LECTURE NOTE ONE

THE DEVELOPMENT OF MONEY

THE CONCEPT OF MONEY

Introduction
The term money is commonly used in the course of our daily activities,
from our marketplaces to our schools and even our homes; the concept of
money resonates as a recurring decimal. It has become the most popular
yardstick with which we measure value and transact our business
activities.
To the lay man money may simply mean the physical cash with which he
carries out his daily transactions, but to professionals engaged in the
management of money, it may refer to a number of financial instruments
which is acceptable as a medium of exchange and settlement of debts.

What is Money?
Money is anything that is generally acceptable for the purchase of goods
and services. Economist have defined money as anything generally
acceptable in payment for goods and services or in
settlement of debts. David Humes, Adam Smith, Ricardo etc. considered
money in terms of influence in international trade relationship.

However, the definitions of money can be categorized into namely

 Institutional definition (Pre-Keynesian)
 Function definitions
Institutional Definition of money
From this Economic stand point, for money to be generally acceptable, it
must backed up by the institutional force of law. The property of money if
to most important factor. Owing to this argument the definition of money
should be based on;

i. Its meaning in the sense of wealth

ii. Its meaning in the sense of property
iii. It’s meaning in the sense of education.

An example of institutional definition is that of Irving who defined money

as “any properly right which is generally acceptable in exchange”.

Functional Definition of money

This economic stand point defined money in terms of function, it
performs: These functions include
 Medium of exchange
 Store of value
 Units of Accounts
 Standard of deferred payment
An example of functional definition of money is;
Money is that which is universally acceptable in an economy by sellers of
goods and services as payment for goods and services and by creditors as
payment for debts.

Function of Money
The function of money can be classified into
  Primary functions
 Secondary functions

Primary Function
Medium of Exchange: This means that money is generally acceptable by
buyers and sellers in exchange of goods and services (i.e. as a medium of
payment). This function of money is dependent on its acceptability (i.e.
infact that the individual trust that when try want to send it, it will be
acceptable in exchange for goods and services).

As a medium of exchange individual can sell their output to money and

use that money to make purchases.
It is however important to note that money as a medium of exchange
eliminate the inconveniences and difficulties of trade by border especially
the mid for a double coincidence of want

Money as a measure of value (units of accounts): This refers to as

money’s side in determining to value or price of product. Just as height is
measured with a tape in terms of meters, kilometer so the value of goods
and services can be measured in monetary terms. Money provides a
comfortable unit for comparing value regardless of size or kind, hence,
money is the yard stick with which people keep their account, determine,
income, profits, losses, prepared budget etc.

It is however important to note that sine money is the yardstick by which

economic choices are measured, it is necessary that this yardstick is as
fixed and stable as possible, as successive in fluctuations in the
purchasing power of money can negatively affect forecast and planning.
For example the monetary unit used in measuring value in Nigeria is the
Naira, in USA it’s the Dollar, and this units enable individuals to compare
the relative value of goods and services.

Secondary Function of money

 Store of value: This means that is a store of purchasing power over
periods of time. For example it is easier for a fisher man to stop the
wealth accrued from the sales of his fishes that to stop the fish
itself. The recover or holder of money can choose between sending
his purchasing power (intermediate payment) or saving it (deferred
enjoyment).

Saving money assumes various forms but the most prevalent involves
holding either money itself (i.e. currency or demand deposit) or money
substitutes (savings deposit, treasury bills etc).

Although there are two assets such as stock, land , jewelry and properties
of which have a good number of advantages over money as a store of
value such as asset suffer the problem of illiquidity that is the ease with
they are converted into a medium of exchange. Money is the most liquid
asset because it does not meet to be converted to anything else inorder to
make exchange/purchase.

 Standard of Deferred Payment: Money plays an important role in

debt settlement. The existence of money has simplified both the
landing and the repayment process. Debts are ordinarily expressed.
In monetary terms a scenario in the barter system where an
individual takes a lot in fishes, it would be difficult to set the term
 of repayment in commodities other than fishes. Money base eased
the process with which people can take and making loan be its
short, medium or long term.

Characteristics of Money
For money to perform its functions, it must possess certain
availabilities/attributes these attributes include;

 General acceptability: No item/commodity can satisfactory serve

as money. If it is not widely acceptable as a means of exchange

amongst the individuals in a community, country or region. Gold
evolved to become a prevalent medium of exchange because it was
highly demanded and universally accepted in order to ensure
acceptability. Money must be a legal tender, accepted by
government for tax purpose.
 Scarcity: This entails money supply is limited relation to demand

and the productive capacity such that money losses its value, it also
ensures that people could have to sacrifice something (i.e.
opportunity cost) in order to own money.
 Stability: It is important that the value of money remains relatively

stable, this is very important because money is supposed to be a

store of value and a standard of deferred. When the value of money
falls i.e. the purchasing power of money is weaken both savers and
lenders loose as a Naira worth today might not be a naira’s worth
tomorrow. However the effect of inflation has makes it difficult for
money to be absolutely stable. Yet the fluctuations in the value of
 money should not be successive
 Divisibility: In order to facilitate transactions (especially small

transaction a good currency should be divisible into smaller units

for example N1000 can be divided into 20 units of 5 naira notes, 10
units of 10 naira notes etc.
 Portability: Money should easy to more around for the purpose of

business transaction. Thus reducing the stress and cost of moving it

around
 Cognisability: For anything to serve as money it must be easily

recognized, they should look alike such that individuals are able to
identity counterfeits in circulation.
 Homogeneity: Closely linked to cognisability is homogeneity, this

means that each unit of a commodity must look alike as much as

possible, exactness enhances people’s confidence in a currency.
 Durability: This is essential because money is supposed to be a

store of value of the item.

