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Friday, 13 October 2017

-QUESTIONS AND ANSWERS ON MONEY AND BANKING





1.                  What are the main factors that determine the interest rates payable to bank customers?

Answer:
The money which the customer deposit for the credit of his account is not held for the customer but borrowed from him with a promise to repay it or any part of it on demand.  Thus, it can be seen that the amount or volume of deposit will determine how much interest is paid to customer.

The Length of time – the customer decides to continue his contractual agreement with the bank i.e. continue to leave his money with the bank determines how much interest the banks would pay to the customer.

The nature of accounts: Customers who operate savings accounts are not likely to attar ts a high interest rate like customers who operates a fixed deports account.


2.                  List the characteristics and qualities of money and explain the differences.

Answer:
The following are characteristics or prosperities of good money.

a.       Acceptability of value – Money is accepted because a specific value has been conferred on it.  Money must posses the important quality of acceptability of value.

b.      Homogeneity – Money must be homogenous.  For example, N5 naira unit should be worth another N5 naira unit at all times and in all places within the geographical area of Nigeria.

c.       Portability:-Money should be easy to carry

d.      Durability:-Money should not be easily damaged or destroyed.

e.       Divisibility – Money should be divisible into smaller units without any loss in value.

f.       Stability of value -

3.                  What are the major ways banks use to generate income/profit?

Answer:

The two major functions of a commercials bank are the mobilisation of deposits and the extension of credits.  Banks act as financial intermediaries, collecting money-on deposit from one group and lending it out to another group. In this role, they are able to convert short-term deposits into long-term loans. 

4.                  What circumstances does a bank have a right to disclose information about a customer account to a third party?

Answer:
In Tournier v. National Provincial Bank (1923) case, it was clearly established that the banker is entitled to disclose information about his customer’s affairs in four instances only:





i. Where disclosure is under compulsion of law ( e.g. where he is required to give evidence in legal proceedings) ii. Where there is a duty to the public to disclose (may be his customer is trading with the enemy of the country).  iii. Where a guarantor asks to know the extent to which is guarantee is been relied upon by the bank iv. Where the disclosure is made by the express or implied consent of the customer e.g. where he supplies a reference for his customer.

                       
5.                  How does Central Bank of Nigeria use the open market operation to support its interest rates policy? What are the Banker’s responsibilities when he acts in  vicarious capacity for his customer?

Answer:
This technique is normally used by CBN where there is a well-developed financial structure.  The national debt relatively large and the CBN has a large stock of government securities.  The CBN can buy or sell securities in the stock market or to the public with a view to influencing interest rates and money supply (i.e. increase or decrease money supply) thereby altering the supply of financial assets.

To increase money supply, the CBN purchases securities.  Conversely, to decrease money supply, the CBN sell securities thereby making the prices to fall and yields to rise leading to a transfer of cash from the purchasers or the public to the CBN, thus reducing the reserve assts of the banks.  Banks now have less money to lend hence they have to curtain their lending so that the money supply is reduced and interest rates will thus rise.

BANKER’S RIGHTS BASIC RIGHTS
The following are the most important rights of the commercial banker:
1.   The charge his customer reasonable commission for services rendered

2.      To repayment on demand from the customer of any overdrawn balance which has be permitted on a current account.
3.      To be indemnified by the customer for expenses and liabilities incurred while acting for him.
4.      to dispose of his customer’s money as he pleases provided he honours customer’s valid cheques
5.      to expect his customer to exercise due drawing cheques
6.      to exercise a lien over any of his customer’s securities that are in his possession, other than those deposited for safe custody, for any money owing to him
7.      to exercise the right of set-off

6.                  Write short notes on the following:
i. Banking ordinance 1952 ii. Special clearing iii. The barter system iv. What is certificate of deposit, and how important is it in the money market?

Answer:
In Nigeria, the first banking legislation was enacted in 1952. The 1952 Ordinance restricted the establishment of banks and banking to companies holding valid licenses.  Prior to that time, banking was not given any special treatment, but treated as any other business.  The need to regulate banks by special laws became apparent after several bank failure and losses to depositors which necessitated the setting up of the Paton Commission in 1948.  The report of the Commission led to the enactment of the first banking ordinance in 1952.

ii. Special Clearing, if a customer is in urgent need to funds and wants the proceeds of a cheque to be credited to his account on the same day or wants to know the fate of a cheque on the same day, he can ask his bank to send the cheque for special clearing or to arrange special presentation.


iii.                      The barter system is the second stage in the development of money, which involves the direct production of goods for personal needs as well as for others.  Barter System is exchange of goods for goods.

The major problems with the barter economy that led to the use of money were;
                                                                                      i.      The absence of a common unit of measure
                                                                                    ii.      The necessity of a double coincidence of wants
                                                                                  iii.       The absence of a means of storing value.
                                                                                  iv.      Poor measure of deferred payment

iv.  Certificates of Deposits: These are in two forms, Negotiable Certificates of Deposit (NCD) and Non-Negotiable Certificate of Deposit (NNCD).  The maturity of these instruments varies between three and thirty-six months.  Certificates of Deposits (CD) was introduced in 1975 as an inter-bank instrument considered relevant at a time when banks had excess liquidity when there was a shortage of government short term debt instruments.

7.                  State briefly the narrow and broad definitions of the money supply as used by the Central Bank of Nigeria.

Answer:
Money supply in Nigeria is usually defined in two ways, namely; the narrow concept (M1) and the broad concept (M2).

The narrow Concept (M1), measures money supply in terms of currency, including coins, paper money and demand deposits in the banks, especially commercial banks, that are generally acceptable in payment for goods and services. Even though demand deposits do not have legal-tender status in the country, they are nevertheless generally acceptable as means of payment once confirmation is obtained form a bank.  Thus, M1=Currency + Demand Deposits.

The broad concept (M2). – this is the definition that incorporates other things that are widely used as store of value or wealth in the money supply.   In particular, in Nigeria, only saving and time deposits are added to M1 to get (M2)., the broader definition concept of money supply.  Thus, (M2).  = M + Saving Deposit + Time Deposits.

8.                  List and explain fully the basic principles of lending, ensuring to recognise the factors that must be considered before grating a loan.

Answer:
The major principles of lending otherwise known as cannon of lending to be considered when giving out loan by the credit analyst is character.  The willingness to repay the loan grated is a major consideration by the credit analyst.  The fact that people do not live up to their promises, had made it necessary that credit risk be properly investigated.  The creditor has a special responsibility, to search for and avoid dishonest debtors. 

Although, a banker will always try to assess the reliability of a customer or a potential customer, honesty and integrity on their own, are insufficient.  Therefore, a record of prudence over a period of years is a better guide to a customer’s credit worthiness than your personal opinion of his probity. 




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