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

CAPITAL MARKET INSTRUMENTS & SECURITIES

CAPITAL MARKET INSTRUMENTS
Capital market instruments are fixed-income obligations that trade in the secondary market, which means anyone can buy and sell them to other individuals or institutions. Marketable securities are exchanged through the organized markets for example, stock exchanges and its Representative dealers and brokers who sell and buy marketable securities on behalf of their customer in exchange of commission.  

Therefore, the capital market instruments fall into four categories such as:  
Treasury securities; government agency securities; municipal bonds; and corporate bonds.

1. Treasury Instruments

All government securities issued by the Treasury department of Govt. are fixed income instruments. They may be bills, notes, or bonds depending on their times to maturity. Specifically, bills mature in one year or less, notes in over one to 10 years, and bonds in more than 10 years from date of issue government securities which confer debt obligations on the government.  

2. Government Bonds and Loan Stocks  
Government securities are sold by the apex banks on behalf of the government to support specific programs, but they are not direct obligations of the treasury department. Mortgage bonds are issued and sold for the purpose of using the proceeds to purchase mortgages from insurance companies or savings and loans; and the home loan which sells bonds and loans the money to its banks, which in turn provide credit to savings and loans and other mortgage-granting institutions. Other agencies are the government banks for cooperatives.

3. State and Local Government Bonds  
These bonds are issued by local government entities as either general obligation or revenue bonds. General obligation bonds are backed by the full taxing power of the municipality, whereas revenue bonds pay the interest from revenue generated by specific projects. These bonds differ from other fixed-income securities because they are tax-exempt. The interest earned from them is exempt from taxation by the government and by the state that issued the bond, provided the investor is a resident of that state. For this reason, these bonds are popular with investors in high tax brackets.

4. Corporate Bonds
Corporate bonds are fixed-income securities issued by industrial corporations, public utility corporations, or railroads to raise funds to invest in plant, equipment, or working capital. They can be broken down by issuer, in terms of credit quality in terms of maturity i.e. short term, intermediate term, or long term, or based on some component of the indenture.

CAPITAL MARKET SECURITIES
These are fixed-income obligations that trade in the secondary market, which means anyone can buy and sell them to other individuals or institutions. Marketable securities are exchanged through the organized markets for example, stock exchanges and its Representative dealers and brokers who sell and buy marketable securities on behalf of their customer in exchange of commission. Instruments issued and traded in the capital market differ in certain characteristics, such as: term to maturity; interest rate paid on the nominal value; interest payment dates; and nominal amount in issue.  

1. Interest Rate Securities

The interest paid on the nominal amount of capital market securities (called the coupon rate) appears on the certificate received by the holder (the investor) of such a security. This coupon rate is one of the parameters used to determine the consideration paid for the security when traded in the secondary market. Most securities are issued at a fixed coupon rate.  

Capital market securities are physical certificates and the issuer of the security keeps a register of owners. This register is used by the borrower (issuer) to pay interest to the lender (owner of the security) on the interest payment dates indicated on the certificate. When an instrument is sold to a new owner in the secondary market, the buyer is registered as the new owner on the settlement date of the transaction.  

2. Zero-rated coupons
These are long-dated securities with many terms to maturity with zero-rated coupons which are capital market instruments issued by borrowers of money such as blue chip firms. These instruments do not earn interest on the capital amount invested by the lender, and are therefore issued and traded at a discount on the nominal value, similar to discount instruments in the money market such as bankers acceptances and treasury bills.

The market value (nominal value less discount) of zero or nil-rated coupon bonds depends on the yield that the investor (lender) expects on his investment. The redemption amount, which is the only cash inflow for the investor, is equal to the nominal value of the bond, and is thus known to the investor.

3. Asset-backed Securities
Where an asset exists which represents cash inflow stream such as a normal loan or investment, a bond can be issued to fund this asset. The bond income is then derived or backed by the income stream of the asset. The performance on the bond is then dependent on the asset performance.

INSTITUTIONAL PARTICIPANTS IN CAPITAL MARKET
There are a number of financial institutions which are directly involved with real investment in the economy. These institutions mobilize the saving from the people and channel funds for financing the development expenditure of the industry and government of a country.  

The financial institutions take maximum care in investing funds in those projects where there is high degree of security and the income is certain. The main institutional sources of capital market are as follows:

(i) Insurance Companies.
Insurance companies are financial intermediaries. They call money by providing protection from certain risks to individuals and firms. The insurance companies invest the funds in long term investments primarily mortgage loans and corporate bonds.

(ii) Pension Funds.
The pension funds are provided by both employees and employers. These funds are now increasingly utilized in the provision of long term loans for the industry and government.

(iii) Building Societies.
The building societies are now activity engaged in providing funds for the construction, purchase of buildings for the industry and houses for the people.

(iv) Investment Trusts.
The investment trust mobilize saving and meet the growing, need of corporate sector, The income of the investment trust depends upon the dividend it receives from shares invested in various companies.  

(v) Unit Trust.
The Unit Trust collects the small savings of the people by selling units of the trust. The holders of units can resell the units at the prevailing market value to the trust itself.  

(vi) Saving Banks.
The saving banks collect the savings of the people. The accumulated saving is invested in mortgage loans, corporate bonds.

(vii) Specialized Finance Corporation.
The specialized finance corporations are being established to help and provide finance to the private industrial sector in the form of medium and long term loans or foreign currencies.

(viii) Commercial banks.
The commercial banks are also now activity engaged in the provision of medium and long terms loans to the industrialists, agriculturists, specialist finance institutions, etc., etc.

(ix) Stock Exchange.
The stock exchange is a market in existing securities (shares, debentures and securities issued by the public authorities). The stock exchange provides a place for those persons who wish to sell the shares and also wish to buy them. Stock Exchange, thus helps in raising equity capital for the industry

Nigeria : Fear grips oil industry operators over probes

Nigeria : Fear grips oil industry operators over probes

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.

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.

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.

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.

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.