Demand for Money

This refers to the motives why economic units (i.e. household films,
government) hold cash and other monetary aggregates. The demand for
money is said to be derived because economic units do not demand
money for its own sale but for the goods and services money providing.

According to John Maynard there are three (3) motives for demanding money
namely;
 Transaction motive
 Precaution motive
 Speculative motive
 Transaction motive: This refers to a desire to hold money for the
purpose of exchange for currently needed goods and services that is for
the purpose current expenditure and day to day transactions.

Precaution motive: This refers to the desire hold cash in order to meet
expenditure arising from unforeseen circumstances or emergencies. Thus
include all expenditure arising from event not previously planned for such
as unexpected illness, drastic fall in sales price etc.

Speculative motive: This refers to a desire to hold cash in order to take

advantage of emerging future opportunities e.g. investment opportunities
in the stock exchange.
QUIZ

1. What is money?
2. Why do people demand for money?

ASSIGNMENT

3. What are the basic attributes money should posses?

4. Briefly discuss the functions of money?

LECTURE NOTE TWO

EVOLUTION OF MONEY
Money as we know it today has gone through several phases in a long
evolutionary process, this is in a bid to enhance the ease and convenience
with which we carryout business transactions and settle debts. This unit
traces the evolutionary trail of payment systems from the barter system to
the present day paper and electronic money.

The Barter System

Prior to the emergency of money people engaged in a border system. In
order to exchange goods and services, this system involves exchanging
merchandise (goods and services) for merchandise (goods and services).
Fishermen had to exchange some of their fishes with farmer for some of
their farm produces like beans, wheat, etc. this system provided at the
beginning of civilization, goods where in their natural state.

However the border system was limited by a number of factor which include;

i. The problem of double coincidence of want: The fisherman in

need of wheat has to find someone in possession of wheat in need
of fishes. In other words, in other to trade an individual had to find
someone who has what he need and needs what he has.
ii. There was no accurate measure of value: There was no
predetermined / agreed standard measure with which buyers and
sellers could exchange commodities according to their relative
values. Earn if the two person wan each other goods meet by
coincidence the freedom arises as to the proportion in which the
two goods should be exchanged.
Furthermore, hunter system required the value of each goods to be stated
in as many quantities as there are types and qualities of other goods and
services.
iii. Indivisibility of certain good: The border system is limited by
 serious challenge that is the indivisibility of certain goods into
smaller marketable units.
iv. Difficulty in making deferred payment

As a result of the numerous challenges associated with the border system

various other forms of exchange had to evolve, thus the evolution of
money (or payment system). The evolution of money can be divided into
various stages.

Evolution Of Money (From Commodity Money To Electronic Money)

Commodity money
Owing to the high demand for certain commodities such commodities
come to be accepted as a means of exchange amongst individuals in a
particular community or region, given that they could readily be
exchanged for any deserved commodity, these commodities not only
became a medium of exchange but also a measure of value. Commodities
such as salt, fur, cattle etc. where widely used as commodity money.
The choice of what item that evolved to become commodity money was
largely dependent on factors like the location of the commodity, climate,
cultural belief etc.

For example people living by the seashore adopted and dried fish as
money people living in very cold region adopted fur as commodity
money. In a bid to further obviate the challenges of border system
commodities begun to develop more durable commodities to serve as
medium of exchange. For instance, item like coral beads, cowries,
manilas and even tools and implements where used as means of exchange.
Metallic money
With the discover of metals man began to fashion versatile, tools and
weapons that was previously made of stone with metals, metal was
treasured because of its cause of transportation, beauty divisibility etc. As
a result of the popular demand for money, it became a major standard of
value. It was exchange in various forms and sizes and required
assessment and saying of its purity of cash transaction.
Overtime metal money began to gain definite forms and weight,
recovering marks indicating their value and source, of its issue. The use of
gold as proto-money has been traced bank to the fourth millennium BCE
when the Egyptians used gold bars as a medium of exchange, as had also
been done early Mesopotamia with silver bars.

In the century BC the first coin bearing resemblance with modern day
coins was issued in the lonra a city in Ephesus, the metal used was
electron a natural allay of gold and silver found locally. The coins were
shaped and were struck on one side with a distinguishing mark such as the
image of lion.
Gold and silver coins were minded in Greece and small ingots were in
Lydia, while Chinese had about the same time period started minting
bronze coins. For many centuries, counties minded coins mostly from
gold, silver for high valued coins using copper for lesser valued coins.
This system remained in practice up to the end of the last country when
cupronickel, and later other metallic clay alloys, became used and coins
came to be circulated for the fair value (extrinsic value).
Paper money
In the middle ages, people trusted the goldsmiths who had security value
to with the safe keep of their gold and valuables most especially
merchants trading in with gold and silver, in return the smith issued
receipts to deposition of such gold as evidence of deposit, which will be
returned on demand by the depositor with time these receipts which were
a form of IOU showing that the gold Smith owed the bearer of the note
abstracted sum.

Come to be end to make payments, circulating from hand to hand giving

rise to the origin of paper money. The acceptance of these receipts was
based on the confidence that whenever. It was returned to the gold smith
who originally issued it, it would be exchange for gold hence the gold
smith were the first bankers to issue bank notes backed by gold.

In Brazil 1810 the Banco de Brazil issued the first bank notes that had its
value within by hand as we do today with cheques. Bank note are usually
rectangular instance, and of various sizes usually devoting the culture of
the issuing county, nowadays bank notes possess several security features
in order to prevent counterfeiting.

