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Functions of Central Bank of Nigeria – An Introduction
Every in Nigeria knows the Central Bank of Nigeria (CBN) as the supreme bank in the country.
The Central Bank of Nigeria logo is reconizable from afar by most Nigerians.
However, not many know the true functions of the Central Bank of Nigeria.
This article aims to discuss the functions of this apex bank and more.
Sit tight.
Central Bank of Nigeria (CBN)
CBN is the pinnacle of monetary authority in Nigeria.
It was established under the CBN Act of 1958 following the failure of the banking ordinance of 1952.
It became operational on July 1, 1959.
Since then, the CBN Act has undergone Amendments a total of six times; 1991, 1993, 1997, 1998, 1999, and 2007.
The CBN Act of 2007 of the Federal Republic of Nigeria charges the Bank with general control and administration of the monetary and financial sector policies of the Federal Government.
This includes policies guiding every entity in the financial sector including commercial banks, investment banks, fintech companies, and several others.
CBN headquarters is in Abuja, FCT, Nigeria, but it has operating stations in other states in the country, some of which include Ogun, Asaba, Akure, Benin, Lagos, Jos, Osogbo, Owerri, and Port-Harcourt.
The Head of CBN is the Governor.
The Governor of the Central Bank of Nigeria exists to design and regulate policies that define the operations of the CBN and other banks in Nigeria.
Nigeria has had a total of 10 CBN Governors, with the current CBN Governor in 2021 being Mr. Godwin Emefiele.
Past and Present CBN Governors
There has been several CBN governors since the body’s establishment.
The past and present CBN governors till date include;
- Roy Pentelow Fenton (24 July 1958 – 24 July 1963)
- Aliyu Mai-Bornu (25 July 1963 – 22 June 1967)
- Clement Nyong Isong (15 August 1967 – 22 September 1975)
- Adamu Ciroma (24 September 1975 – 28 June 1977)
- Ola Vincent (28 June 1977 – 28 June 1982)
- Abdulkadir Ahmed (28 June 1982 – 30 September 1993)
- Paul Agbai Ogwuma (1 October 1993 – 29 May 1999)
- Joseph Oladele Sanusi (29 May 1999 – 29 May 2004)
- Charles Chukwuma Soludo (29 May 2004 – 29 May 2009)
- Sanusi Lamido Aminu Sanusi (3 June 2009 – 20 February 2014)
- Sarah Alade (20 February 2014 – 3 June 2014)
- Godwin Emefiele (3 June 2014 to Date/2021)
The above is a list of all past and present CBN governors.
History of Central Bank of Nigeria
The origin of the Central Bank of Nigeria and its functions started when the then colonial administration launched an investigation into the Nigerian banking system in the late 1880s.
This investigation gave birth to the G.D Paton Report which built the foundation of the first Banking Ordinance of 1952.
The Ordinance was established to create and maintain a stable banking system for commercial banks and to curtail the establishment and operations of illegal banks.
In 1958, a proposal for the establishment of the Central Bank of Nigeria was presented before the House of Representatives.
This proposal was fully implemented on the first day of July 1959, and the CBN was born.
The Central Bank Act, 1958 (as amended) and the Banking Decree 1969 (as amended) highlighted the legal foundation for the operation, supervision, and regulation of commercial banks by the CBN.
One cannot overlook the role of commercial banks in the economic development of Nigeria, hence the need for a body to oversee their functions.
The adoption of a Structural Adjustment Program in 1986 gave birth to economic liberalization and deregulation measures, which resulted in the rise of more banks and other financial institutions.
The revoking of the Banking Decree, 1969 and all its amendments by the Banks and Other Financial Institutions (BOFI) Decrees 24 and 25 of 1991 gave the CBN the powers to cover the new institutions.
This aimed to amplify the impact of monetary policy, regulation, and supervision of commercial banks and non-banking financial firms.
However, this limited autonomy was revoked in 1997, when the Federal Government of Nigeria introduced and enacted the CBN (Amendment Decree No. 3 and BOFI (Amended)] Decree No. 4.
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The 1997 Amendments
The Amendments of 1997 put the CBN back under the supervision of the Ministry of Finance.
This Decree put the Minister of Finance in charge of the CBN, in terms of supervision and regulation of commercial banks and other financial institutions.
However, the supervisory role was transferred to other specialized institutions.
The 1998 Amendments
The CBN (Amendment) Decree No. 37 of 1998 repealed the CBN (Amended) Decree No. 3 of 1997.
The Decree provided the CBN with a measure of operational autonomy to carry out its traditional functions and amplify its economic versatility.
The BOFI (Amendment) Decree, 1998
The regulatory powers of the CBN were further strengthened by the Banks and other Financial Institutions (Amendment) Decree No. 38 of 1998.
This Decree repealed BOFI (Amendments) Decree No. 4 of 1997.
According to these amendments, the CBN is at liberty to vary or revoke any condition subject to which a license was granted or may impose fresh or additional conditions to the granting of a license to conduct financial business transactions in the country.
The Decree restored the CBN’s powers on banks, specifically those relating to withdrawal of licenses of distressed banks and appointment of liquidators of these banks, including the NDIC.
