OVERVIEW OF THE NIGERIAN FINANCIAL SYSTEM

A lecture Series of
THE NDIC CAPACITY DEVELOPMENT PROGRAMME FOR EFCC OPERATIVES

By:

Ibrahim Alley, PhD, ACCA

Research Department

27th August, 2020

 Learning Objectives
At the end of this lecture, participants are expected to :

•Understand the concept of the financial system from relevant

perspectives.
•Appreciate the structure of the Nigerian financial system, and the
relevance of its components.
•Know the financial market and their instruments
•Have awareness of the regulating and supervisory authorities and
their functions.
•Understand the relevance of financial system to the operations of
the EFCC, especially in tackling the inadvertent functions and
perversion of the system
 OUTLINE
1. Introduction.
2. The Financial System.
3. Defining Characteristics of a Financial System - Functions and Structure.
4. The Nigerian Financial System in Perspective.
5. Participants of the Nigerian Financial System:
A. Operating Institutions
i. Private Sector Financial Firms
 Money Market Institutions - Deposit Money Banks, Primary Mortgage Banks, Microfinance Banks
 Capital Market Institutions – Insurance Companies, Pension Fund Admins/Custodians
ii. Public Sector/Development Financial Institutions – Bank of Industry, Bank of Agriculture, NEXIM, etc.
B. Regulating/Supervisory Institutions (Regulators): Central Bank, NDIC, PENCOM, SEC, NAICOM.
6. Financial Markets.
7. Financial Instruments.
8. The Nigerian Financial Institutions and Crimes.
9.The Nigerian Financial Institutions and Crimes: Relevance to EFCC.
10. Conclusion.
 Financial System – Introduction
• The Financial System comprises two words: Financial & System.
Given the general familiarity with of the word ‘financial’
(generally has to do with money and finance), the understanding
the concept of ‘system’ is thus important for conceptualization of
‘the Financial System’

• A system is a (complex) structure of functionally interrelated or

interdependent components that synergize to deliver a unique
purpose of existence,
• Examples: The Digestive System in Man; Legal System, Financial
system of the Society
Financial System
(Contd.)
 Defining Characteristics: Functions of FS
Preferred (Intended) Functions Unintended Functions

Direct Function i. Fraud/E-theft

i.Mobilize Savings Overall Purpose
i.Economic Growth ii. Money
ii.Allocate Resources
and Development Laundering
iii.Exert corporate Control
iv.Facilitate risk through: iii. Terrorism
Management ii.Capital Accumulation Financing
v.Ease trading of goods, & Technological iv. Other illegal
services, contracts Innovation financial
(Payment System) activities
Defining Characteristics: Structure of Financial System (FS)

I nternal FS External FS

I nformal FS Domestic Formal FS

Markets I nstitutions I nstrument I nfrastructure Regulators

FS

Depository Non-Depository Payment &

Legal Property Security
Settlement
System Right Exchange
System

Capital Money
Short Medium Long
Term Term Term I nternational
Domestic

Debt Equities Derivatives

Primary Secondary
I nt’l Bank of
World
Monetary I nt’l
Bank
Fund Settlement
Primary Secondary
Ministry Security
Central
Source: Author, Adapting from Eleje (n.d.) of Banks
Exchange
Finance Commission
 Defining Characteristics:
Components
• Intermediaries such as banks, brokerage firms and
Institutions insurance companies which act as principals in assuming
liabilities and acquiring claims
• Financial structure: Debts, Equities, Derivatives
Instruments • Maturities: Short Term, Medium Term, Long term

• Equity market; fixed interest securities,

Markets
• Foreign currencies; commodities; derivative contracts

The mechanisms that provide contractual certainty, & generate and

Infrastructure verify the information need for efficient financial intermediation
Securities Exchanges; Payment and Settlement systems;
• Local: Central Banks, Deposit Insurance, Capital Market (Security Exchange)
Regulators, Pension Funds Regulators etc.
Regulators • International: International Monetary Fund, IMF; World Bank, Bank of International
Settlements (BIS)
The Nigerian Financial Presidency

Central Bank of Nigeria Federal Ministry of

Finance

Specialized DFI s Nigeria Deposit Security and Exchange National I nsurance Pencom
System

I nsurance Company Commission Commission

Nigerian Stock
Exchange

I nsurance I nsurance
NEXI M FMBN NACROB BOI UDB Brokers loss Reinsurance
companies
Adjusters

Finance Registrars I nsurance Pension Pension

Bureaux PMI s DMBs Discount Commun Fund Fund
Compani Brokers
de Houses ity Banks Administra Custodians
es I ssuing house
Change tors