Credit money
Credit money emerged almost the same time with paper money. People
kept part of their cash as deposits with banks which they could withdraw.
At the convenience through cheques, although the cheque is not money
deposit of performs the same function as money. Demand deposits is the
one the most important form of money in advanced economies. Although
they are not legal tenders what gives them acceptability. Is the
 convenience and confidence that will be cashed in the bank.

Electronic money: Is broadly deposit as an electronic store of monetary

value on a technical device that may be widely used for making payments
to other entities, e-money could be hardware, based or software based,
depending on the technology used to store the monetary value.
Electronic / Digital money is different from physical money although they
are similar in some respects, but electronic money allows for
instantaneous and borderless transactions.

Money Aggregates
This refers to the various of a country’s money supply in order to measure
the money supply in an economy. Central Banks use monetary
aggregates. The question of what constitutes money stock has being a
controversial one leading to several definition of money, the narrowest
focus on exchange medium function the broadest definition includes store
of value function.
QUIZ
Describe briefly the evolution of money through the barter system

ASSIGNMENT

Describe briefly the evolution of money from commodity money to

electronic money.

BANK LENDING

INTRODUCTION
Bank lending is basically the key factor in banking methods and practices,
it is fundamental that keep banks in existence and perhaps grow. However
their are various types of lending and the ability to synchronize these
different forms properly leads to profitability of banks and that's the
reason we say banks create money, even when they don't print money

BANK LENDING

Lending is the root of bank business, as soon as deposits are been taken. it
is actually the cornerstone of the money creating functions of banks. From
the three strongholds of banks – deposit, payment and lending, lending
function is a major source of income to the bank . the quality of a bank’s
loan portfolio determines to a reasonable extent its survival capacity
because lending is actually one of the most traditional elements in bank-
customer contractual relationship.

Over the years, commercial banks have been the major source of credits,
but competitors have emerged thereby making finance companies,
insurance companies, pension funds etc as other sources of credits. In
recent times beyond commercial bank loans which is now offered even by
savings banks, large corporate firms with excellent credit ratings borrow
in the money market by using commercial papers and even banks borrow
among themselves and from the central bank as a lender of last resort.

Importantly is the basic condition for lending, which are- (a) Character, (b)
Capacity-contractual,
(a) Capital, (d) Collateral and ( e) Condition-Economic.
Bank Roles as Lenders

Banks albeit remains the most important lending source and unarguably
so. They provide a variety of loans ranging from short, medium and long
term(even up to 20 years) and some are actually secured by collateral

TYPES OF BANK LENDING

1. Consumer loans
2. Business loans
3. Mortgage loans
4. Government sponsored loans

Consumer Loans: this is a part of full service lending; this is the demand
for consumer loans to meet up basic consumption needs/ requirement and
are referred as agreed. They come in two ways

Open End Credit: here a borrower is given a revolving time of credit

where he can draw funds for a specific time frame and amount. This the
balance to fluctuate between zero and the maximum limit. They are
basically credit card and home equity line of credit.

Closed End Credit: this is a form of instalment loans, with specified

amount, and maturity period and number of payment with due dates.

The borrower receives a lump sum upfront and payment are scheduled
monthly and often times the bank automatically debits the account of the
borrower. This type could be secured or unsecured e.g. A car purchased
loan, where the bank holders on the title of the car within the tenure of the
loan.

Business/Commercial Loans: This constitute the largest component of a

bank’s total loan portfolio. This covers a variety loan products to cover a
diverse area for example:

i. Working Capital Loan: A short term loan (30-70 days) for the
provision of immediate daily needs of the firm
ii. Term Loan: this one has a typical maturity 1-5 years, which is
normally used to acquire fixed assets at which repayment planning
tied to the useful life span of the asset.
iii. Syndicate loan: usually when the
amount involved is very high and it is therefore shared and given
out by more than one bank to a particular customer. This maybe
due to the fact that the amount exceeds the capacity of one bank as
regards the loans limit policy of the bank.
iv. Lease Financing: here the bank
owns the collateral and leased it to the customer for a specified
period and receives monthly payments, depending on the forms of
the lease, ownership may be transferred to the customer when the
lease ends, and furthermore, it is generally known that financial
lease are non-cancellable.
Letters of credit: this is a document issued by the bank to substitute
the bank credit for the credit of buyer of goods, making the buyer no to
pay in advance.

It should be known that bank lending starts with the application by the
customer and does not end with the delivery of the credit to the customer,
but entails constant monitoring by the bank until the expiration of the loan

Mortgage/Real Estate Loans

 A mortgage loan is a long term and closed end credit facility, secured for
the purpose building/acquiring residential houses, shopping centres and
office building. Mortgage loans are usually requires the borrower to
pledge his property as collateral security.
QUIZ

1 What constitute the basic characteristic of the types of loans that you know

ASSIGNMENTS

Identify and explain the C' s for bank lending

LECTURE NOTE THREE

UNIVERSAL BANKING

INTRODUCTION

The banking system in Nigeria has been undergoing tremendous reforms. These
reforms relate to the capital base, number of institutions, ownership structure and the
depth and breadth of operations. These changes were occasioned largely by the
challenges posed by deregulation of the financial sector, globalization of operations,
technological innovations and adoption of supervisory and prudential requirements
that conformed to international standards.
The sector has shifted focus from the traditional borrower and lender to a more
differentiated and customized product or service provider. It has moved from
regulation to liberalization and from planned economy to a market driven economy.
This transformation results from economic reforms and liberalization which allowed
banks to explore new business opportunities rather than generating revenues through
the conventional borrowing and lending. The change in the financial sector created
the platform for universal banking in Nigeria.
The adoption of universal banking in several countries may be attributed to changes
in laws and regulations. These changes were responses to the pressure mounted by
banking institutions to be allowed to expand their activities. In France, a number of
legislative changes in the 1960s prepared the ground for universal banking. In the
USA, following the rapid changes in the financial structure, including the initiatives
taken by some financial institutions to expand their scope of services, the Depository
Institutions Deregulation and Monetary Control Act
of 1989 was passed. The Act sought to improve monetary control and also to remove
impediments to competition and equalize the cost of monetary control among deposit
institutions.

