Lesson Notes By Weeks and Term - Senior Secondary 2

Financial institutions and their functions

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Term: 3rd Term

Week: 4

Class: Senior Secondary School 2

Age: 16 years

Duration: 40 minutes of 2 periods each

Date:       

Subject:      Economics

Topic:-       Financial institutions and their functions

SPECIFIC OBJECTIVES: At the end of the lesson, pupils should be able to

  1. Define financial institutions
  2. Explain commercial banks and their roles in economic development
  3. Identify the assets and the liabilities of commercial banks
  4. Explain central banks and their roles in economic development
  5. Discuss various instruments or tools used by the central bank to control commercial banks
  6. Explain development banks
  7. Explain insurance banks
  8. Explain merchant banks
  9. Explain mortgage banks

INSTRUCTIONAL TECHNIQUES: Identification, explanation, questions and answers, demonstration, videos from source

INSTRUCTIONAL MATERIALS: Videos, loud speaker, textbook, pictures

INSTRUCTIONAL PROCEDURES

PERIOD 1-2

PRESENTATION

TEACHER’S ACTIVITY

STUDENT’S ACTIVITY

STEP 1

INTRODUCTION

The teacher reviews the previous lesson ways of measuring national income and their limitations

Students pay attention

STEP 2

EXPLANATION

She Define financial institutions. She explains commercial banks and their roles in economic development. She identifies the assets and the liabilities of commercial bank and explains central banks and their roles in economic development

 

Students pay attention and participates

STEP 3

DEMONSTRATION

She explains development banks, insurance banks, merchant banks and mortgage banks

 

Students pay attention and participate

STEP 4

NOTE TAKING

The teacher writes a summarized note on the board

The students copy the note in their books

 

NOTE

FINANCIAL INSTITUTIONS

Financial institutions are organizations which deal primarily in money. They constitute the financial framework of an  economy.  The  traditional financial  institutions came  into existence as group of people with common interest mutually agree to pool their resources together in order to safe, lend and manage money. A good example of this is the so called ‘ESUSU’ OR ‘ISUSU’.

 

The following are the modern financial institutions:

 

  1. Commercial Banks

 

  1. Central Banks

 

  1. Acceptance Houses

 

  1. Insurance Banks

 

  1. Development Banks

 

  1. Mortgage Banks

COMMERCIAL BANKS

A Commercial Bank may be defined as a financial institution which deals in money and credit and which receives deposits from the public and from organizations, some of which are repayable on demand by cheque. It originated from Goldsmiths who had facilities such as Safes for the safekeeping of valuables. Examples of Commercial Banks in Nigeria are: First Bank, UBA, Zenith Bank, Fidelity Bank, GTB, Union Bank, etc.

FUNCTIONS OF COMMERCIAL BANKS

  1. Mobilizations of savings or acceptance of deposit: The three types of accounts that can be kept with commercial banks are:
    1. Current Account (Demand or Cheque Account);
    2. Savings Account
    3. Fixed Account

 

  1. Commercial banks act as agent of payment on behalf of their customers

 

  1. They are lending agents

 

  1. They help in the safekeeping of their customers’ valuables

 

  1. They give financial and technical advice to their customers
  2. It acts as banker to discount houses and other financial institutions which operates in the money and capital markets
  4. It acts as the lender of last resort Issuing of currency
  5. Promotion of economic growth
  6. Maintenance of monetary stability
  7. It carries out external business for a country

 

 

 

CONTROL OF COMMERCIAL BANKS BY THE CENTRALL BANK

The Central Bank controls the credit policy of commercial banks by using various instruments of monetary policy such as:

 

Use of Open market Operations

Open market operations refer to the buying and selling of government securities,

such  as  treasury  bills  and  bonds,  etc  from  and  to  the  public  and  business

organizations. If the amount of money in circulation is too high and the Central Bank

wants to reduce it, it will sell securities to the public and financial institutions. When

the public and the commercial banks buy government securities such as the treasury

bills, the amount of money left with the Commercial Banks will fail, thereby

reducing their lending capacity and the amount of money in circulation. The opposite

is the case if the Central Bank wants to increase the amount of money in circulation.

That is, the central bank will buy back the securities from the public and the

commercial banks, and make payment to them. This will increase the amount of

money left with the commercial banks, thereby increasing lending power and money

in circulation.

 

Use of Bank Rate

The bank rate is the rate at which the central bank lends money to the commercial

banks. If there is inflation, the Central Bank will increase the Bank rate. This will

force the commercial banks to increase their own interest rate. Then, people will be

discouraged from borrowing, the amount of money in circulation will reduce and

inflation will be controlled. The opposite is the case if there is deflation in a country.

 

Cash-deposit Ratio

This refers to the minimum legal cash reserve requirements of the commercial banks.

If there is inflation, the central bank will increase the cash-deposit ratio. If the

commercial banks keep a higher percentage of their deposits as reserves, their

lending ability will be reduced. The amount of money in circulation will reduce as

well.

 

Use of directives and moral suasion

A directive is an instruction or guideline from the central bank to the commercial

banks regarding the size of loans to give and the areas to which to direct bank

lending. If it is a policy of the government to encourage agriculture, the Central Bank

will instruct the commercial banks to increase their lending to the farmers. Moral

Suasion is an appeal or suggestion by the central bank to the commercial banks to

pursue certain lending policies, in order to restrict lending habits or to adopt more

liberal loan policies.

Use of Special Deposits

They are the additional deposits (other than the one required by the law) which the central bank may require the commercial banks to keep with it. This will reduce inflation by reducing their lending power.   

Funding

This refers to the conversion of short term government securities to long term securities. If inflation persists, short term securities such as treasury bills could be converted to long term securities such as bonds.

THE ROLES OF CENTRAL BANK IN ECONOMIC DEVELOPMENT

  1. The development of money and capital markets which provide capitals
  2. Provision of money
  3. Maintenance of stable price through the control of money supply
  4. The central bank sometimes engages directly in productive sectors of the economy
  5. The bank stimulates economic growth by carrying out external businesses
  6. The function of the central bank as a financial and economic adviser to the government influences economic development.

DEVELOPMENT BANKS

A development Bank is a bank specifically established to provide long term finance for various development projects which help to accelerate economic development. Examples are: The Nigerian Bank for Commerce and Industry, Nigerian Industrial Bank, etc.

INSURANCE COMPANIES

Insurance companies are financial institutions which deal in insurance. Insurance can be defined as contract between an insurer and an insured, under which an insurer promises to identify (compensate) the insured against loss which he may suffer in future, upon the payment of a premium. It is a provision made by an individual or an enterprise against the occurrence of some future loss.

MERCHANT BANKS (ACCEPTANCE HOUSES)

Examples in Nigeria are Nigerian Acceptances Limited and Chase Merchant Bank. They perform functions which promote the growth of commerce and industry and enhance business stability

MORTGAGE BANKS

A Mortgage Bank is a “Building Society”. Mortgage banks help in providing housing loans to individuals and organizations wishing to buy or own houses. Example is the Federal Mortgage Bank. 

EVALUATION:   

  1. Define financial institutions
  1. Explain commercial banks and trace their roles in economic development
  1. Identify the assets and the liabilities of commercial banks
  1. Explain central banks and trace their roles in economic development
  1. Discuss various instruments or tools used by the central bank to control commercial banks
  2. Explain development banks
  1. Explain insurance banks
  1. Explain merchant banks
  1. Explain mortgage banks

CLASSWORK: As in evaluation

CONCLUSION: The teacher commends the students positively