NAME:

EZENWA CHIDUMEBI VICTORIA

COURSE:
ECO 262
(MONETARY ECONOMICS)
DEPARTMENT:
DEPARTMENT OF ECONOMICS
FACULTY:
FACULTY OF SOCIAL SCIENCE
MATRICULATION NUMBER:
VUG/ECO/22/8077
LEVEL:
200 LEVEL
LECTURER:
MR. BENJAMIN OGUCHI
SCHOOL:
VERITAS UNIVERSITY ABUJA
QUESTIONS:
DISCUSS THE ROLE OF THE NIGERIAN FINANCIAL
SYSTEM
INTRODUCTION
A system, can be defined as a group of interaction or interrelated element that act according to a
set of rules to form a unified whole. In other words, a system is a set of things working together
as parts of a mechanism or an interconnecting network, a complex whole. It is influence by its
environment, described by its boundaries, structure and purpose and is expressed in its
functioning.
A Financial System, can be defined as a set of institutions/ a system, that allows the exchange of
funds between financial markets participants such as lenders, investors, and borrowers, and it
operates at a national and global level. A nation’s financial system is a pool of instructional, as
well as pother arrangements that transfer savings from persons that create them to persons who
eventually utilize them for productive activities such as investments or for expenditure. The
financial system includes all financial intermediaries that operate in the financial sector in the
economy.
Now that the financial system has been defined, it’s time to take a look at the Nigerian financial
system. The Nigerian Financial system, comprises of markets related to finance, such as the
money and capital markets, institutions that deals on finance and these includes the regulatory
and supervisory establishments; development finance organizations; and other finance
institutions, among others. In this work, I am going to be discussing the roles of the Nigerian
Financial system.

ROLES OF THE NIGERIAN FINANCIAL SYSTEM

Financial systems, all over the world play fundamental roles I roles in the development and
growth of the economy. The effectiveness and efficiency in performing these roles, particularly
the intermediation between the surplus and deficit units of the economy, depend largely on the
level of development of the financial system. It is to ensure its soundness that the financial sector
appears to be the most regulated and controlled by the government and its agencies.

● It pools savings, from net surplus economic units and channels them to productive
investment: The financial system, helps to pool saving from surplus economic units,
towards productive investments, through the use of financial intermediaries, such as
banks, credit unions, insurance companies, pension funds, etc. This is so as the savings
made by individuals and businesses turn into loanable funds. These funds are hence kept
in the bank and are loaned out to individuals in need of these funds, which allows them to
make investments. For Example: An individual, named John has more money with him
than he needs to carry out his financial activities. Hence, he deposits this surplus fund in a
bank account. On the other hand, Peter doesn’t have enough funds to invest in a
productive business venture, hence he goes to the bank and borrows money for his
 investment, in this way, the bank has pooled savings from a surplus economic Unit being
John and channeled it towards Peters productive investment.

● It provides a suitable, as well as effective payment system without which specialization in

production would to a great extended be obstructed: An efficient and reliable payments
system is important for promoting economic efficiency and the proper functioning and
integration of financial markets. The payments system acts as a conduit through which
financial and non-financial firms and other economic agents can influence the overall
financial stability, as well as accelerate the pace of financial deepening and efficiency of
financial intermediation. Over the course of history, the payments system has evolved
from trade by barter to the use of commodity money, cheques to electronic money. As the
repository of the economy's immediate liquidity, the financial system, especially banks,
constitute the backbone of the payments system. The financial system, creates an efficient
and seamless process, that allows merchants, individuals and businesses to send and
receive money in exchange for products and services. Additionally, they enable
individuals to access cash regardless of location. Through this system, individuals can
make payments with credit cards, cheeks or cash. For Example: In Nigeria, through the
financial system, individuals are able to make payments efficiently through bank-to-bank
transfers, the usage if credit cards, and withdrawals of cash from ATM’s, the bank or
POS stands.

● It enhances economic performance of the players by making the general welfare of the
people better: The financial system, enhances economic performance, as it encourages
individuals to save, and transfer savings from surplus spenders, towards productive
investments which allow for an increase in productive activity, in the economy. It also
encourages the welfare of individuals, by having an effective payment system which
allows consumers to purchase better, and the transfer of savings to borrowers, in order to
meet their financial needs at a particular period of time.

● Monetary Policy Implementation: Efforts to improve the efficiency and soundness of the
financial system are often geared toward supporting macroeconomic and monetary
performance. That is because a reasonably sound, competitive and responsive financial
system is critical to the effective conduct of monetary policy and efficiency of the
transmission mechanism. In this regard, the maintenance of financial sector stability is
complementary to monetary and price stability. Both go hand in hand and are key
ingredients for economic confidence upon which investment, growth and prosperity
depend.

● It offers a platform of financial infrastructure to assist in allocating resources to

individuals/units that are possibly more productive to invest those resources: This is
 possible as the financial system provides platforms and intermediaries for, he effective
allocation of resources to productive units, through bank transfers, cheques, effective
payment systems, etc.

● It gives room for further efficient transfer of resources funds: The financial system,
allows for efficient transfer of resources. This is so as there are legal and regulated
processes in which the financial institutions and intermediaries conduct their operation.
Hence making transfer of funds efficient and trustworthy by customers. Services outside
the financial system may lead loss of funds during transfer processes. For Example: If a
person named Amanda wants to transfer the monthly salary to her gateman, she can
easily make use of bank-to-bank transfer for efficient transfer of funds.

● It offers a balance between those who have funds to invest, and those in need of funds, if
the problem of information asymmetry is solved.

● Financial Intermediation: The process of financial intermediation involves the

mobilization and allocation of financial resources through the financial markets (money
and capital) by financial institutions (banks and non-banks) and by the use of financial
instruments (savings, securities and loans). The efficiency and effectiveness of financial
intermediation in any economy depend critically on the level of development of the
country's financial system. ln effect, the underdeveloped nature of the financial system in
most developing countries account largely for the relative inefficiency of financial
intermediation in those economies.

CONCLUSION
In conclusion, the Nigerian financial system plays a variety of roles to the Nigerian economy,
such as effective allocation of resources, effective payment system, transfer of funds from
surplus spenders for productive investments, etc. These roles help in the growth of the economy,
and overall help to achieve various macroeconomic goals.

REFERENCES
● Aderibigbe J. O. (2004). An overview of the Nigerian financial system. An overview of the
Nigerian financial system, 2(28), 5-6.