DEFINITION OF UNIVERSAL BANKING

A banking system in which banks provide a wide variety of financial services,

including both commercial and investment services. Universal banking is common in
some European countries, including Switzerland. In the United States, however,
banks are required to separate their commercial and investment banking services.
Proponents of universal banking argue that it helps banks better diversify risk.
Detractors think dividing up banks' operations is a less risky strategy.

Universal banking is a combination of Commercial banking, Investment banking,

Development banking, Insurance and many other financial activities. It is a place
where all financial products are available under one roof. So, a universal bank is a
bank which offers commercial bank functions plus other functions such as Merchant
Banking, Mutual Funds, Factoring, Credit cards, Housing Finance, Auto loans,
Retail loans, Insurance, etc.
Universal banking is done by very large banks. These banks provide a lot of finance
to many companies. So, they take part in the Corporate Governance (management) of
these companies. These banks have a large network of branches all over the country
and all over the world. They provide many different financial services to their
clients.

ln India, two reports in 1998 mentioned the concept of universal banking. They are
the Narasimham Committee Report and the S.H. Khan Committee Report. Both
these reports advised to consolidate (bring together) the banking industry through
mergers and integration of financial activities. That is, they advised a combination of
all banking and financial activities. That is, they suggested a Universal banking.

The word universal banking is a new concept in the banking industry and therefore
has no definition on what it tends to achieve by adopting universal banking.
Definitions given to universal banking have therefore ranged from what can be
termed multipurpose banking, financial conglomeration to a single product in a
bank’s stable.

The Governor of the Central Bank of Nigeria. Sanusi the guideline he released for
the implementation of the universal banking in Nigeria as the business of receive
deposit on current, savings or other account paying or collecting cheques drawn or
paid by customers, provision of finance, consultancy and advisory services relating
to corporate and investment matters, making or managing investment on behalf of
any person and the provision of insurance marketing services and capital market
business or such other services as the governor of the Central Bank may be gazette
designated as banking business.

On the other hand, the managing director of Magnum Trust Bank plc. Mr. Babatunde
Dabiri defined universal banking as ‘a form of banking which allows a single
financial institution to perform the function of merchant and commercial banks,
participate in the clearing of cheques and other instruments and at the same time
render insurance and capital market services”.

On its own the banking supervision department of the CBN referred to universal
banking as “a financial system where banks in addition to offering traditional
banking services are not barred from holding equity interested in commercial and
industrial undertakings or engage in capital market activities such as securities. It
also encompasses”. Equipment leasing, discount houses services, insurance
brokerage, trusteeship and administration of estate etc. All carried out by the same
bank or each of its branches and subsidies.

Modern banking in Nigeria started with the advent of the British colonial rule with
the advent of the government in Nigeria came a need for modern day banking in the
country to care for the government and the business community and to replace the
barter system that had been prevalent. The structure of the banking industry then
even now is tailored towards that prevailing in the United Kingdom. This is
characterized by a single banking company engaging in business in one or more
branches.
The first sets of banks to open in the country were expatriate banks. This is because
Nigeria business class was not conversant with the modern day banking and the
multinational firms then dominated the respective counties. For six decades
expatriate banking dominated the Nigerian banking industries notable among these
banks were the bank of British West African (now first bank) of 1894, Bardays bank
(Union Bank) and the British French Bank (U.B.A) of 1949. Between then, they
control about 90% of aggregate bank deposits.
Many of the indigenous banks established during this period could not survive
because “the absence of local money or capital market and Central Bank meant that
any bank without a “Godfather” in London, new York or Paris was doomed to failure
because it can neither raise money from outside to loan out not attract deposit from
customers”. (Osubor, 1984). Through their headquarters situated in Europe the
expatriate banks had adequate terms of fund generation for customers in Nigeria. The
foreign banking domination was checked for the first time in 1969 banking decree,
which repealed the earlier banking legislation in the country.

It required all banks to be locally incorporated. During the indigenization decree of

1973, the federal government acquired 40% equity shares in the first three and
biggest expatriates’ banks first bank, union bank and U.B.A. This was increased to
all expatriate banks. Thus we can safely say that today there is no foreign bank in
Nigeria.

Universal banking has been adopted by many countries to remove restrictions and
allow free flow of transactions for efficient allocation of resources to boost economic
development. With increasing deregulation of economic activities across the world,
the practice of universal banking is gaining global spread. It has been embraced in
Germany, U.S.A, United Kingdom, South Africa, Zambia, Canada, Japan and
Congo.
In the United Kingdom the big banks have steadily taken on multipurpose functions
through the acquisition and take-over of institutions already established in the
specialized areas of their interest. Following the “big bang” of 1986 banks have
become broad-based institutions. British banks may engage in almost any type of
financial activity.
Indeed the clearing banks are permitted to develop into diversified financial services
grown that engage in universal banking. The case of the U.S. is instructive in the
banking Act of 1933 (the famous Glass Steagal Act) impose significant restrictions
on banks in respect of investment bank ties. This prohibition was as a result of the
1929 stock market crash and the indictment of some banks and their securities
affiliate’s owners and their role in the collapse of the market.