Source: CBN (2017)

 Participants in the Nigerian Financial
System - An Overview
• Financial Institutions - Front-line
 The Private Sector Financial Firms
The Intermediaries
Money Market Financial Firms
Capital Market Financial Firms
 The Public Sector (Government) Firms
 The Regulatory and Supervisory Authorities

• Non-Financial Institutions - Latent (The real sector)

 Households - Mainly Suppliers of Funds
 Non-Financial Firms - Mainly Users of Funds
 (Sector drivers (primary, secondary, and tertiary (non-
financial) sector))
 Deposit Money Banks

Operators :Insured by the NDIC

Description: Financial intermediaries that transfer surplus money from to savers (lenders) to investors (borrowers)
for productive investment to promote sustainable economic performance and facilitate a vibrant real sector:
Functions: Accepting deposits, ii. Granting of business loans, iii. Basic investment products like savings accounts
and time deposit; iv. Payment Services
Structure of the DMBs:
i.29 DMBs (comprising of 22 Commercial Banks, 5 Merchant Banks and 2 Non-Interest Banks) as at date.
Money Market

ii.Three new banks licensed in 2019: Titan Trust Bank, Globus Bank Ltd; Taj Bank.
iii.49 DMBs Liquidated by the NDIC and ₦109.01 billion paid to their depositors, as at December, 2019.
Primary Mortgage Banks (PMBs)
Firms

Description: Any company that is licensed to provide mortgage services in Nigeria.

Function: i. Granting of loans or advances to any person for the ii. Performing estate management duties; iii.
Offering project consultancy services for estate development iv. Engaging in estate development through loan
syndication v. Embarking in property trading including land acquisition and disposal.
Structure of the PMBs: 34 PMBs Operation as at December, 2019, 51 liquidated and ₦84.55 million paid to
depositors of the affected PMBs as at December, 2019.

Microfinance Banks (MFBs)

Description: A company that provides financial services to economically active low-income earners, low
income households, the un-banked and under-served people, in particular, vulnerable groups.
Function: Provision of financial services such as savings and deposits, loans, domestic fund transfers
Structure of the MFBs: 907 MFBs in operation as at December, 2019, 325 liquidated and ₦3.34 billion paid to
depositors of the affected MFBs as at December, 2019.
 Payment Service Banks
Description: Deposit-taking financial institutions that leverage on mobile and digital
technologies and services to provided limited CBN-described financial services such as high
Other Private Sector

volume low-value remittance services, micro-savings and withdrawal services to customers,

Insured by the NDIC
mostly resident in the rural areas, in promotion of financial inclusion drives of monetary and
financial authorities in Nigeria.
Financial Firms

Functions: i. Deliver financial services from mostly rural and unbanked locations ii. Establish
ATMs in the said areas iii. Liberty to operate through banking agents iv. Use electronic
channels to render services
Structure: Approvals in Principle issued to : Hope PSB, Money Master PSB and 9PSB

Mobile Money Operators (MMOs)

Description: These comprise corporate bodies and their agents which leverage on mobile
phone technology to deliver many financial services to people, especially the unbanked in
rural areas. They are encouraged and regulated by the financial authorities to promote
financial inclusion in Nigeria.
Functions: i. Deliver financial services from mostly rural and unbanked locations, ii. Leverage
on mobile phone technology to enhance financial inclusion.
Structure: There are 29 MMOs, 12 of which were bank-led.
 Finance Companies
Description: Non-bank financial intermediaries operating as middle tier financial
institutions which provide financial services to individual consumers and to industrial,
Money Market Operators

commercial, or agricultural enterprises in the Micro, Small and Medium Enterprises

(MSMEs) segment (CBN, 2014)
Functions: Consumer Loans ii. Fund Management iii. Asset Finance iv. Project Finance v.
Local and International Finance (LPO & Import and Export Finance) vi Debt Factoring vii.
(Contd.)

