also from the point of view of the literacy level, the literacy level in Nigeria is about the same or slightly higher than what you have in Kenya, and Kenya has had a very successful mobile money roll-out, and if you also look at the fact that a lot of the adult population in Nigeria are currently unbanked, then you find out that all of the odds are in favour of a successful mobile money rollout in Nigeria."

Talking about telephony penetration which is a prerequisite for a successful and wider reach of mobile banking ,it is evident that people have access to cell network more than they have to electricity and portable water. According to  GSMA’s 2014 Mobile Economy report , in Nigeria 56 million people live without access to electricity, and 38 million live without access to clean water. But roughly 90 percent of the population has access to cell network coverage, which connects them to health, banking and other services through their cell phones.

Therefore, with a supportive regulatory framework that allows over-the- counter mobile money transactions and the efforts of some licensed companies, Nigerians will now be able to use their phones like a bank account— depositing, withdrawing and transferring money with their handset. They can also pay utility bills and in a limited way, pay for goods and services. And local businesses can use their phones to provide these services for customers without accounts or phones.

In view of these, the Central Bank of Nigeria (CBN) has approved two models for the implementation of mobile money services in the country. The Regulatory Framework and Guidelines on Mobile Money Services in Nigeria issued by CBN on its website, classified the services as bank led, which is a bank and/or its consortium as lead initiator and non- bank led, which is a corporate organisation duly licensed by CBN as lead initiator.

The apex bank explained that the introduction of mobile telephony in the country, and the identification of person to person payments as a practical strategy for financial inclusion, has made it imperative to adopt the mobile channel as a means of driving financial inclusion of the unbanked. The whole issue of financial inclusion adds a lot of value in that by bringing people into the financial system, it gives them access to financial services. This means they are now able to save and access micro schemes that will help and empower them.

The bank-led model allows a bank either alone or a consortium of banks, whether or not partnering with other approved organisations, seek to deliver banking services, leveraging on the mobile payments system. This model would be applicable in a scenario where the bank operates on stand-alone basis or in collaboration with other bank(s) and any other approved organisation.

The apex bank’s guidelines noted that the lead initiator should be a bank or a consortium of banks, stating that the non-bank led model allows a corporate organisation that has been duly licensed by CBN to deliver mobile money services to customers.

According to CBN, the lead initiator shall be a corporate organisation (other than a deposit money bank or a telecommunication company) specifically licensed by CBN to provide mobile money services in Nigeria. Under this arrangement, the participants are grouped into six categories: regulators (CBN), Nigerian Communications Commission (NCC), mobile money operators, infrastructure providers, other service providers, consumers and mobile money agents.

The introduction and full operation of mobile money in the country will bodes well for the economy as it enhance cashless society, brings about financial inclusion of the unbanked populace, facilitate economic growth through its effective payment system. Apart from these, it is convenient, accessible, much more secured than carrying physical cash, encourage savings and cost effective compared to banks having presence in every rural areas.

For all these benefits to be enjoyed the apex bank should  work with all the stakeholders in the industry on surmounting challenges of epileptic power supply, poor telecommunication connectivity, lack of synergy between mobile payment operators and telecommunication companies and the need for enhanced customer awareness..

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.

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.

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.

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.

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.

Points to note by an astute and diligent Teller before paying a cheque across the counter

1. Date on the cheque – it should not be stale

2. The presenter of the cheque, the payee [the cheque ] is not endorsed for another person

3. Amount in figures and words must agree

4. The cheque bears the signature authorized in the customer’s mandate

5. The cheque is not mutilated

6. The signature must be regular

7. There is sufficiency of fund to meet the payment

8. There is no stop notice/ countermand of order

9. There is no government order on the account

10. There is no bankruptcy notice on the customer

11. Any alterations on the cheque is duly signed by the authorized signatory

12. There is no court order freezing the account

13. No garnishee order on the account is received

Instances which might make a collecting banker to be liable for negligence

Failure to obtain a reference when a new account is opened – Ladbroke V Todd [1914];

Failure to follow up references, especially where the referees are unknown or doubted;

Failure to obtain employee’s reference from employer when a worker open personal account;