However in recent years, banks and bank holding companies have been allowed to
expand their investment banking activities into areas such as brokerage and financial
advisory services, mutual fund services and securities underwriting. In Africa
counties that have introduced universal banking, full banking licenses are issued
without functional or class delimitation.

Advantages of Universal Banking

The benefits or advantages of universal banking are:-

Investors' Trust: Universal banks hold stakes (equity shares) of many companies.
These companies can easily get other investors to invest in their business. This is
because other investors have full confidence and faith in the Universal banks. They
know that the Universal banks will closely watch all the activities of the companies
in which they hold a stake.
Economics of Scale: Universal banking results in economic efficiency. That is, it
results in lower costs, higher output and better products and services. In India, RBI is
in favour of universal banking because it results in economies of scale.

Resource Utilisation: Universal banks use their client's resources as per the client's
ability to take a risk. If the client has a high risk taking capacity then the universal
bank will advise him to make risky investments and not safe investments. Similarly,
clients with a low risk taking capacity are advised to make safe investments. Today,
universal banks invest their client's money in different types of Mutual funds and
also directly into the share market. They also do equity research. So, they can also
manage their client's portfolios (different investments) profitably.

Profitable Diversification: Universal banks diversify their activities. So, they can
use the same financial experts to provide different financial services. This saves cost
for the universal bank. Even the day-to-day expenses will be saved because all
financial services are provided under one roof, i.e. in the same office.

Easy Marketing: The universal banks can easily market (sell) all their financial
products and services through their many branches. They can ask their existing
clients to buy their other products and services. This requires less marketing efforts
because of their well-established brand name. For e.g. ICICI may ask their existing
bank account holders in all their branches, to take house loans, insurance, to buy
their Mutual funds, etc. This is done very easily because they use one brand name
(ICICI) for all their financial products and services.

One-stop Shopping: Universal banking offers all financial products and services
under one roof. One-stop shopping saves a lot of time and transaction costs. It also
increases the speed or flow of work. So, one-stop shopping gives benefits to both
banks and their clients.

Disadvantages of Universal Banking

The limitations or disadvantages of universal banking are:-

Different Rules and Regulations: Universal banking offers all financial products
and services under one roof. However, all these products and services have to follow
different rules and regulations. This creates many problems. For e.g. Mutual Funds,
Insurance, Home Loans, etc. have to follow different sets of rules and regulations,
but they are provided by the same bank.

Effect of failure on Banking System: Universal banking is done by very large

banks. If these huge banks fail, then it will have a very big and bad effect on the
banking system and the confidence of the public. For e.g. Recently, Lehman Brothers
a very large universal bank failed. It had very bad effects in the USA, Europe and
even in India.

Monopoly: Universal banks are very large. So, they can easily get monopoly power
in the market. This will have many harmful effects on the other banks and the public.
This is also harmful to economic development of the country.

Conflict of Interest: Combining commercial and investment banking can result in

conflict of interest. That is, Commercial banking versus Investment banking. Some
banks may give more importance to one type of banking and give less importance to
the other type of banking. However, this does not make commercial sense.
 OBJECTIVES OF UNIVERSAL BANKING

Universal banking is a term related to banks providing both investment services and
savings and loan options to their customers. Many of the banks in Europe function
on the basis of the universal banking model. The main objectives of such a model are
an increased participation in investment strategies, securing clients through saving
and loan schemes, development of private sectors and cutting costs for financial
services.

v. Participation in Investments

Universal banking focuses on performance of private firms by directly investing into

such entities. By participating on the investment market, such banks can directly
exercise decision-making power in the governance of corporations. This objective of
universal banking aims to secure the financial interests of companies that have
received direct investment and to protect the future development of such institutions.
For example, Swiss economist Georg Rich indicates that by aiming to directly
participate on the investment market, universal banks in Switzerland want to ensure
that the companies that have received investment funds would deal with them
properly and will not undertake unreasonable financial decisions.

vi. Savings and Loans

By delivering multiple financial services, universal banking aims to deliver

immediate benefits for their clients. This makes such entities quite attractive for
people who want to take care of their all financial needs at one place -- they can both
apply for an investment scheme and require credit for business development. By
providing their clients with saving and loan options, universal banks aim to diversify
their range of services and have larger influence on the financial markets. German
economist Ralf Elsas from Frankfurt University emphasizes on the fact that by
aiming to promote saving and loan programs, universal banks can benefit from
different types of clients and obtain more working capital to invest in the future.

vii. Development of Private Sector

Among the main objectives of universal banking is the development of the private
sector. As such, banking institutions are highly unlikely to cooperate with
governmental funds because of their urgent need to invest money, universal banks
target the private sector as a main source of clients. But to have such clients,
universal banks need to develop the sector and ensure its stable run and economic
growth. This has been revealed by economist Gary Gorton who states that universal
banks in Germany are the main contributors for the rapidly expanding private sector
in the country.

viii. Cutting the Costs

Since many of the European continental banks are adopting the universal banking
approach, it is essential for them to be more competitive on the global market where
American and Asian banks offer better prices for providing financial services. The
idea of the universal banks is to reduce the costs of their financial services by
enlargement being able to expand their areas of expertise would empower European
banks to engage in more serious price reduction strategies. The European Central
Bank has already partially achieved this objective by providing low interest loans to
European Union economies.

THE FALL OF THE UNIVERSAL BANKING

Before the great crash of 2008, the universal banks swaggered around London, Hong
Kong and New York. Barclays, Citigroup, Credit Suisse, Deutsche and UBS
imagined they could be all things to investors in (almost) all corners of the globe.
Five years on, in 2013, such ambitions will seem quaint as the American and
European banks find themselves either shrinking further or increasingly
marginalised.

