THE ESSENCE OF BANKING
The Bank is one of the Financial Market Operators. The bank/financial market is an institutional framework/arrangement, by which savers lends their surplus funds to borrowers who have a deficit and wish to borrow, most likely to finance a commercial profit oriented venture/project.
Like the market for goods, the financial market has the demand side and the supply side. On the demand side we have the borrowers, buyers of funds, and on the supply side we have the savers/depositors which may pass for the sellers of funds.
The financial institutions/banks intermediate between the savers and the borrowers to facilitate the transactions. Because the process of intermediation requires seamless structure, and incurs cost for its continuous operation, and also because it is business oriented, the banks levy charges by way of interest and other charges which constitute cost of funds.
Because of the crucial role of financial institution – i.e making it possible for borrowers to borrow, and lenders/savers to lend, financial institution serves as important link between savings and investment. They are therefore crucial for the growth and development of the economy.
Financial market are broadly classified into two – Money Market and Capital Market. It is apt to highlight briefly the distinctions. The capital market is characterized by long term securities while the money market has short time securities. Inspite of this distinction, our emphasis from the onset had been on the money market, which takes expression through the commercial banks and discount houses.
The implication for short time securities is that the bank cannot lend for too long because the bulk of funds at the disposal of the banks are depositors fund which can be withdrawn at will by depositors.
It is also apt to remark that money market operators (commercial banks) use several instruments in their transactions such as treasury bills, treasury certificates, certificates of deposit, commercial papers and Bank Acceptance etc. These are devices for lending and borrowing, and they are distinguished by the terms they carry.
More importantly, the money market, though driven by the force of demand and supply has significant level of regulation/control, enforcement and compliance – that is where we come in.
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