Failure to obtain and sight the original copy of a Certificate of Registration where an account is opened for a corporate customer;

Collecting for a company employee a cheque payable to the employer – A.L. Underwood V Bank of Liverpool [1924];

Collecting for the private account of an employee’s spouse/relatives a cheque payable to his employer;

Collecting for the private account of an agent a cheque drawn by him on his principal’s account- Morison V London County and Westminister Bank Ltd [1924];

Collecting cheques for amounts which are inconstitent with the customer’s station/situation in life or business;

Collecting cheques crossed “Account Payee Only” for an account other that of the payee;

Collecting cheques for the account which had unsatisfactory operations – Motor Traders Guarantee V Midland Bank.

What is Treasury Management and state its functions?

Treasury management is a system by which an institution monitors and controls the funds available to ensure a maximum yield or savings for the good of the organization.

Functions of Treasury Management

a. Cash Management
This involves the activities of the organization to plan, track, and direct cash account to ensure proper utilization and availability of funds. It provides method for planned and proper uses of cash resources, preventing cash short falls and balancing risk, liquidity, return and cost of cash accounts.

b. Foreign Exchange Management
Conscious decisions are made about foreign currency exchange in order to minimize the associated risk of less than expected returns or higher than expected cost due to fluctuations in exchange rate.

c. Inventory Management
This involves minimizing accumulation of inventories and cost of inventory. It ensures that the best practices are employed to ensure and align with overall company’s financial objectives while meeting operational needs.

d. Risk Management
Every organization in the course of their normal business are faced with different kinds of risks such as liquidity risk, foreign exchange risk, interest rate risk, etc. As such, treasury management tries to navigate through this murky waters to find a way of mitigating against all risks and reduce them to the barest minimum.

e. Assets/Liabilities Matching
There is need to strike a balance between the acquisition of assets and liabilities incurred to get them. Financial mismatch will occur when short term fund is used to finance long term projects as this could lead to liquidity risk and which if not properly handle could lead to insolvency and eventually leading to liquidation.

f. Money market advisory services
Money market is a market for financial claims that are close substitute for money as a result of their ease of conversion to cash. It is a market that facilitates raising of short term funds to bridge the gap between investment or consumption. So treasury management provide advisory services to the organization to ensure they invest in high yielding but low risk marketable securities that could benefit the organization.

g. Fund Management
Treasury management ensures that excess funds available to the organization are not left idle but rather put into productive uses through investment most preferably in short term marketable securities .And when sourcing for funds for the organization, it ensures optimal capital structure is employed in order to maximize the value of the firm and minimize the cost of capital.

The Bulls, And The Bears Of The Stock Market.

There are two basic market descriptions used to determine  the general direction of the market most times.The terms are used to describe general actions and attitudes, or sentiment, either of an individual ( bear and bull) or the market.


Bull Markets
The first one is known as the Bulls
market which is used to refer to the market when it is generally rising, typically signaling a strong economic state of the market where gains are the order of the day. A bull market is typified by generally rising stock prices, high economic growth, and strong investor confidence in the economy. A bull market is therefore a financial market where prices of instruments (e.g., stocks) are, on average, trending higher. A bull market is when everything in the economy is great, people are finding jobs, gross domestic product (GDP) is growing, and stocks are rising. Things are just plain rosy ! Picking stocks during a bull market is easier because everything is going up.

Bull markets cannot last forever though, and sometimes they can lead to dangerous situations if stocks become overvalued. If a person is optimistic and believes that stocks will go up, he or she is called a "bull" and is said to have a "bullish outlook". A news item is considered bullish if it is expected to result in higher prices. Bull markets are generally characterized by high trading volume.

Bear market
Bear market is the exact opposite of the bull market . A bear market is when the economy is bad, recession is looming, stock prices are falling and low investors confidence in the economy. Bear markets make it tough for investors to pick profitable stocks.
What this means is that there is
economic downturn, coupled with
rising unemployment figures and of course inflation. A bear market tends to be accompanied by widespread pessimism.