Debt Factorization viii. Financing Consultancy ix Loan Syndication x. Warehouse Receipt

Firms

Finance
Structure: There are 45 licensed FCs in Nigeria

Bureau De Change [BDC]

Description: Any company that is licensed to carry out small scale foreign exchange service
in Nigeria and whose sole object is the carrying on of such business on a stand alone basis.
Functions: i. Dealing in bank notes, coins, ii. Buying and selling of Traveller’s cheques and iii.
Such other businesses as the CBN may approve from time to time
Structure: There are over 2500 BDC all over the country
 Discount Houses (DHs)
Description: A registered company in Nigeria with the business of trading in and holding of treasury
bills, commercial bills and other securities and whose operations are in the opinion of the CBN those of
Money Market Operators

a discount house
Functions: i. Promote rapid growth and efficiency of the money market in Nigeria ii. Act as an
intermediary between the Central Bank of Nigeria and the licensed banks in OMO transactions and
other eligible securities of not more than three years maturity iii. Facilitate the issue and sale of short
term government securities and other eligible short-term commercial bills iv. Provide discount/re-
(contd.)

discount facilities for treasury securities and other eligible financial instruments.
Firms

Structure: There are 5 licensed DHs in Nigeria

Holding Companies (HCs)
Description: An HC is a financial holding company is a company whose principal object includes the
business of a holding company set up for the purpose of making and managing (for its own account)
equity investment in two or more companies, being its subsidiaries, engaged in the provision of
financial services, one of which must be a bank.
Functions: Provide shared services to its subsidiaries within the group in respect of: i. Human Resources
policy; ii. Risk Management policy; iii. Internal Control policy; iv. Compliance policy; v. Information and
Communication Technology; vi. Facilities (Office Accommodation including Electricity, Security and
Cleaning Services in that accommodation) vii. Strategy;
Structure: FBN Holdings PLC; FCMB Group PLC; Stanbic IBTC Holdings PLC
 Insurance Companies
Description: Companies that pool and manage risks on behalf of their customers with the objective of
Private Sector Financial

Capital Market Operators protecting them from the insured risks.

Structure: 59 insurers; 6,637 intermediaries including brokers; net claims paid: N136 billion as at end-
2018
Functions: i. Selling insurance policies, ii. Collecting premiums, iii. Paying compensations to customers in
event of the occurrence of the insured risks, iv. Suppliers of long term fund to the capital market
through investment of premium collected.
The Pension Companies/Operators – PFAs/PFCs
Firms

Description: Any company involved in mobilizing long term savings for matched duration-investment
for the purpose of ensuring retirees receive their benefits when due.
Structure of the PFAs: 22 Pension Fund Administrators (PFAs), 21 as at end 2018, , 4 Pension Fund
Custodians (PFCs)
Functions:
i.PFA open Retirement Savings Account (RSA) for employees,
ii.Invest and manage pension fund assets,
iii.Payment of retirement benefits and accounting for all transactions relating to the pension funds
under their management,
iv.PFCs receive pension contributions on behalf of PFAs,
v.Settle transactions and undertake activities relating to the administration of pension fund
investments on behalf of PFAs and,
vi.Notify the PFA within 24 hours of the receipt.
 Other Intermediaries
Private Sector Financial

Capital Market Operators Stock brokering firms: Major players (intermediaries) in both the primary market where new issues
of securities are traded and in the secondary market where holders of securities exchange them for
cash considerations
Registrars:
i. Ensure the achievement of the basic goals relative to the issue for which it has been appointed
namely
ii.Participate actively in all logistics and all parties and completion board meeting relating to the offer
iii. Receives/processes application forms from the public and returns from receiving agents
Firms

nationwide
iv.Summarizes applications received and prepares allotment data that will enable issuing house
prepare Allotment proposal
v.Prepare comprehensive application list, Return surplus and rejected application moneys to
subscribers, after the approval of Return of Allotment by SEC
vi.Produces an allotment register reflecting shareholding position of shareholders
vii.prepare certificate of register reflecting details of certificates emanating from the offer and
management of the register of members
viii.Ensure continuous transferability of the companies securities, particularly in the case of publicly
quoted companies.
(Idigbe, n.d.)
 Bank of Industry (BOI)

Development Financial Institutions)

The Public Sector (Government)
Description: The largest and most successful development financing institution in Nigeria established in 2001 with
a capital base of N250 billion.
Functions: Effectively carry out its primary mandate of providing long term financing to the industrial sector of the
Nigerian economy, with the objectives of increasing output, generating employment, diversifying the revenue base,
increasing foreign exchange earnings and providing inputs for the industrial sector on a sustainable basis.

Nigerian Export-Import Bank (NEXIM)

Description: Held jointly by the Federal Ministry of Finance and the Central Bank of Nigeria
Functions: i. Provision of export credit guarantee and export credit insurance facilities to its clients, ii. Providing
Firms

credit in local currency to its clients in support of exports, iii. Management of funds connected with exports; iv.
Maintenance of a foreign exchange revolving fund for lending to exporters who need to import foreign inputs to
facilitate export production, v. Provision of domestic credit insurance where such a facility is likely to assist exports
and, vi. provision of trade information system in support of export business.