Far from competing in every category from asset management to equity derivatives
and fixed income, the universal banks will abandon businesses and locations,
through forced disposals or severe cost-cutting. From the ruins, a new order will
emerge: one with different capital structures, new credit channels and a continued
shift in power towards Asian institutions, some of which will be either partly or
wholly government-owned.

The decline of the universal bank will pass unlamented. The promise of the cross-
selling financial supermarket has long been eclipsed by the destruction of
shareholder value after the crash. Sandy Weill, universal baking’s evangelist-in-
chief when at the helm of Citigroup, recanted publicly in 2012. In 2013, combining
stolid utility banking and bonus hungry investment banking under one roof will look
even more questionable. As one City of London veteran says: “It’s like putting Tesco
together with Harrods it doesn’t work.”

The new banking order in 2013 will not be fashioned by a son-of-Glass Steagall, the
Depression-era act which separated commercial lending and investment banking.
There will be little appetite for a giant legislative overhaul, coming on top of
America’s Dodd-Frank act and Britain’s Vickers commission. Instead, the power of
universal banks will be eroded by market forces driven by the new Basel 3 rules on
capital ratios as well as a more intangible but vital factor: culture.

In 2012 universal bankers and, more importantly, their clients at last realised that
financial capitalism had moved too far towards transaction banking at the expense of
“relationship banking”. Politicians and regulators won the argument. Bankers came
to understand that in a world of lower leverage using money borrowed on the
wholesale markets to invest the old turbo charged transaction model no longer
worked. The liberate-fixing scandal was the final straw.

In 2013 the rock-star banking CEO typified by Bob Diamond at Barclays will be
consigned temporarily to the Hall of Infamy. Power will either be shared (at
Deutsche, Anshu Jain, a high flying Indian investment banker, serves as CEO
alongside Jurgen Fitschen, an older German) or invested in a low profile CEO like
Antony Jenkins, a sober retail banker who has succeeded the abrasive Mr. Diamond
at Barclays, or like Michael Corbat, who has succeeded Vikram Pandit at Citigroup.
Expect further moves at the universal banks, with Brady Dougan at Credit Suisse
among the vulnerable.

QUIZ

1. Define Universal Banking

ASSIGNMENT

Discuss the objectives of Universal Banking

LECTURE NOTE FOUR

THE ROLE OF THE CENTRAL BANK IN A DEVELOPING

ECONOMY
INTRODUCTION
The position of the central bank in any developing economy is of dual purpose. It
performs the normal or traditional central bank functions and at the same time non-
traditional functions of stimulating the general economic development of the country
by direct participation in key establishments.

The principal traditional functions of the central banks as you have already learnt in
unit twelve include – issuance of the nation’s legal tender (currency), banker to the
government, banker’s bank, lender of last resort, maintenance of external reserves
and the controller of credit and maintenances of stable foreign dealings.

In developing nations, the central bank helps the economy to develop fast by making
money available for rising level of production and distribution, helping the drive to
increase exports and keep prices stable. It further through the use of its monetary
policy, maintains stability in the supply of money and credit. These functions of the
central bank in the economic development of nation are discussed hereunder.

CREATION AND EXPANSION OF THE FINANCIAL SYSTEM

The commercial banks that have the function of credit creation in the economy are
mostly profit oriented institutions. They therefore prefer to be localized in the big
cities to provide credit facilities to estates, plantations, big industrial and commercial
ventures.

The commercial banks hitherto provide only short-term loans to the aforementioned
groups, thus credit facilities in the rural areas to peasant farmers, small business
men/women and traders were mostly nonexistent. The central bank in its bid to
improve the currency and credit system of the country issues directives to the
commercial banks to extend branch banking to rural (i.e. rural banking scheme) areas
to make credit available to the rural business operatives. Also they are directed on
the provision of credit facilities to marginal farmers on short, medium and long term
basis. The central bank also encourages the establishment of community banks and
other programmes through which deposit mobilization and investment s are
encouraged in the rural areas. The central bank also helps in establishing specialized
banks and financial corporations in order to finance large and small industries.

PRICE LEVEL STABILITY ROLE

In units six, seven and eight where we discussed the demand and supply of money
and inflations, you learned about the movement in price level resulting from the
imbalance between demand and supply of money. It is a general economic system
that as the economy develops; the demand for money is likely to go up due to
increase in production and price.

This if not properly checked may result in inflation. The central bank controls the
uses of policy that will prevent price level from rising without affecting investment
and production adversely.

INTEREST RATE POLICY STABILITY ROLE

In developing economies, the existence of high interest rates in different sectors act
as an obstacle to the growth of both private and public investment. Since investors
borrow from the banks and the capital market for purposes of investment, it
therefore, behoves the system to encourage them by ensuring a low interest rate
policy. Low interest rate policy is a cheap money policy, making public borrowing
cheap, cost of servicing public debt low and finally encouraging and financing
economic development. The policy becomes more effective if the central bank
operates a discriminatory interest rate, charging high rates for non-essential and
unproductive loans and lower rates for productive loans.
 DEBT MANAGEMENT ROLE

In developing economies in particular and every economy in general, the central

bank manages the domestic and foreign debts on the instruction of the Federal
Ministry of Finance. Debt management involves debt service payments and
participation in debt restructuring through rescheduling, debt refinancing, as well as
debt conversion to ensure that the debt is reduced to a manageable size. The aim of
the bank in this results in areas of proper timing and issuing of government bonds
and securities, stabilizing their prices and also minimizing the cost of servicing the
public debt.
In order to achieve this role, it becomes essential that the central bank should ensure a low
interest rate policy on these bonds to make them more attractive. Thus, for this role of debt
management to be successful, the central bank will ensure and encourage the existence of well
developed money and capital markets where both short and long-term securities abound.

