TOPIC:

TABLE OF CONTENT

1. WHAT ARE COMMERCIAL BANKS

- 2.FUNCTIONS OFCOMMERCIAL

BANKS

3. ROLES OF COMMERCIAL BANKS IN ECONOMICAL DEVELOPMENT -

4. CREDIT CREATION BY COMMERCIAL BANKS -

5. RESTRICTIONS ON COMMERCIAL BANKS -

6. WHAT ARE INVESTMENT BANKS -

7. DIFFERENCES BETWEEN INVESTMENT AND COMMERCIAL BANKS -

8. LIMITATIONS OF THE POWER OF BANKS TO CREATE CREDIT -

WHAT ARE COMMERCIAL BANKS

Intro Commercial banks have over the years served as the mainstay for the provision of
financial services to Nigerians even though they are under the watch of the Central bank of
Nigeria And in fact, the role they played in the development of origiña’s economy can never be
underestimated.

• But what is the history of Commercial banks in Nigeria?

• Definition & Purpose: Commercial banks are financial institutions that accept deposits
from Customers and provide various financial Services including Loans, Credit facilities
and investment opportunities – their primary goal is to facilitate the flow of money within
the economy and provide a safe place for individual and businesses to store their funds

What are Commercial banks?

Commercial banks in Nigeria got a history as they actually established as a result of the need to
Participate in Commercial banking. In fact, commercial banking started in Nigeria before
independence – Now do you see how old the bank of system is?

• Commercial banking started in Nigeria in 1872 with the establishment of Africa banking
corporation (ABC). Then the bank is endowed with the responsibility of distributing
Bank of England notes to the British Treasury.

Later, in 1894, the bank of “British west Africa”. Now called the First bank of Nigeria was
established in Nigeria, after which the Union bank of Nigeria (UBA) formerly called the
Barclays bank was also established. You know at that time, Nigeria is Still battling with the
development of its economic system. So, the banks were created to provide financial and other
banking services for the Colonial administration and also the british commercial interests
 The two administrations (which were of first bank & Barclays bank) continue to the
monopoly until 1933 when the “National bank of Nigeria” came into existence and as such
became the first indigenous bank.

Actually, the bank became the first indigenous banks because it was able to Survive as two
indigenous banks: Indigenous banks Industrial and commercial bank and the Nigerian
mercantile bank that were already established did not survive cause they collapsed.

Between 1945 and the present time, the indigenous commercial banking System has
undergone a period of turbulence, especially in the last 1950s and 1960s with most of them
moving out of the business as a result of; insufficient funds, Lack of management, patronage
and many more. Some of these banks include merchant bank limited, Nigerian Farmers, and
commercial bank, etc.

GOVERNMENT INTERVENTION

• Then the government saw the need to intervene. As time goes on and the Collapse of more
banks goes with it, the early federal government saw the need to intervene in the commercial
barking Sector by the infusion of capital into the National bank, Agbonmagbe bank, and
African Continental bank.

Rumors have it that the intervention was a result of the export of businessmen with Strong
Political influence to ensure that the banking sector was revived.

The objective of the government in providing assistance to the banks as inscribed in the
Statements of thhe two sponsoring State government’s which were the East and west Regional
Governments include:

1) to discourage the monopoly of monetary transactions by the two established expatriate banks

2) To liberalize Credit facilities for Nigerian entrepreneurs.

History has it that the governmental intervention all actually resulted in the survival of the
banks by giving the banks a new Dimension of management. The lending Policy of these banks
showed respondent bias in favour of loans to those close to the Corridors of Powers, often
without any adequate Securities.

So in the end, the growth and development of commercial banks experienced occasional
setbacks that had to be countered by the infusion of more funds, restructuring of the boards,
and stream-lining of management. Other state-owned banks like New Nigerian bank, Pam
African bank, Progress bank, Lobi bank, owena bank, Bank of North, etc, later came into
existence to join the list of the three indigenous banks which had actually Survived the test

However, in the meantime, the federal government has continued to be extending its
Participating interest in business enterprises into the bank of sector. Later, the government
acquired a 60% interest in all the established expatriate commercial and merchant banks in the
Country following the promulgation of the indigenization decrees of 1972 and that of 1977 as
ammended.
 On a clear ground, the main aim of the government is intervening in the banking Sector most
especially in the Commercial banking as stated in the 1973/74 budget was expressed as thus;

“The aim of the federal government in commercial banking activities so as to guide them to
operate to the maximum benefit of the economy. This is as much is their own interest, as it is in
the interest of the country “

THE ROLE OF COMMERCIAL BANK IN NIGERIA

The role of the Commercial bank is broadly Classified into 2.

