The various actors that constitute the Nigerian financial system fall into seven broad groups:
- Trading exchanges
- Exchange facilitators
- Investment banks and asset managers
- Stockbrokers and brokerages
- Deposit banks
- Discount houses
Central Bank of Nigeria
The Central Bank of Nigeria is the primary regulator of the country’s banking system, serving as a banker of last resort to other banks as well as the main banker for the government.
The central bank also has the crucial responsibility of ensuring price stability in the economy. For this reason it has a couple of tools it deploys periodically to keep prices under control.
One of them is through the deliberations of its Monetary Policy Committee, which meets every two months to set the benchmark interest rate, the rate at which the central bank lends to banks, which then sets the tone for the rates used by the banks in turn in lending to their own customers.
Another tool the central bank uses is through intervention in the foreign exchange market. During periods of short supply, the central banks sells to the market while at the same time poised to buy if there’s an over supply. The regulator also controls the volume of money in circulation by stipulating cash-reserve and other requirements for banks as well as through the sale of Treasury bills to mop up excess funds in the system that could be a source of inflationary pressure.
Most institutions that will perform financial services related to taking deposits from the public and engaging in lending must have to be licensed and regulated by the central bank in order to operate legally in Nigeria.
Nigeria Deposit Insurance Corporation
This is a government agency created to insures deposits made by customers of banks and other financial institutions in order to reduce the risk they face in the event of failures. As an insurer, the NDIC protects deposits to the tune of 500,000 naira per account as currently provided for under the law. As currently designed, it essentially protects only the low income earners, likely to have less than the said amount in any bank in the estimation of the law.
In performing its mandate, the NDIC has other ancillary powers related to the supervision of banks, determination of insolvency as well as the eventual liquidation of the failed institution and the payment of depositors. As a supervisor, it subjects lenders to stress tests aimed at determining their state of health and the potential risk of failure through scrutiny of their books to ensure they’re adhering to safe and sound banking practices.
Where at-risk banks fail to respond to remedial measures, the NDIC has the responsibility to see that they’re folded up in an orderly and efficient manner. The depositors are the first in the line of settlement, followed by creditors and then shareholders.
The Debt Management Office
The Debt Management Office is the government agency with responsibility for the issue and management of all public debt, that is all government borrowings. Before it was set up in 2000, the responsibility for managing public debt was scattered among several offices and departments between the central bank and the finance ministry.
The result was that these officials worked in silos, with poor or inadequate communication with other relevant departments. This often gave rise to administrative chaos due to inefficient collection and management of data, claims that were difficult to verify and a system that frequently attracted penalties for late payment.
The establishment of the DMO, as it’s popularly known, created a one-stop shop for handling these debt transactions covering Treasury bills, federal government and state bonds as well as foreign-currency denominated debt instruments such as Eurobonds. The office issues notices of government debt issues and keeps track of their performance and government obligations. It periodically publishes the size of Nigeria’s debt, including domestic and foreign debt.
The Securities and Exchange Commission
The Securities and Exchange Commission is responsible for overseeing the public trading of financial instruments to ensure that stipulated regulations and objectives are met. The SEC, as it is commonly called, has the duty of registering and regulating market intermediaries such as the exchanges that trade in stocks, commodities, futures, options and derivatives as well as associated clearing, settlement through depository platforms or organizations. Others that also fall under the purview of SEC are securities-issuing houses and dealers, stockbrokers, registrars, trustees, reporting accountants and investment advisers, among others. It’s also the duty of the regulator to approve the creation of financial securities such as equities, debentures, debt instruments (including bonds and commercial papers) and collective investment products like mutual funds or unit trusts.
Toward fulfilling its duties, the commission periodically requests for information from market operators about their activities, conducting audits and other examinations where considered necessary in order to maintain the integrity of the market, prevent insider trading and other attempts to manipulate the market. Where breaches are suspected, it’s the responsibility of the regulator to conduct investigations and apply requisite sanctions.
In disputes, the SEC conducts investigations and convenes mediation meetings with the parties. More serious disputes go before the Administrative Proceedings Committee, with appeals against decisions made by the body are taken before the Investment and Securities Tribunal. Infractions of a criminal nature are referred to the law enforcement agencies, including the police, the Economic and Financial Crimes Commission and the Justice Ministry for investigation and prosecution.
Federal Mortgage Bank of Nigeria
The current role of the Federal Mortgage Bank of Nigeria is that of regulator of mortgage providers and manager of the National Housing Fund. First set up in 1973, it was then intended as the replacement for the Nigerian Building Society, founded during colonial rule in 1956. For long periods afterward, it was the sole mortgage institution in Nigeria. The liberalization of the mortgage sector in 1989 saw the emergence of new primary mortgage institutions, with the FMBN now retooled as their regulator in addition to collecting and managing the National Housing Fund, to which Nigerian workers are required to contribute 1 percent of their salaries every month.