One solution to investment during a bearish market is to invest in small proportions in historically dividend paying companies. Where possible invest in big corporations that have records of gliding through hard economic times successfully. Don’t invest too much on a single stock. You can also diversify your investments into stocks that can never be out of demand. In order words, invest in companies that have long history of survival.

When the stock market slides downwards for a longer time , if market becomes bearish, the money you invest buys more shares and the stocks you possess have less value. Bearish situation gives you opportunity to build up more equity than when the market is soaring.
Another strategy is to wait on the sidelines until you feel that the bear market is nearing its end, only starting to buy in anticipation of a hull market. If a person is pessimistic, believing that stocks are going to drop, he or she is called a "bear" and said to have a "bearish outlook".

Modus Operandi Of The Central Securities Clearing System, (CSCS) In Relation To Stocks And Shares In Nigeria.

Introduction 

The Central Securities Clearing System, CSCS, has become a major operator in the Nigerian stock market, as stock transactions cannot be completed without interfacing with the CSCS. The Central Securities Clearing System's depository, clearing, settlement and delivery functions ensure the speedy and transparent conduct of share transactions on the Nigerian Stock Exchange. For a shareholder, a CSCS account has become a pre-requisite for share transfers, whether buying or selling shares.

The Central Securities Clearing System is a subsidiary of the Nigerian Stock Exchange and is licensed by the Securities and Exchange Commission, Nigeria, as a capital market agent to handle central depository, clearing and settlement services for transactions in the Nigerian stock market. It began operations in April 1997.

By its depository function, the Central Securities Clearing System has created a central depository for the shares of the quoted companies on the Nigerian Stock Exchange. What that means is that shareholding certificates of individual shareholders are captured into the depository, which maintains a record of them. By dematerializing the shareholdings into electronic records, share transactions are expedited. Now, a shareholder can have all his shareholdings in electronic information, domiciled in his CSCS account, a statement of which can easily be obtained. In several respects, that eases the processing of transactions, giving the shareholder better opportunity to respond quickly to market action and take advantage of market trends.

The Central Securities Clearing System controls the clearing process of the share transactions on the Nigerian stock Exchange. Information on the day's transactions is forwarded to the CSCS by the Stock Exchange, enabling the latter to process them for settlement. Settlement is the process whereby the stockbrokers' accounts are charged or given value for the shares they've bought and sold respectively. The Central Securities Clearing System has appointed Clearing Banks, which work with it to complete the clearing process.

Transactionary Processes at CSCS
A stockbroker is required to have a settlement account with at least a clearing bank. Such account is expected to be funded for any share purchase the stockbroker would undertake on a given day.

The stockbroker's account is debited for such trades through the settlement process, while the selling stockbroker's account is credited. Through its settlement procedures and rules, the Central Securities Clearing System ensures the smooth conduct of those
transactions and that parties meet their obligations. In effect, it is not expected that a shareholder, whose shares have been sold by his stockbroker, will fail to receive the proceeds and in good time. The clearing and settlement process is designed to ensure that value is transferred within the stipulated time frame.

Part of that process is the delivery of stocks to a buyer. The CSCS, as an integral part of the clearing and settlement process, ensures delivery of stocks to the party that bought. That is guaranteed by the requirement that shares be deposited in the CSCS depository, prior to the trade. In effect, a stockbroker is not permitted to sell without the availability of the stocks meant for the sale. This protects the buyer as the shares are in the CSCS depository and are transferred to his account as payment settlement is done. By that, there is convergence of payment and delivery. That process is required to be concluded on the fourth day, that is "T + 3" (transaction day plus 3).

Before CSCS, there was the difficulty associated with the transfer of shares and the production of certificates for traded securities between stockbrokers and the registrars. It usually takes several months to conclude, but with the advent of CSCS Plc, transaction circle is now T+3 (Three working days after transactions). The CSCS system operates a T+3 settlement circle for transactions on The Nigerian Stock Exchange floors in conformity with the practice in emerging markets. The T+3 settlement circle is facilitated by the immobilization of share certificates in a central location, which in turn
enables trades to be processed in an electronic book-entry form. In effect, physical delivery of share certificates to fulfill settlement obligations has been replaced by electronic credits and debits to shareholders stock position.

