Welcome! We will be looking at Financial Institutions today in our Economics class. Do have a great time studying with us!

Lesson Note

Subject : Economics

Topic: Financial Institutions

Learning Objectives: By the end of the lesson, the learners should be able to:

  • Explain the term financial institution;
  • State the types of financial institutions;
  • Define the ten bank;
  • Narrate how banking originated;
  • Mention the types of banks.


Financial Institution

Financial institution refer to all business organisations which hold money for individuals and institutions may borrow from them in order to give loans or make other Investments. Financial institutions are very important for the economic development of a nation. They represent the main channel or medium by which funds can flow from lenders to borrowers.

Types of financial Institution

Financial Institutions may be divided into two major groups. They are banking and non-banking financial institutions.
The major difference between the two is that the liabilities of the banking institutions are counted as part of the total supply of money while those of the nonbanking institutions are excluded from the money supply.

Banking Financial institutions

Commercial banks
Central bank
Merchant banks
Development banks
Savings banks

Non financial institutions

Insurance companies
Hire purchase companies
Building societies

Definition of A Bank

A bank is a commercial institution which performs various financial activities such as accepting and handling of deposits of its customers. It is a body of persons who carry on the business of banking. Banks are institutions that create money and give out loans to people. Bank is also a place where money and other valuables like jewelry are kept.

Origin of banking

Banking had it’s origin with the goldsmiths in London in the seventeenth century. The goldsmiths had facilities for storing valuables, therefore, they accepted money and other valuables from merchants for safe keeping.
The first banking function was accepting deposits of cash from merchants who had no safe place to keep their money. The second stage came when receipts for these deposits began to be used as means of payment by merchants. This made the early bankers to issue bank notes of fixed denominations, which were more generally acceptable.

The next stage in the development of the banking system was the development of money lending to customers with interest charged on it. This provided a profitable business, hence bankers began to encourage merchants and others to increase their deposits.
In recent times, banks have introduced more complex systems of banking into the industry.

Types Of Banks

The major types of banks include:

  1. Commercial banks
  2. Central bank
  3. Merchant banks
  4. Development banks
  5. Savings banks

These banks listed above are discussed individually. Do stay connected for more on this lesson.

Take a quick test for this lesson


1. Which of the following is a function of merchant banks A. acting as banker’s bank. B. Lending to the
commercial banks as a last resort. C. Controlling inflation in the economy. D. Underwriting and issuing
of shares.

2. Which of the following is an asset of a commercial bank A. Reserve funds. B. Shareholder’s capital. C. Customer’s deposits. D. Treasury bills.

3. Which of the following is the most liquid asset to a commercial bank A. Money at call and short notice.
B. Treasury Bills. C. Commercial Bills. D. Cash.

4. The drawer of a cheque is the A. person who is to be paid the sum of money as written on the cheque.
B. person who takes the cheque to the bank. C. bank on which the cheque is drawn. D. person who writes out the cheque.

5. The financial institution that specializes in risk spreading is called A. an investment bank. B. a development bank. C. an insurance company. D. the stock exchange.

6. The clearing house of all commercial banks in Nigeria is the A. General Post Office. B. Bank for Commerce at Industry. C. Nigerian Industrial Development Bank.
D. Central Bank.

7. In open market operations, what the Central Bank sells or buys are A. shares. B. debentures. C. securities.
D. equities.

8. Deposits held in a commercial bank are part of A. money supply. B. transfer payments. C. ordinary shares. D. treasury bills.

9. One profitable form of business undertaken by the commercial banks is A. the issuing of cheques. B. the
payment of standing order. C. lending money to borrowers. D. accepting cheques from customers.

10. Which of the following is not a function of the West African Development Bank A. Promotion of both private and public investments in member states.
B. Financing and executing projects in member states.
C. Promotion of social development of member states. D. harmonization of oil prices to the advantage of member states.

11. Time deposit has the same meaning as A. current account. B. demand deposit. C. deposit account.
D. bank deposit.

12. In order to develop the banking habit of rural dwellers, the traditional money lenders should be A. proscribed. B. legalized. C. subsidized. D. heavily taxed.

13. All rates of interest in a country are influenced by the A. bank rate. B. population growth rate. C. wage rate. D. mortgage rate.

14. The liquidity ratio of a commercial bank refers to the A. proportion of the bank’s total assets which should be held in cash and liquid form. B. total amount of cash for the bank’s treasury. C. total amount of cash for the bank in the central bank. D. proportion of the bank’s cash that should be on loan.

15. Open market operations are the processes by which
A. the Central Bank purchases and sells securities. B. commercial bankS purchase and sell securities.
C. business firms buy raw materials freely. D. households buy consumer goods openly.

16. Examples of joint stock banks are A. commercial banks. B. co-operative credit societies. C. central banks. D. development banks.

17. One major function of the central bank is to A. mint
money. B. hold demand deposits and honour cheques. C. act as a medium of exchange. D. control and regulate money supply.

18. The amount of money to be created by commercial banks is actually influenced by the A. legal reserve ratio. B. external reserve. C. external borrowing. D. availability of money and capital market.

19. A financial institution established for the purpose of providing specialized services like acceptance of bills of exchange and equipment leasing is known as A. merchant Bank. B. development Bank. C. central
Bank. D. insurance Company.

20. Which of the following is a liability of a commercial bank A. Deposits. B. Money at call. C. Loans to customers. D. Overdrafts.

21. Which of the following is a function of the Central Bank of Nigeria A. Serving as custodian of important valuables. B. Giving advice to customers. C. Serving as bankers’ bank. D. Creating credit.

22. Which of the following is specialized in lending money
for the purpose of developing real estate A. Merchant
banks. B. Mortgage banks. C. Discount houses. D. Commercial banks.

23. The marketing of government securities by the Central Bank is termed A. retail banking. B. open
market operations. C. selective credit control. D. credit

24. Which one of the following serves as a banker’s bank A. Commercial Bank. B. The Mortgage Bank.
C. The Central Bank. D. Development Bank.

25. Which of the following is a function of merchant banks A. Minting of coins. B. Preparation of government budget. C. Keeping watch on external reserves of the country. D. Acting as acceptance

26. Open Market Operation (OMO) means the A. provision of credit facilities by commercial banks.
B. provision of credit facilities by the mortgage banks. C. buying and selling of government securities
by the central bank. D. procedure for the establishment of commercial banks.

27. Commercial banks settle their inter-bank indebtedness through A. merchant banks. B. central bank. C. development banks. D. stock exchange.

28. Which of the following banks grant credit facilities to individuals wishing to build houses A. Central Bank of Nigeria. B. Nigerian Industrial Development Bank. C. Agricultural Credit Bank. D. Federal Mortgage Bank of Nigeria.

29. The primary objective of the Nigerian Industrial Development Bank (NIDB) is the provision of loans to A. farmers. B. manufacturers. C. estate agents. D. transporters.

30. The proportion of commercial bank’s total assets kept in the form of highly liquid assets is known as A. demand deposit. B. fixed deposit. C. cash ratio. D. moral suasion

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