So, you want to learn more about the types of banks in Nigeria right? I’ve got you covered.
I’ll give you a detailed explanation on each of the type of banks in this post. I’d suggest we start at the beginning. Ready?
What Is a Bank?
In other words, what makes a bank what it is?
A bank by definition according to business dictionary is an establishment or financial institution licensed or authorized to accept deposits, grant loans, clear cheques, act as an intermediary in financial transactions, and provide other financial services to its customers.
You’ll observe from the above definition that a bank is regarded as a financial institution and they provide different types of bank account options to customers.
Financial institutions which are of great importance for economic development are divided into banking financial institution and non-banking financial institution.
The banking financial institution is what this article is all about, while non-banking financial institutions include insurance companies, hire purchase companies and building societies.
Origin of Banking
Before heading straight to the types of banks in Nigeria, I think you’ll want to know the origin of banking.
Banking has been said to have its origin with goldsmiths in London in the 17th century. The goldsmiths had facilities for storing valuables, therefore, they accepted money and other valuables from merchants for safekeeping.
Their first banking function was accepting deposits of cash from merchants who had no safe place to keep their money
The second stage surfaced when receipts for these deposits began to be used as means of payments by merchants.
This made the first generation bankers to issue bank notes of fixed denominations, which were more generally acceptable.
The next stage? That’s the development of money lending to customers with interests charged on it. This provided a means to make profit.
Hence, bankers began to offer the inducement of interest to encourage merchants and others to increase their deposits.
Fast forward to the 21st century, all types of banks have introduced more complex systems of banking into the industry.
For example, internet banking has brought about more than enough possibilities, making life easier for banks and customers.
Now, let’s move to the types of banks in Nigeria.
Types of Banks In Nigeria and Their Functions Explained
The following are the types of banks in Nigeria namely;
- Central bank
- Commercial banks
- Merchant banks
- Development banks
- Savings bank
- Mortgage bank
Want to know more about each of these types of banks right? Interestingly, some of these banks provides one or more type of loan to their subscribers.
Let’s take it one after the other.
1. Central Bank of Nigeria
The central bank of any country is the highest financial institution in that country which carries out the monetary policy of the government.
The Central Bank of Nigeria is the sole authority of all banks in Nigeria banking industry. It is often referred to as the apex of all banks.
The Central Bank of Nigeria was established by the CBN Act of 1958 and commenced operations on July 1, 1959.
It is saddled with the responsibility of managing Nigeria currency and supervise all other financial institutions in the country, to facilitate economic development.
What makes a central bank what it is?
- It is not for profit
- There’s only one central bank in any country
- It is the highest financial institution of the country
- It is owned by the government as there are no transactions with private individuals.
Functions of the Central Bank of Nigeria
As one of the major types of banks in Nigeria, the central bank performs the following functions:
- It serves as the banker to the government as it controls public account, receives revenue and obtain loans on behalf of the government.
- The central bank acts as a banker to all other types of banks in Nigeria. This is done by ensuring that other commercial banks open accounts with it in order to facilitate clearing of cheques.
- The central bank holds foreign reserve of the country and help in enforcing foreign exchange control.
- The central bank manages the national debt of the country.
- It serves as lender of last resort as it provided financial assistance to banks in demanding financial difficulties.
- The central bank controls the commercial banks through instruments such as Open Market Operation, Moral Suasion, Special deposits, Liquidity Ration, etc.
2. Commercial Banks In Nigeria
Commercial banks are one of the popular types of banks in Nigeria.
It is a financial institution which accepts deposits and other valuables from the public for safekeeping, with the sole aim of making a profit.
In other words, commercial banks perform services of holding people’s money and accounts and using such money to make loans available to customers.
Commercial banks are owned by private individuals, institutions or governments. Also, they are limited liability companies.
