NIGERIA FINANCIAL SYSTEM Lesson Note
This SS3 ACCOUNTING lesson note covers NIGERIA FINANCIAL SYSTEM for First Term, Week 1.
Learning Objectives
- At the end of the lesson, students should be able to:
- • Describe the Nigerian financial system.
- • Identify the components of the Nigerian financial system.
- • State the usefulness of the money market.
- • State the usefulness of the capital market.
- • Distinguish between the money market and capital market.
Lesson Note
Meaning of Financial System
A financial system is a system made up of institutions, markets, rules and activities that help money move from people who have surplus money to people or businesses that need money.
The Nigerian financial system is the arrangement through which money and financial resources are saved, borrowed, invested and transferred within Nigeria.
Components of the Nigerian Financial System
The major components include:
Financial Institutions These are organisations that deal with money and financial services. Examples include commercial banks, insurance companies, microfinance banks and pension funds.
Financial Markets These are places or systems where financial assets are bought and sold. The two major financial markets are the money market and capital market.
Financial Instruments These are documents or assets that represent money or a financial claim. Examples include shares, treasury bills, bonds and certificates of deposit.
Financial Regulatory Bodies These are organisations that supervise and regulate financial activities in Nigeria. Examples include the Central Bank of Nigeria (CBN) and Securities and Exchange Commission (SEC).
Financial Services These are services provided by financial institutions, such as banking, insurance, investment and pension services.
Meaning of Money Market
The money market is a market where short-term funds and financial instruments are borrowed, lent and traded.
Short-term means that the money is usually for a period of one year or less.
Examples of money market instruments include:
Treasury bills
Commercial papers
Certificates of deposit
Call money
Usefulness of the Money Market
The money market is useful because it:
Provides short-term funds to businesses and government.
Helps banks obtain funds when they need them.
Provides a place for people and organisations to invest surplus funds for a short period.
Helps in the smooth running of financial institutions.
Assists the Central Bank in controlling money supply.
Meaning of Capital Market
The capital market is a market where medium-term and long-term funds are raised and invested.
It helps businesses and governments obtain money for projects that may take several years to complete.
Examples of capital market instruments include:
Shares
Bonds
Debentures
Usefulness of the Capital Market
The capital market is useful because it:
Provides long-term funds for businesses.
Helps companies raise money by selling shares.
Provides investment opportunities for individuals and organisations.
Helps government raise money for development projects.
Encourages economic growth and development.
Difference Between Money Market and Capital Market
The money market deals mainly with short-term funds, while the capital market deals mainly with long-term funds.
The money market uses instruments such as treasury bills and commercial papers, while the capital market uses instruments such as shares and bonds.
The money market is mainly concerned with meeting short-term financial needs, while the capital market helps to provide funds for long-term investment and development.
Note:
Money Market = Short-term money
Capital Market = Long-term money
Evaluation
Objective Questions
1. The Nigerian financial system helps to move money from ______. A. workers to teachers B. surplus units to deficit units C. sellers to farmers D. government to schools
2. Which of the following is a component of the financial system? A. Financial institutions B. Markets C. Financial instruments D. All of the above
3. The money market deals mainly with ______ funds. A. long-term B. short-term C. permanent D. unlimited
4. The capital market deals mainly with ______ funds. A. short-term B. daily C. long-term D. weekly
5. Which of the following is a money market instrument? A. Ordinary shares B. Treasury bills C. Land D. Buildings
6. Which of the following belongs to the capital market? A. Shares B. Treasury bills C. Cash D. Coins
7. One major use of the money market is to provide ______ funds. A. short-term B. permanent C. free D. personal
8. The capital market helps companies to raise ______ funds. A. short-term B. long-term C. daily D. weekly
9. Which institution regulates the Nigerian capital market? A. SEC B. NIMASA C. NAFDAC D. FRSC
10. Which of the following is an example of a financial institution? A. Commercial bank B. Supermarket C. Bakery D. School
Theory Questions
1a) What is a financial system?
1b) Describe the Nigerian financial system.
1c) Mention four components of the Nigerian financial system.
2a) State three uses of the money market.
2d) State three uses of the capital market.