1. Money Generating Role

2. Service Rendering Role

• Out of the two(2), the money generating role is the most important as it forms a cornerstone in
Nigerian economic development. This usually does not only involve the raising of funds or
collection and pooling of bank deposits but also the provision of Credit to the various sector of
Nigeria’s economy.

The Service Rendering Role includes the following but is not limited to;

1. The opening and management of accounts for customer. This may be a current account,
saving account, deposit account.

2. The provision of facilities for domestic and foreign remittances for their customers e.g
the provision of ordinary Cheques and foreign currency.

3) The correction and Settlement of National and international debts resulting from domestic
and external trade for their Customes including the provision of letters of Credit

4) The Provision of facilities for their customers for the Safekeeping of their money and for the
safe custody of their Valued materials.

5) Undertaking feasibility studies and provision of financial and investment counsel and other
coperate assistance to thier customer.

6) The undertaking of trust and administration of estates in term of thier deceased or unhealthy
customer.

Currently we have 21 commercial banks in the country, some of which are ; First Bank of
Nigeria PLC, Zenith Bank PLC, Guaranty Trust Bank, Eco Bank, Acess Bank, Diamond Bank
e.t.c

Conclusion, the role of commercial bank in the development of developing countries like Nigeria
can never be over estimated as the help in ensuring the proper circulation of money for citizens.

FUNCTIONS OF COMMERCIAL BANKS:

Accepting of deposit: Commercial banks provide a safe place for individuals and businesses to
deposit their money, such as savings accounts, current account and fixed deposit.

Providing
Loans: They lend money to individuals and businesses for various purposes,
including home loans, personal loans and business loans.

Credit creation: Commercial banks can create credit by lending out a portion of the deposits
they hold, which stimulates economic activity.

payment services: Banks offer various payment services, including issuing checks, debit and
credit cards and facilitates electronic fund transfers.

Safe keeping of valuables: Some banks offer safe deposit boxes for customers to store valuable
items securely.

Investment Services: Commercial banks often provide investment products and services such
as mutual funds, bonds and brokerage services.

Foreign exchange services: They assist in currency exchange and provide services for
international trade and remittances.

Treasury functions: They manage the financial resources of the government and help in
implementing monetary policy.

Financial advisory: Banks offer financial advisory services including investment advice and
wealth management.

Online and Mobile banking: Many banks provide digital banking services,allowing customers to
manage their accounts and perform transactions online or through mobile apps.

Trust services: Some banks act as trustees and administer trusts,estates and pension funds on
behalf of their clients.

Risk management: Banks help individuals and businesses manage financial risks through
products like small business loans and community outreach payments

These functions above make commercial banks essential institutions in the modern financial
system,playing a crucial role in economic development and stability.

ROLES OF COMMERCIAL BANKS IN ECONOMIC DEVELOPMENT

1) CREATION OF CREDIT: Banks Create Credit For the Purpose Of Providing more funds
for development Project, Credit Creation Lead to Increased Production, employment,Sales
and Price and thereby they Cause Faster Economic Development.

2) MOBILIZE DEPOSIT FROM THE SURPLUS UNIT OF THIS ECONOMY TO THE

DEFECEIT
UNIT:

Commercial Bank Provides the needed Channel for Savings.they get Funds from Surplus Unit
and Lend it to the Defeceit Unit,by so doing it increase economic activities and boost the
economic Development.

3) INCREASE IN EMPLOYMENT: The Economic Prosperity of a Country Depends on the

development of trade, Commerce, Industry Agriculture, transport and
 Communication.These Sector are Financed by Commercial Banks and employment
Opportunities are increasing.