MONETARY STABILITY

Monetary policy: The credit control measures adopted by the central bank of a country, is of
vital importance in the process of development.

This is important because of how they influence the pattern of investment and production
through the conscious action taken by the bank in the control of the supply of money. This
mechanism in effect, when the proper mix of the control instrument is adopted effectively,
controls inflationary pressures arising in the process of development. These instruments as we
saw in the previous unit include open market operations, required reserve, ratio, bank rate or
discount rate, among others.

FOREIGN EXCHANGE MANAGEMENT ROLE

The central bank manages and controls the foreign exchange resources of a nation– its
acquisition and allocation in order to reduce destabilizing short-term capital flows. The bank
thus monitors the use of scarce foreign exchange resource to ensure that foreign exchange
disbursement and utilization are in line with the economic priorities at the same time in line
with economic priorities and within the foreign exchange budget. In this regard the central
bank further acts as the technical adviser to the government on foreign exchange policy,
especially in maintaining a stable foreign exchange rate.This, the bank still achieves this
through exchange controls and variations in the bank rates (discount rates). This role generally
helps in achieving a balance of payment equilibrium; a problem prevalent in the developing
economies.

QUIZ
Outline the role of the central bank in the economic development of a nation.
ASSIGNMENT

Discuss extensively three of the roles of the central bank in the economic development of a
nation.

LECTURE NOTE FIVE

MONETARY POLICY AND FISCAL POLICY CONTENTS

INTRODUCTION

In any economy to operate effectively, policies which are codes, guides or general rules that
stipulates the referenced procedure to follow in handling recurring situations or in exercising
delegated authorities must be followed. These policies theoretically serve to ensure that
decisions support set objectives and describes plans to follow in a coordinated and consistent
manner. Policies should however be controlled, monitored and considerably enforced in order to
be effective.

Macroeconomic policies are those measures taken by government intended to influence the
behaviour of the economic policies, to achieve desired objectives through the manipulation of
a set of instrumental variables. The scope for macroeconomic policy depends upon the
economic system in operation, and thus the framework of laws and institutions governing it.
The most important class of macroeconomic policy is demand management, which seeks to
regulate the pressure on the community’s resources by operating on the level of spending
power and so of demand. This generally takes the form of measures we shall be discussing in
this unit – monetary policy and fiscal policy.

MONETARY POLICY: MEANING AND OBJECTIVES

Monetary policy is the means by which the Central Bank (i.e. the monetary regulatory
authority) manipulates the money supply in order to influence the overall direction of the
economy; particularly in the areas of employment, production and prices.

Monetary policy can therefore be seen as any conscious action taken by the Central Bank to
change the volume, quantity, availability, cost and direction of money and credit in the
economy.

It therefore involves the regulation by the Central Bank of the supply and interest rates in
order to control inflation and stabilize currency. Monetary policy is one of the two ways the
government through its regulatory agencies can impact on the economy.

The principal objectives of monetary policy include:

1. Full Employment

This is the economic term used to describe a situation in which everybody who wants to work
gets work; thus, the absence of involuntary unemployment. The
U.N. experts on National and International measures for full employment define it as ‘a
situation which employment cannot be increased by an increase in effective demand and
unemployment does not exceed the minimum allowances that must be made for the effects of
fractional and seasonal factors’. It further states that full employment stands for 96% to 97%
employment. This can be achieved in the economy by following expansionary monetary
policy.

2. Economic Growth

The general goal of monetary policy is to promote a stable economy. Thus, one of its
objectives is the rapid growth in the economy. Economic growth is the process whereby the
real per capita income of a country increases over a long period of time and is measured by
the increase in the amount of goods and services produced in that country. Economic growth
is therefore a desirable goal of a country since it raises the standard of living of the people and
reduces inequalities in income distribution. A good monetary policy influences this by
controlling the real interest rate through its effect on the level of investment in the economy at
the same time controls hyper-inflation.

3. Balance of Payment

The monetary policy of a country also has as one of its objectives the maintenance of
equilibrium in the balance of payments. This follows from the phenomenal world trade
growth as against the growth in international liquidity.

THE CENTRAL BANK OF NIGERIA AND MONETARY POLICY

The Central Bank of Nigeria in its conduct of monetary policy in Nigeria undertakes
monetary policy in order to:

 Maintain Nigeria’s external reserves to safeguard the international value of the legal
currency.

 Promote and maintenance of monetary stability and a sound and efficient financial
system in Nigeria.

 Act as banker and financial adviser to the Federal Government; and

 Act as lender of last resort to banks.

The recent CBN economic reforms and monetary policy which focused on structural changes,
monetary policy, interest rate administration and exchange management, encompasses both
financial and market liberalization and institutional building in the financial sector. The broad
objectives of this reform include:

a) Removal of control on interest rates to increase the level of savings and improve
allocative efficiency;

b) Elimination of non-oil rationing of credit to reduce misdirected credit and increase

competition;

c) Adoption of indirect monetary management in place of the imposition of credit ceiling on

individual banks;

d) Enhancing of industrial structure and supervision;

e) Strengthening the money and capital markets through policy changes and distress
resolution measures; and

f) Improving the linkages between formal and informal sectors.

