What is finance ?

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

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

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

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

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

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

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

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

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

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

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

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

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

The concept of merger and acquisition

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

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

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

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

Types of mergers

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

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

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

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

Motives For Merger

The following factors have been advanced as reasons for mergers.

a). Access to the market

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

b). Access to source of supply

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

c). Reduction of competition

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

d). Economies of scale

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

e). Better management

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

f). Diversification

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

g) Show of serious intent

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

h). Stronger asset base

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

i). Enhance quality earning

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

j). Improved liquidity

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

k). Lower cost

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

l). Tax

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

BANKER-CUSTOMER RELATIONSHIP

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

1. Relationship of Debtor and Creditor

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

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

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

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

a) The creditor (the customer) must demand payment  

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

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

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

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

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

2. Relationship of Pledger and Pledgee

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

3. Relationship of Licensor and Licensee

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

4. Relationship of Bailor and Bailee

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

i) Bailment is a contract for delivering goods by one

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

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

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

5. Relationship of Hypothecator and Hypothecatee

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

6. Relationship of Trustee and Beneficiary

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

7. Relationship of Agent and Principal

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

i) Buying and selling securities on his behalf,

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

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

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

8. Relationship of Advisor and Client

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

CONCEPT OF FINANCIAL MANAGEMENT

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

i) anticipation of financial needs of the organisation;

ii) acquisition of financial resources for the organisation;  

 
iii) allocation of financial resources within the organisation.

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

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

√ What specific assets should the organisation    acquire?  

√ How much of funds should the organisation commit?   

√ How can such funds be acquired?  

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

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

Functions of a Financial Manager

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

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

1 Anticipation of the Financial Needs of an Organisation

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

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

2 Acquisition of Financial Resources  

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

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

3 Allocation of Financial Resources  

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

4 Funds Management  

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

5 Financial Analysis and Interpretation

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

6 Financial Planning and Control

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

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

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

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

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

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

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

                                                                 

Banker's Right of Set-Off

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

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

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

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

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

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

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

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

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

Conditions before right of Set-off can be exercised

i. The amount must be ascertained sum.

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

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

Negative Pledge

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

Advantages of Negative pledge to the bank

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

Disadvantages/risks to the bank

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