4) FINANCIAL ADVICE: Commercial Banks Provides Useful Financial advice to their

Customer in addition to Financial benefit ln business development

5) GROWTH OF ENTREPRENEURSHIP: By providing Capital to entrepreneurs and

Investing in productive purposes, banks encourage self sufficiency, reduce joblessness and
Promote the right industries, and So it has help in the Economic Development of the Country.

6) CAPITAL FORMATION: Commercial Banks promote savings and investment,which help to

eliminate Capital deficiency. they then put these resources to Productive use,boosting, Capital
Formation in the Country.

7) FUND TRANSFER: With the help of Commercial Bank, Sending Funds to anywhere in the
Country or Abroad has become very easy and has also contributed in the growth of the
Economy

8) INCREASE IN INVESTMENT: Commercial Banks Raise Public Savings,They make them

Available to Farmers, traders and industrialist for the development of Agriculture,trade and
Industry

Commercial Bank: A Commercial Bank is a Financial Institution Which accept deposits from
the public and gives loans for the purposes of consumption and investment to make profit.

Economic Development: Economic Development is programs, policies or activities that seek to

improve the economic well-being and quality of life for a community

CREDIT CREATION BY COMMERCIAL BANKS

Bank deposits play an instrumental role in the process of credit creation.

Most of the time these bank deposits are used to make fund transfers from one account to the
other. This makes them one of the most common forms of money. As banks can easily create
bank deposits, this has pushed cash to be a relatively small part of the total money circulating in
an economy.

Credit creation is a process where a bank uses a part of its customers’ deposits to offer loans to
other individuals and businesses. This results in more money created in an economy.

Every bank receives deposits from its customers and uses these deposits to make loans to other
individuals or businesses. All banks are required to keep a portion of these deposits in their
reserves. The reason why they keep only a portion is that not all clients are expected to
withdraw their funds at once. This allows banks to keep a portion and loan the rest of the
money. If everyone wanted to withdraw money at once, banks would have to keep everything in
their deposits rather than just a portion. This is pretty much how bank deposits work and how
credit creation takes place. By expanding their deposits, banks create credit in an economy.
They do this by loaning a part of the deposits they have, therefore, generating money and funds
for other people.
In addition to that, a bank must ensure that it has enough provisions and capital to absorb
unforeseen losses resulting from bad and doubtful loans while still complying with the reserve
requirement set by the Central Bank.

Mind, total deposits of a bank is of two types:

Primary deposits (initial cash deposits by the public)

Secondary deposits (deposits that arise due to loans given by the banks which are assumed to be
redeposited in the bank.)

HOW DOES CREDIT CREATION WORK?

If person A goes to the bank and deposits 1000, and the bank has a required reserve ratio of
20%, the bank will then keep 200 on their cash reserves. What happens to the remaining 800?
The bank uses them to generate loans. How? The bank lends these 800 to person B who has a
credit account where the funds are stored.

Now, person B has 800 in their account. The bank keeps 160 in their reserves and lends the
remaining 640 to person C. Person C also has a credit account where these funds are stored.
The bank again keeps 20%, of 128, and lends the remaining to person D.

The bank continues this process until the entire primary deposit is distributed and loaned out.

The total deposits that the bank created are 800+640+512+….=5000. This way the bank has
managed to create £5000 which serves as money from an initial deposit of 1000.
Table 1. Credit creation example:
Credit
People Primary deposit Reserves(r=20%)
Creation
Person A 1000 200 800
Person B 800 160 640
Person C 640 128 512

Person D 512 102 410

.... .... ....

Total 5000 1000 4000

Instead of adding the deposits and going through the entire process, you can calculate how
much money is created by a deposit using the money multiplier. This is given as;

Total credit creation = Initial Deposits × Money Multiplier Where;

Money Multiplier = 1÷ R ( Required Reserve Ratio) In the example above, we have a required
reserve ratio of 20%. The money multiplier is then 1÷20% which is 5.

Therefore, the credit creation will be ; 1000 × 5 = 5000

This means that 1000 can theoretically generate 5000

ADVANTAGES OF CREDIT CREATION

It can increase the money supply, which can stimulate economic activity and help to boost
employment and output.