Bank of Agriculture
Description: The Nigeria agricultural and rural development finance institution, owned the Federal
Ministry of Finance Incorporated and Central Bank of Nigeria (CBN) ownership structure is 60% and
40% respectively.
Functions: i. Ensuring effective delivery of agricultural and rural finance services to support the national
economic development agenda, e. g. food security, poverty reduction, employment generation,
reduction in rural to urban migration, less dependency on imported food items, and increase in foreign
exchange earnings, ii. Agricultural value chains activities are also supported by the services of the bank
 Central Bank of Nigeria CBN
Description: Established in 1959, the CBN is at the apex of all banking institutions operating in the
money market
Mandate:
The Regulatory and Supervisory

i. Regulating and supervising all DMBs, PMBs, MFBs, Finance Companies, Discount Houses, Bureau De
Change, and all other Financial Institutions
ii. Formulation and implementation of monetary policies to achieve set of macroeconomic objectives of
.

the Government e.g. price stability, economic growth, full employment, balance of payment equilibrium
Authorities

Nigeria Deposit Insurance Corporation (NDIC)

Description: Established in 1988 and started operation in 1989, the NDIC is jointly held by the Federal Ministry of
Finance and the Central Bank of Nigeria, and has the following mandate:
Mandate:
i.Deposit Guarantee: as its primary and unique mandate NDIC discharged this role through the payment of insured
sum to depositors of closed insured financial institutions. As at 31st December, 2019,
ii.Bank Supervision: NDIC monitor the financial health of insured financial institutions (DMBs, PMBs and MFBs)
through both On-site Examination and Off-site Surveillance to ensure and sustain public confidence and take
prompt corrective actions where necessary.
iii.Failure Resolution: the NDIC provides technical and financial assistance to distressed banks to restore their
financial health and contributions to the systemic financial stability, where possible. Other resolution mechanisms
deployed to perform this role include: merger and acquisition, purchase and assumptions, bridge banks method,
hold action, and management take-over.
iv.Bank Liquidation: the NDIC as the official liquidator of failed insured institutions, the NDIC ensure effective and
orderly closure of the affected failed banks and prompt reimbursement to their depositors.
 Security and Exchange Commission (SEC)
Description: Established in 1979, SEC is the apex regulatory authority in the Capital Market.
Functions:
i.Examine applications from companies seeking to raise capital from the capital market,
The Regulatory and Supervisory

ii.Recommend the timing of such issues to prevent issues clustering which could overstretch the
market’s capacity,
Authorities (Contd.)

iii. Determine the prices of issues and setting the basis for allotment of securities.
The National Pension Commission (PENCOM)
Description: The PENCOM was established to supervise, coordinate, regulate and control the efficient
and effective administration of pension matters in Nigeria.
Functions:
i. Regulate and supervise the Pension Scheme and provide guidelines for the pension funds operation, ii.
License pension fund administrators, supervising custodians and other institutions dealing with pension
matters, iii. Provide a database for all pension matters, iv. Educate the public on pension related issues
and how the scheme is managed.
National Insurance Commission (NAICOM)
Description: Established in 1997 to ensure the effective administration, supervision and regulation of
insurance business in Nigeria.
Functions:
i.Regulate transactions between insurers and reinsurers within and outside Nigeria.
ii.Determines and approves the rates for premiums and commissions in the insurance industry
iii.Protects policy holders and other beneficiaries of insurance contracts
 Money Market
This is a market for trading financial instruments that are considered to be of high liquidity with
very short maturities. In the short term, it provides participants a window to borrow and lend
from a period of overnight to one year. The securities traded in the money market are
particularly IOU by large corporations, governments & financial institutions, & are extremely safe
,
and liquid.
Financial Markets

Capital Market
This is a financial market whereby equity-backed securities and long-term debt are traded. It is a
market where funds are made available for more than one year for investment. It is of two types:
Primary market : this market is part of the capital market involved in the issuance of new
securities.
Secondary market – also called aftermarket. This is a market where previously issued financial
instruments are traded. These instruments include bonds, options, stocks, futures

Cash or Spot Market

This is where trading of financial instruments or commodities in a public financial market for
immediate delivery takes place. This market is in contrast with the futures market where delivery is
done in a later or future date.
Derivative market
A financial market which is derived from other asset forms is referred to as derivative market.
Instruments like futures, options and contracts are the financial instrument offered in such a
market. A derivative market is usually divided into two: the over-the-counter derivatives and the
exchange-traded derivatives.
 Financial Instruments
i. Certificates of Deposit (CDs)
ii. Bankers' Acceptances (BAs)
iii. Commercial Paper (CP)
iv. Treasury Bills (TBs)
v. Banker's acceptance (BA)
vi. Unit Trust Funds
vii. Open Buy Back (OBB)
Money Market
A financial instrument
viii. Liquidity Adjustment Facility
with less than 1-year
maturity
Derivatives
A financial instrument
used to create a i. Forwards
synthetic position in ii.Swaps
Financial iii.Futures
other financial assets. Its
I nstruments iv.Options
value depends on other
instruments’ parameters v.