Procedures for using shares in CSCS depository as collateral for loan
In recent years, trading and settlement volumes especially withthe Securities Settlement System (SSS) have soared, as securities markets have become an increasingly important channel for intermediating flows of funds between bor and lenders and as investors have managed their securities port more actively.
Before the global financial crisis eroded the value of stocks on the nations bourse, one of the collateral for assessing loans from financial institutions ishares in the Central Securities Clearing System (CSCS). T currently this trend seems to have fallen but the CSCS still believe investors need to understand how they can use such shares in depository as collateral for loan facility.

1.The first step is for the lender to demand from the borrower, a current statement of stock position issued to him/her/it by CSCS Limited.

2. The lender can confirm from CSCS, the statement of shareholding issued to a shareholder/prospective borrower by CSCS (status report) on payment of a fee of N100.00kobo. The lender must obtain from the borrower/shareholder a letter of authority to the effect that the borrower/shareholder has mandated the lender to collect the stock position on his/her/its behalf.

3.(a) Thirdly, a memorandum jointly, signed by the parties requesting CSCS to place a lien on specific quantity of the stock(s), should be forwarded to CSCS Limited.
Also, an undated letter signed by the borrower, authorising the lender to sell the stocks in the event of default at the expiration of the loan due date, must be given to the lender upon which CSCS would act when the lender so instructs.

(b) It is essential that the Joint Memorandum be registered at the Stamp Duties Office or sworn to before a Commissioner for Oaths in any Court of Law. Note that the Joint Memorandum must have been completed on the front and reverse sides as directed thereon and explicit therefrom, before same is stamped or sworn to by Authorised Signatories of the Lender (and /or the Borrower).

(c) It is in the interest of the lender not to disburse funds until a letter advising lien placement has been received from CSCS Limited.

(d) The lender, the borrower and the stock-broking firm (s) may be required to confirm and/ or consent to the lien agreement. The stock broking firm(s) in particular is required to expressly ascertain/ confirm in writing that the Shareholder is the genuine owner of the stated stock(s) and that they therefore have no objection on Lien being placed on the stated stock(s) by CSCS Limited.
Furthermore, The stock broking firm (s) must write the letter as earlier referred and addressed to CSCS of which same is expected to accompany the Joint Memorandum when forwarded to CSCS limited. Any insertion/alteration on the Joint Memorandum may be a ground for rejection of the application. The draw down date and duration of the lien agreement must be specifically stated (filled out) in the Joint Memorandum.

4. Upon the receipt of the executed Joint Memorandum and after the lien processing at CSCS have been completed, the shareholding of the shareholder would be moved into a CSCS Reserved Lien Account with the interest of the lender noted. This will be communicated to the parties, thereafter.

5. The lender (and no other party) should advise CSCS to remove the lien placed on stocks en bloc when the Borrower has discharged his/her/its obligation under the contract.
The stock(s), which should be listed on the letter of instructions from the Lender, is/are moved back to the original stock-broking firm(s) from where the stock(s) was taken.

6. When the borrower defaults and/or fails to discharge his/her/its obligation under the contract, the Lender at the expiration of the loan due-date shall:

(i) Inform the borrower of his /her default and this will put the borrower on notice that the lender can exercise his option to sell the stocks to realize the benefit of the contract.

(ii) Inform CSCS of the default by the Borrower and advise CSCS to remove the lien to enable sale to be effected. With a copy of the undated letter written by the borrower to the lender further give instructions/directives to CSCS for the purpose of the release and sale of the totality of the holdings through a mandated or named stock-broking firm, which is a member of The Nigerian Stock Exchange. CSCS, if satisfied that the procedure has been complied with, will be obliged to remove the lien on the stock(s) upon such information/ instructions from the Lender after the expiration of the loan due-date without recourse to the Borrower, moreso when evidence of Notice of Default from Lender to Borrower is received/sighted by CSCS Limited. If the Debtor/Shareholder refuses to acknowledge receipt of the Notice of Default, write a letter to CSCS affirming such position/situation which may suffice for CSCS to release the stock(s) without recourse to the Debtor/Shareholder.