The aim is to have a pool of funds ùfrom which contributors can access mortgage funding, working through the registered primary mortgage institutions. While doing so FMBN monitors the activities of mortgage banks to ensure that they conform with the national housing objectives and other quality parameters.
The National Insurance Commission
The National Insurance Corporation is the industry regulator for the insurance sector in Nigeria. Set up in 1997, its mandate includes making sure through supervision and regulation, that the insurance industry meets national policy objectives while at the same time protecting the interests of policyholders as well as the business.
There are at least five broad areas of insurance operations covered by providers in Nigeria. These include the composite insurer, who provides both life insurance (including term and group life) as well as non-life insurance, usually referring to things such as property, vehicle or travel insurance; the general insurer that deals with fire, accident, marine and other miscellaneous events; the reinsurer, who takes in some of the risks of the traditional insurer to minimize their exposure to risks. Others are life insurance, which promises to pay a certain sum for the insured in the event of death; and takaful, the Islam-compliant version of insurance, where policy subscribers contribute funds to a pool to protect against the risk of loss or damage.
The National Pension Commission
The regulatory body to oversee the administration of pensions was set up following the 2004 reform. Before then payment of pension in Nigeria was mostly restricted to civil servants and had to be provided for in the budget, with the result that payments weren’t made in times of austerity. In the private sector, some companies paid while others didn’t; even among those who did, some categories of workers were excluded. It was a system largely unregulated that it was riddled with inefficiencies and malpractices.
The 2004 Reform Pension Act sought to change many of these shortcomings. It provided for a contributory scheme where the funds are managed by pension administrators and expanded access both in the government and private sectors. This has been the foundation for the growth of a pension industry in Nigeria with contributions now worth xx trillion naira.
After a decade of operating the new system, some amendments were made to the law in 2014 to deal with observed weaknesses. It gave the regulator more powers to resolve conflicts as well as impose stronger penalties on operators and participants where deemed necessary. The changes also took note of the place of political office holders and university professors while adding a clause that allows contributors to use a portion of their funds as equity toward securing a mortgage.
Besides providing guidelines for how pension funds are deployed, the commission also approves licenses for fund administrators and other custodian institutions. The commission also has the duty to investigate any allegations of malpractices against administrators, fund managers or employers and their agents, and take swift action to protect the integrity of the pension system.
The Federal Inland Revenue Service
The Federal Inland Revenue Service is the agency charged with tax administration in Nigeria. A tax is a compulsory payment charged by the government on citizens and corporate organizations that form the pool of funds for administering a country. While tax charges by modern governments presupposes a social contract whereby people give up some income to a bureaucracy that in turn protects them with good governance and basic services, they have also been instruments of oppression by oppressive regimes unjustly extracting funds from hapless citizens.
Unsurprisingly, Nigeria’s current tax system dates back to the proclamation of the Stamp Duties Law in 1903 under British colonial rule, culminating in the formal establishment of the Nigerian Inland Revenue Department in 1943. FIRS, as the latest iteration of the agency is known, was given autonomy in 2007 and operates the latest tax law signed by former President Goodluck Jonathan in 2014. Nigerians are required to pay personal income taxes, while business corporations are liable to company profit taxes. There are yet other taxes and levies such as the petroleum-profit tax paid by oil and gas companies, the withholding and capital gains tax on interest income and dividends, the property tax as well as the value-added tax and the stamp duties on sundry personal purchases and expenditures.
At the state and local government levels, taxes manifest as internally generated revenue, and could be charged on anything ranging from personal income, advertisement hoardings, a company logo on a car and as well as through tickets issued to vehicles entering motor parks. It’s an ubiquitous instrument encroaching on personal finance and investments at every turn and needs to be watched carefully.
The Nigerian Stock Exchange
The Nigerian equities market is essentially dominated by the Nigerian Stock Exchange, which has its main trading floor in the country’s commercial capital, Lagos. In the past it had trading floors in the northern city of Kano and the southern city of Onitsha, the commercial hub on the Bank of the Niger River. Both have been dormant in recent decades as the bulk of securities trading in Nigeria moved to Lagos.
There were 328 companies listed for trading on the main board of the Nigerian Stock Exchange, drawn from banks, manufacturing companies, conglomerates agriculture, oil and gas and others with a total market capitalization — the sum value of all shares traded on the exchange at 28 trillion naira as of January, 2020. The NSE also has 139 bonds and 11 exchange-traded funds listed for for trading.