 INSTRUMENTS OF MONETARY POLICY

The tools, techniques or instruments of monetary policy in an economy are of two broad
groups. First, the general, quantitative or indirect instruments, which are meant to regulate the
overall level of credit in the economy through the commercial banks. The second group –
selective, qualitative or direct instruments that aims at controlling specific types of credits in
the economy. They all affect the level of aggregate demand through the supply of money, cost
of money and availability of credit. Central Bank Functions and Credit Control include:

1. Open Market Operation (OMO): This is the sale and purchase of government
securities in the market by the Central Bank.

2. Legal Reserve Ratio (Cash Reserve Requirement) of Banks: This is the proportion of
commercial banks deposits kept with the Central Bank for the purpose of monetary control.

3. Bank Rate Policy or Discount Rate Operation: This refers to the interest rate at which
the CBN lends to the commercial banks or rediscounts first class bill of exchange and
government securities to the commercial banks.

4. Liquidity Ratio: This is the percentage of a bank’s deposit held in form of cash or liquid
assets to meet sudden rush on banks by depositors.

THE ROLE OF MONETARY POLICY IN ECONOMIC DEVELOPMENT

The economists’ measure of the effectiveness of a monetary policy is its influence on

inflation, employment, and industrial production. This stems from the already mentioned
principal objectives of monetary policy, especially in a developing economy. We can restate
these objectives again as the major role monetary policy plays in a developing economy thus:

a) Credit Control

With a view of controlling inflation and inflationary pressures within the economy. This is
achieved through the adoption of one or a combination of the instruments of monetary policy
discussed above.
Price Stability

The adoption of various tools of monetary policy brings a proper adjustment between the
demand for and supply of money. In a developing economy, the gradual monetization of the
non-monetized sector leads to increase in the demand for money. This also results from
increase in agricultural and industrial production. All these will lead to increase in the demand
for transactions and speculative motives, which monetary policy reacts to by raising the
money supply more than proportionate to the demand for money in order to avoid inflation.

b) Exchange Rate and Interest Rate Stability

Towards bridging the balance of payment deficit, monetary policy in the form of interest rate
policy plays an important role. A developing economy must have to increase imports to meet
their respective development needs. On the other hand, exports in such economies are almost
stagnant, thus leading to imbalance in balance of payments. This could be narrowed through
the adoption of a high interest rate policy which will in turn attract the inflow of foreign
investments. The policy will also have a positive effect on the exchange rate favourable to the
development of the economy.

In Nigeria, the implication of the monetary policy reforms has the following implications on the
economy:

i) Increase in the number of Banking Institutions resulting from the provision of a

liberalised and level playing field for the emergence of effective and efficient institutions
that would serve as an engine of growth for the economy. Improved service delivery
through new innovations and new product development like the Automated Teller Machines
(ATM), use of debit and credit cards, e-money and e-banking.

ii) Shift in Monetary Policy management from direct to indirect approach to monetary
management. This led to a better development of the primary and secondary markets for
treasury securities. These took advantage of the liberalization that discount houses, banks
and some selected stock brokers are now very active in the primary market for treasury bills.
 iii) Between 1987 and 1996, the CBN had adopted different interest rate regimes in 1987 to
a total deregulation of interest rates in October 1996.

iv)Modernisation in the Nigerian payment system process with the implementation of

Magnetic Ink Character Recognition (MICR), ATMs and electronic banking (e- banking).
These are all aimed at promoting the automation of the payments system, thus reduce delays
in the clearing of payment instruments, reduce cash transactions and enhance transmission
mechanism of monetary policy.

The foregoing reveals that monetary policy has a global reach in addition to its domestic
effects. This revolves around its main objective of promoting a stable economy. Through its
effect in the economy, many economists agree that the central bank of a nation is the most
important political tool a government has. This stems from the fact as discussed above that
each of a monetary policy’s effects influences the everyday financial decisions of the citizens
of the economy, whether they should buy a car, save more money, or start a business.

FISCAL POLICY

Fiscal Policy is a deliberate government policy designed to change the level of government
expenditure or varying the level of taxation or both; for the purpose of achieving some desired
economic objectives. It is therefore government’s decisions relating to taxation and its
spending with the goals of full employment, price stability, and economic growth.

Fiscal policy objectives are implemented and achieved through changes in the budget [a
financial statement of the sources (revenue) and uses (expenditure) of fund of the
government). Government is said to adopt a “loosened fiscal policy” when it reduces taxation
or increases public expenditure with the aim of stimulating aggregate demand. On the other
hand, “tightened fiscal policy” prevails when taxation is increased or public expenditure is
reduced.

Thus, by changing tax laws, the government can effectively modify the amount of disposable
income available to its tax payers. For example, during tightened fiscal policy regime, when
taxes are increased, consumers would have less money to spend on goods and services.

Also, government could choose to increase her spending by directly purchasing goods and
services from private companies. This would increase the flow of money through the
economy and would eventually increase disposable income available to consumers.

FISCAL POLICY AND ECONOMIC DEVELOPMENT

Fiscal policy which has been seen as government policy in relation to taxation and public
spending is one of the two most important components of a government’s overall economic
policy concerned with money supply.
In times of recession and inflation, government can apply fiscal policy to solve the resulting
problems. Some of the mechanisms as discussed partly in section 3.5 follow the fiscal policy
regime adopted by the government. Either loosened or tightened fiscal policy regimes when
adopted aids in achieving the desired objective.

During times of recession, reduction in taxation, increase in government spending and

government grants or/and financial assistance to industries will get the economy out of the
problems.

Conversely, in periods of inflation, increased taxation, reduction in government expenditure

and reduction of grants and/or financial aids to industries will reduce inflationary pressure on
the economy.

QUIZ
1) Discuss the objectives and principal instruments of monetary policy.

ASSIGNMENT
2) Discuss the role and instruments of fiscal policy in a developing economy.