A financial system in the scope of finance is a system that allows the exchange of funds between borrowers, investors, and lenders. They consist of closely related services, markets, complex and institutions intended to provide an effective and relevant linkage between depositors and investors. Financial systems operate at national, global, and firm-specific levels. Credit, Money, and Finance are regularly used as means of exchange in financial systems.
Financial systems gives room for funds to be allocated, invested, or moved between economic sectors. They enable organizations, individuals and companies to share the associated risks.
They work as means of known value for which goods and services can be exchanged.In the same vain, a modern financial system may include banks i.e public or private sector, financial markets, financial instruments, and financial services.
The Nigerian Financial System
The Nigerian Financial System according to the Central Bank of Nigeria is a Monetary Policy Department of the Central Bank of Nigeria. It is designed to enlighten the public about basic concepts of monetary policy and central banking.
Nigerian financial system consist of two sub sectors, that is the formal and the informal sub sectors. The formal sub sector is made up of the foreign exchange markets, money market, capital market, regulatory bodies, insurance companies, brokerage firms, deposit money banks development finance and other financial institutions.
In March 2010, the following financial institutions sprang up:- 101 primary mortgage institutions, 24 deposit money banks, 1621 bureau-de-change operators, 1 stock exchange, 5 discount houses, 941 micro-finance banks, 5 development finance institutions, 107 finance companies, 13 pension fund administrators, 5 pension fund custodian, 1 commodity exchange, 690 securities brokerage firm and 73 insurance companies.
Meanwhile the informal sub sector includes self-help groups, financial cooperatives and credit associations.
It is importance to understand that there is a weak relationship between the informal and the formal sub sectors.
Overview of the Nigerian Financial System
The Nigerian financial system is made up of financial institutions including the regulatory and supervisory authorities, financial markets (money and capital markets), development finance institutions (Urban Development Bank, Nigerian Agricultural and Rural Cooperatives bank) including other finance institution.
In Nigeria, discount Houses came into establishment first in 1993. They were given the right to commence operations with just three discount houses as key players. With time, their number increased to five and their foundation can be associated to Great Britain, which is generally referred to as the origin of discount houses. The institutions with time grow to provide a link between the Nigerian banks and the Bank of England by serving as a rout for the exchange of banks’ funds and also paving way to the Bank of England as a lender of last resort and in the same manner, discount houses in Nigeria are to play the role of intermediaries between the Central Bank of Nigeria and other licensed banks in Nigeria in Open Market Operations transactions.
The structure of the Nigerian Financial System has undergone thorough changes, beginning from their ownership structure, the length and breadth of financial instruments used, to the number of institutions established regulatory and supervisory frameworks as well as the overall macroeconomic environment within which they operate. They also consists of inter-relationships among the persons and the bodies that make up the economy. Commercial banks are the most relevant financial institutions in Nigeria to encourage and mobilize savings and also channel savings into productive investment units.