Capital Market i. Ordinary/Common stock

Equity ii. Preference shares
A financial instrument A financial instrument
with more than 1-year a. cumulative Preference Shares
with variable returns b. Non-Cumulative Preference Shares
maturity and residual interest iii. Redeemable Preference shares

Debt
A financial instrument i. Mortgages
with fixed returns and ii. Debentures
no residual interest iii. Government Bond/ Treasury Certificates
iv. Corporate Bond
v. Redeemable/ Irredeemable Bond
vi. Convertible or Non-convertible Bond
vii. Fixed or Floating I nterest Rate Bond

Source: Author
 The Financial System and Crimes
• Financial System functionality depends on Stability which, in turn, depends on
public confidence in the system to deliver its intended functions without any
adversity to its users.
• Financial System stability underlies strong economic growth and development;
hence,
• Any threat to the financial system is injurious to individuals directly (though
economic loss to victims) and indirectly (through decline in economic growth
occasioned by loss of public confidence in the financial system).
• The economic fortune and the international reputation of a country plummet
when its financial system is compromised by crimes.
 Macroeconomic effects include, but not limited to
 Decline in capital flows - foreign direct investment, portfolio flows.
 Increase in unpredictability of capital flows and exchange rate.
 Difficulty in tax collection and law enforcement.
 Undermined integrity of the banking and other financial institutions.
 Bad lemon effects : unhealthy competitions that displaces legitimate business, leading to loss of
economic growth.
 Liquidity volatility and risks of bank runs.
 Insider trading and market manipulation.
 The Financial System and Crimes (contd.)
• To protect the economy, its participants (households, corporate firms, government) and the
financial and socio-political sovereign of the Nigerian state for the effects of financial crimes,
the Government has in place commissions to fight against the crimes.
• Some of these crimes include:
 Identity Theft: Involves using someone else’s personal information for financial gain. This could
involve use of someone’s banking information to make unauthorized purchases or obtain a loan from a
financial institution
 Insurance Fraud: Obtaining financial claims illegally from Insurance companies and contract by
providing wrong information such as misstating the amount of damage in order to receive more money.
 Credit Card Fraud: Use of someone else’s card to make purchases without their permission.
 Embezzlement: Entails misappropriation of funds entrusted to someone in position of authority on . in
businesses, government agencies or nonprofit organizations.
 Tax fraud: Entails failing to file a return, non-payment of taxes, failing to report certain income or
taking deductions that are not authorized.
 Theft/counterfeiting financial instruments.
 Money Laundering and Terrorism Financing.
 Ponzi-schemes: Fake investments scheme promising to paid unreasonably high returns. Used to scam
victim.
 Phishing: Luring people to unwittingly divulge their financial information while accessing emails sent to
them.
 Skimming: Involves stealing information off a credit card during a legitimate transaction.
 Advance fee scams: Inducing people to accept an unreasonably attractive offer and lure them to pay some money and
divulge their information.
 Business Email Compromise (BEC).
 The Financial System and Crimes –
Relevance to EFCC
• Knowledge of the Financial System and Combating
Financial Crimes
 Virtually all the financial crimes’ proceeds route through
the financial system
 The financial proceeds are often laundered by passing
through different financial institutions.
 Many institutions are complex and interconnected.

 It is thus imperative to understand the structure of the

financial institutions and their functions (intended and
unintended) to enhance combative strategies against the
crimes and protect the countries from their menace
 Conclusion
• This lecture presents a clear understanding of the Nigerian financial system,
its functions, structures and other characteristics by which the system can be
identified and defined

• It also discusses the markets and instruments in the system as a means of

highlighting the mechanisms that underlie the workings of the system.

• Relevance of financial system understanding to the operation of the EFCC in

tackling the inadvertent functions and perversion of the system is also
discussed.

• Given the dynamic and continuous evolution of the financial system, this
lecture only present an insights into the workings and implication of the
financial system, and may not provide all that is needed in understanding all
time-behaviour of the Nigerian financial system without necessary update.
• Thank you