Functions of Commercial Banks
The functions of commercial banks include:
- Acceptance of deposits
- Lending of money
- Serve as an agent of payment
- Safe keeping of valuables
- Aid foreign exchange transactions
- Provide financial advice, etc.
You can learn more about commercial banks in Nigeria, learn more about the features, how they are different from the central bank, and how they help create credit facilities.
3. Merchant Banks
So what are merchant banks?
Merchant banks are one of the types of banks in Nigeria that perform specialized functions, such as;
- Acceptance of bills of exchange
- Issuance of loans for foreign trade transactions
- Issuance of new shares and;
- Provision of medium and long-term loans.
Merchant banks are sometimes referred to as acceptance houses. They contribute greatly to any economy.
The first merchant bank in Nigeria was the Nigerian Acceptance Limted (NAL) established in 1966. Today, there are many merchant banks in Nigeria, e.g Coronation Merchant Bank, Nova Merchant Bank, etc.
Also Read: How to check your BVN online in Nigeria
Functions of Merchant Banks
The functions of Merchant banks include:
- Discounting bills of exchange i.e they accept and discount bills of exchange.
- They provide loans to foreign traders
- Merchant banks provide long term loans to government and companies abroad for development projects
- They also act as trust management
- Loan syndication is undertaken by merchant banks by organizing a consortium of institutions to finance business enterprises.
- They underwrite new issues of shares.
4. Development Banks
What is a development bank?
Development banks are one of the types of banks in Nigeria that provide long-term credit or loan to other enterprises for capital projects.
They encourage businesses which have long gestation periods particularly in the areas of agriculture, commerce and industry.
They do not accept deposits from private individuals and they source their funds from international financial institutions such as the International Monetary Fund IMF, the World Bank, African Development Bank or from the government in form of grant.
Also Read: Bank of industry loan in Nigeria
Functions of Development Banks
The functions of development banks in Nigeria among others include;
- Provision of financial development by providing medium and long term finance
- They stimulate the growth of private sectors of the economy.
- They embark on studies that will enable them know the kinds of projects that the society needs
- They help to implement government policies on industrial, commercial and agricultural development
- They provide special advice to industrialists on the best way to invest
- Development banks also underwrite security issues.
5. Mortgage Banks In Nigeria
Mortgage banks are types of banks in Nigeria established for the sole purpose of coordinating the housing policy and land development in the country.
They grant loans to individuals and corporate bodies for building purposes and such loans are repaid by installments and can be spread over years.
Mortgage banks accept deposit from the investing public at a rate of interest, and use the funds to lend, at a higher rate of interest, to people who wish to purchase their own houses.
The Federal Mortgage Bank was established to encourage people to save in order to own their house. The Federal Mortgage bank is the apex of all other mortgage banks in the country.
Functions of Mortgage Banks
Functions of mortgage banks in Nigeria include;
- Acceptance of deposit from customers in order to encourage savings towards owning a house.
- Provision of long-term loan to people or estate developers to build houses
- Development of mortgage institutions
- They give specialist advice on housing matters
- They provide houses by building and offering them for sale to people
6. Savings Banks
The savings banks also constitue an aspect of the financial institutions. IN Nigeria, they are mainly set up to inculcate financial habit among the people.
Also, savings banks promote fund mobilization for financing government development programmes.
7. Bank Clearing Houses
Bank clearing house is an institution established by member banks to simplify exchanging and obtaining of payments for the cheques that are paid into bank branches throughout the country.
The clearing system is used among banks to settle cheques drawn on them. Indebtedness between banks as a result of differences between the daily totals of cheques exchanged are set off against each other.
Types of Banks In Nigeria (summary)
There you have the types of banks in Nigeria banking industry.
You should know that traditional financial institutions like the ESUSU came into existence several years before the establishment of modern banking system.
These traditional financial institutions take the form of association of people who have mutually agreed to pool resources together to save, manage and lend to members.
So, what do you think of these post about types of banks in Nigeria? Let’s have your comment in the box provided below.