It can also make it easier for businesses and individuals to borrow money, which can help them
invest in new projects and expand their operations.

Credit creation can reduce the cost of borrowing for consumers and businesses, which can make
it easier for them to make large purchases.Credit creation reduces the cost of borrowing in two
ways. First, it increases the amount of money available in the economy, which makes it

easier for banks to lend money at lower interest rates. Second, it reduces the demand for money,
which also puts downward pressure on interest rates. The end result is that borrowers can get
loans at lower interest rates than they would otherwise. This lower cost of borrowing can
encourage people to take out loans to finance purchases, invest in businesses, or even start their
own businesses. In turn, this can boost economic activity and growth.

Credit creation can help to prevent deflation by keeping the money supply from contractin

DISADVANTAGES OF CREDIT CREATION

1). It can lead to inflation : If too much money is created, it can cause prices to rise. This can be
harmful to consumers and businesses, who may see their purchasing power decrease.

Credit creation can create asset bubbles, where prices for certain assets (like housing or stocks)
become inflated beyond their true value. This can lead to economic instability and make it
difficult for people to afford basic necessities.

It can lead to a misallocation of resources. When money is created too quickly, it can lead
businesses and individuals to invest in projects that are not economically viable. This can lead to
a "boom and bust" cycle, where an economy grows rapidly but then crashes due to the lack of
sound investments.

Credit creation can encourage people to take on too much debt, which can leave them
vulnerable to economic shocks.

ASSUMPTIONS OF CREDIT CREATION

The bank's credit creation process is based on the assumption

that during any time interval, only a fraction of its customers

genuinely need cash

The bank assumes that all its customers would not turn up demanding cash against their
deposits at one point in time.

WHAT IS AN INVESTMENT BANK?

An investment bank is a financial services company that acts as an intermediary in large and
complex financial transactions. An investment bank is usually involved when a startup company
prepares for its launch of an initial public offering (IPO) and when a corporation merges with a
competitor. It also has a role as a broker or financial adviser for large institutional clients such
as pension funds.

1. Global investment banks include JPMorgan Chase, Goldman Sachs, Morgan Stanley,
Citigroup, Bank of America, Credit Suisse, and Deutsche Bank.

Many of these names also offer storefront community banking and have divisions that cater to
the investment needs of high-net-worth individuals.

How an Investment Bank Works

The advisory division of an investment bank is paid a fee for its services. The trading division
earns commissions based on its market performance. As noted, many also have retail banking
divisions that make money by loaning money to consumers and businesses.

1. Professionals who work for investment banks may have careers as financial advisors, traders,
or salespeople. An investment banking career is lucrative but typically comes with long hours
and significant stress.

2. The Intermediary Role

Investment banks are best known for their work as intermediaries between a corporation and
the financial markets. That is, they help corporations issue shares of stock in an IPO or an
additional stock offering. They also arrange debt financing for corporations by finding large-
scale investors for corporate bonds.

The investment bank's advisory role begins with pre-underwriting counseling and continues
after the distribution of securities.

The investment bank is responsible for examining a company’s financial statements for
accuracy and publishing a prospectus that describes the offering in detail to investors before the
securities are available for purchase.

Investment bank clients include corporations, pension funds, other financial institutions,
governments, and hedge funds.

DIFFERENCES BETWEEN MERCHANT BANK AND COMMERCIAL BANK

1. Medium term nature of their operation: it is established that commercial banks provides
short term financing to the economy, whereas merchant banks and investment Banks were
established to breach the gap between the short term and Long term.

Originally, funding requirement by businesses were centered around short term financial needs.
Hence, the funding commitments were also short term in nature, given the increasing demand
by some large corporations who were engaged in large capital projects. There was a need to fill
the gap for their funding requirement, which were basically medium to long term in nature.
Merchant were therefore primarily established to sustain the needs of large corporation in
providing the medium and long-term funding requirement.

2. Scale of operation: commercial Banks were limited to providing financial and advisory
services to small businesses, individuals and small corporations, whose funding requirement is
just short term in nature, whereas the merchant bank activities were designed to operate
between medium and long term, thus, fill he gap between the short term financial needs of
commercial banks and the long term finance provided by the development banks.