The market also has a secondary listing for companies with smaller market capitalization. In recent years it has included over-the-counter trading in bonds and added products such as depository rights, mutual funds and exchange-traded funds.
The Financial Market Dealers Association’s (FMDQ) platform
This is another securities-trading platform that began operations in xx. It’s owned by the Financial Market Dealers Association, which is a grouping of Nigerian commercial banks that was originally geared at facilitating inter-bank transactions.
Currently it has grown to become the leading means for trading in bonds and currencies. The FMDQ trading system also enables the purchase shares from a secondary listing of the stocks of some Nigerian companies that are not available on the Nigerian Stock Exchange.
The Central Securities Clearing System
As the name indicates, the Central Securities Clearing System is a body charged with clearing exchanges made by stock buyers and sellers during trading. It’s the switching system whereby the changes in ownership of securities made during trading are given full effect.
Every investor in the market is assigned a CSCS account number. This makes possible the efficient recording and management of transactions, usually completing a sale or a purchase within three business days of its initiation.
The Nigerian Interbank Settlement System
Set up by the Bankers Committee (a grouping of chief executives of licensed banks and the central bank governor) in 1992, the interbank settlement system was designed as a platform for the clearing of interbank payments.
With its adoption of digital technology and the automation of payments, it has been the backbone for all the payment systems that are now linked to bank accounts, including automated-teller machines (ATMs), internet and USSD banking, card payments and other digital financial transactions. It provides the infrastructure and switching capacities to implement banking instructions and execute payment requests.
Run by the Nigeria Inter-Bank Settlement Systems Plc, its shareholders are licensed banks, issuing houses and the Central Bank of Nigeria.
These are companies, frequently subsidiaries of banks, in charge of keeping the records of all the investors and their earnings. The investments could be in stocks, bonds or other securities.
Beyond just keeping ownership records, the registrar also ensures that shares held by shareholders don’t exceed authorized share capital. As owners sell and new buyers acquire shares, it’s the duty of the registrar to maintain an up-to-date record of these transactions. With these they determine which shareholders should be paid and how much when it’s time to pay on dividends.
INVESTMENT BANKS AND ASSET MANAGERS
Investment banks act as financial advisers and intermediaries, helping companies to raise capital through sale of shares or bonds. Apart from acting as intermediaries between companies seeking to raise funds and investors, they also act as financial advisers in mergers and acquisitions. Some investment banks combine their advisory role with assets and wealth management as well as brokerage services, managing securities such as commercial papers, mutual funds and unit trusts, exchange-traded funds, index funds, derivatives, futures and options.
Examples of investment banks in Nigeria include Afrinvest Ltd., Vetiva Capital Management Ltd., Rand Merchant Bank Nigeria, Renaissance Capital, Stanbic IBTC Capital and Asset Resources Management among others (Click here for full list).
STOCKBROKERS AND BROKERAGES
Stockbrokers, as the name indicates, provides brokerage services to clients that may be retail investors, companies or institutional investors. In other words, the broker takes buy and sell orders from investors, executes these orders and earns a commission for the service. Brokers help to buy and sell a wide range of securities including stocks, bonds and Treasury bills, mutual funds and unit trusts.
Most investment banks and asset management companies are also licensed stockbrokers, enabling them to have the full range of investing and brokerage services under one roof. In Nigeria, brokerage licenses are issued by the Securities and Exchange Commission. There’s also a professional body known as the Chartered Institute of Stockbrokers, which provides professional certification and regulates members to ensure they adhere to ethical practices.
These are banks that receive money from individuals or organizations for safe keeping. Most banks of whatever description take deposits, which essentially form the foundation of banking as these deposits now form the pool of funds from which banks lend at higher interest rate that the cost of the deposits. Deposits that be in savings accounts or current accounts or in fixed or term deposits.
For most people, any discussion of personal finance would start with funds they have deposited in banks. It’s from these deposits that expenditures are made as well as savings and investment. It’s for this reason that banks play a very crucial role in the management of personal finance and investments.
Discount houses are specialized financial institutions that act as an intermediary between a lender and a borrower by making discounted purchases various financial instruments, such as commercial papers, Treasury bills, certificates of deposits or bonds, thereby helping to keep the market liquid.
For many central banks, discount houses are useful in implementing monetary policy measures, especially in controlling the volume of money in circulation and curtailing excess liquidity to reduce inflationary pressures. There are five licensed discount houses in Nigeria, namely, Associated Discount Ltd., Consolidated Discount Ltd., Express Discount Ltd., First Securities Discount Ltd. and Kakawa Discount Ltd. A all are owned by groups of banks in the country.