3. Nature of business: given the highest demand for financial needs of corporate
organizations, and also given a large number of financial requirement of corporate
organizations, merchant banks were designated to provide and make available of huge amount
of finance. Such financing includes; leasing, provision of inter-bank debt instruments, project
financing etc. Whereas the commercial bank provides funds to small businesses, individuals and
small corporations.

4.Branch network: merchant bank are designed to operate with a very few branches because
their activities were not retail in nature, their clients are usually few and very restrictive in
nature and there are no needs for retail outlets, whereas commercial bank are designed to
operate with more branches because of their activities were retail in nature and their large
volume of customers.

OTHER DIFFERENCES INCLUDES;

1. Merchant bank offer wholesale Banking services while commercial bank offers retail banking
services.

2. Risk taking: Due to their nature of operation merchant bank are involve in higher degree of
risk while commercial bank activities is less riskier.

3. Commercial bank is governed by Banking Regulation Act while merchant bank is governed
by Security and SEBL.

4. The minimum capital requirement by merchant bank is 15 billion, while in the case of
commercial Bank is N25 billion for national bank, N10 billion for regional bank and N50
billion for international bank.

LIMITATIONS OF THE POWER OF BANKS TO CREATE CREDIT

1. Amount of cash:

the credit creation power of banks depends upon the amount of cash they posses . The larger the
cash the larger the amount of credit that can be created by bank ,the amount of cash that in it's
vault cannot be determined by it .The power of creating credit is thus limited by cash it possess .

2. Proper securities:

An important factor that limits the power of a bank to creat credit Is availability of adequate
securities .A bank advance loans of it's customer on the basis of a security ,or a bill ,
building ,share stock .if proper securities are not available with the public a bank cannot create
credit .

3. Banking habits of the people:

the banking habits of the also govern the credit creation on the part of banks ,if people are not
in the habit of using cheque , the grant of loan will lead to the withdrawal of cash from the
credit creation stream of the banking system.
4. Minimum legal reserve ratio:

the minimum of cash to deposit fixed by the central bank is an important factor which
determine the power of the bank of create credit .The higher this ratio ( RRr) , the lower the
power to create credit ,and the lower the ratio ,the higher the power of banks to create credit

5. Excess Reserve:

The process of credit creation is based on the assumption that the bank stick to the required
reserve ratio fixed by Central Bank . If a bank Keeps more reserves in the bank rather than the
required amount ,the tern to have low credit creation

6. Leakages:

If there are leakages in the credit creation stream of the banking system, credit expansion will
not reach the required level, given the legal reserve ratio. It is possible that some persons who
receive cheques do not deposit them in their bank accounts, but withdraw the money in cash for
spending or for hoarding at home. The extent to which the amount of cash is withdrawn from
the chain of credit expansion, the power of the banking system to create credit is limited.

7. Cheque clearances:

The process of credit expansion is based on the assumption that cheques drawn by commercial
banks are cleared immediately and reserves of commercial banks expand and contract
uniformly by cheque transactions. But it is not possible for banks to receive and draw cheques
of exactly equal amount. Often some banks have their reserves increased and others reduced
through cheque clearances. This expands and contracts credit creation of the part of banks.
Accordingly, the credit creation stream is disturbed.

8. Behaviour of other banks:

The power of credit creation is further limited by the behaviour of other banks. If some of the
banks do not advance loans to the extent required of the banking system, the chain of credit
expansion will be broken.
Consequently, the banking system will not be “loaned up”.

9. Economic climate:

Banks cannot continue to create credit limitlessly. Their power to create credit depends upon
the economic climate in the country. If there are boom times there is optimism. Investment
opportunities increase and businessmen take more loans from banks. So credit expands. But in
depressed times when the business activity is at a low level, banks cannot force the business
community to take loans from them. Thus the economic climate in a country determines the
power of banks to create credit.

10. Credit control policy of the central bank:

The power of commercial banks to create credit is also limited by the credit control policy of the
central bank. The central bank influences the amount of cash reserves with banks by open
market operations, discount rate policy and varying margin requirements. Accordingly, it
affects the credit expansion or contraction by commercial bank