The 1999 Amendment
The BOFI (Amendment) Decree No. 40 of 1999 makes the provisions relating to failing banks applicable to other financial institutions.
It also empowers the Governor of the CBN to remove any manager or officer of a failing bank or other financial institution.
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The CBN Act, 2007
The current legal framework within which the CBN operates is the CBN Act of 2007 which repealed the CBN Act of 1991 and all its amendments.
The Act provides that the CBN shall be a fully autonomous body in the discharge of its functions under the Act and the Banks and Other Financial Institutions Act to promote stability and continuity in economic management.
In line with this, the Act widened the objects of the CBN to include ensuring monetary and price stability as well as rendering economic advice to the Federal Government.
The Money and Capital Markets
The CBN introduced treasury bills in 1960, treasury certificate in 1968, and facilitated the establishment of the Lagos Stock Exchange in 1961 and the capital issue committee now known as the Securities & Exchange Committee in the early 1970s.
These were all done as part of the CBN’s responsibility to nurture the financial markets.
Related: Mobile Money Operators in Nigeria (A Complete List)
History of Currency Issuance by the CBN
The CBN took up the role of currency issuance in 1959 when it replaced the circulating West African Currency Board Pound (WACBP) with the Nigerian pound.
Today, the CBN engages in currency issuance and distribution within the economy.
To simplify transactions, the CBN introduced the decimal currency denominations, Naira and Kobo in 1973.
This helped the economy to move to a metric system.
1984 saw a currency exchange process, which involved color swapping of existing currencies to kick against the circulation of fake currency and currency hoarding in the system.
Another currency reform by the CBN in 1991 saw the exit of the 2 kobo and 5 kobo coins, the redesign of the 1 kobo, 10 kobo, and 25 kobo coins, the coining of the 50 kobo and 1 naira notes, and the introduction of 50 naira notes into the system.
Read: What Currency Does Nigeria Use; Everything to Know about the Nigerian Naira.
To enhance the state of the Nigerian payment system and to reduce the cost and volume of currency production, the 100 and 200 naira were introduced to the system in December 1999 and November 2000 respectively.
The 500 naira and 1000 naira notes were introduced in April 2001, and October 2005 respectively.
Functions of Central Bank of Nigeria
As the pinnacle of the monetary authority in Nigeria, CBN plays a major role in driving, regulating, and determining the state of the Nigerian economy.
Here, we list the structure and functions of the Central Bank of Nigeria:
Issuance of Legal Tender in Nigeria
This is one of the primary functions of CBN.
Naira notes and coins are printed/minted by the Nigerian Security Printing and Minting Plc. (NSPM) and other overseas printing/minting companies and issued by the Central Bank of Nigeria (CBN).
The CBN operates the Mint Inspectorate in the premises of NSPM Plc. to maintain the security and quality of printed/minted naira notes and coins.
Branches of the CBN also undertake the issuance of currency to deposit money banks.
They also retrieve old currency notes via the same process.
Old currency deposited by the banks are processed and sorted to fit and unfit notes in compliance with the clean note policy by the CBN.
The clean notes are re-issued while the old and dirty ones are demolished.
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Maintenance of External Reserves
The condition of the Nigerian foreign reserve determines the international economic value of the naira which is why it needs to be sustained and protected.
The CBN performs this function by managing the country’s debt and foreign exchange.
Here’s how:
How CBN Manages the Country’s Debt and Foreign Exchange
Debt Management
Before 2007, the CBN, on the advice of the Federal Ministry of Finance was responsible for the management of Nigeria’s domestic and foreign (external) debts.
For domestic debts, the CBN;
- Gives counsel to the Federal Government concerning the timing and size of new debt instruments
- Advises the Federal Government on the implications of budget deficit and debt size redeems matured stocks
- Collects issue proceedings for and on behalf of the Federal Government, and
- Other domestic debt-related functions.
For external debts, the CBN liaises with other institutions to ensure it is properly managed.
The Debt Management Office (DMO) is the institution currently saddled with Debt Management.
Foreign Exchange Management
In simple terms, Foreign Exchange Management involves limiting an institution’s (in this case a country) exposure to foreign currency fluctuations.
It is a myriad of protocols and resources that help lessen the damaging effects of short-term capital flows into the economy.
Since Nigeria engages in foreign trade, it is pertinent to have a body that handles these issues, and the CBN is that body.
The CBN carries out this duty by using foreign exchange resources to ensure that foreign exchange disbursements and utilization comply with top economic needs and within the annual foreign exchange budget.
This ensures the stability of the naira, as well as the availability of balance payments positions.
The CBN monitors events on the foreign exchange market and is aware of any fluctuations in the market.
As a result of this, the CBN publishes the current rate of the naira against other major currencies of the global economy.
Note that the CBN exchange rates may differ from those of other sources.
Ensure Monetary and Price Stability and Sound Nigerian Financial System.
The stability of a country’s currency is a reflection of the effectiveness of its Central Bank.
This stability in turn also determines the effectiveness of a Central Bank in executing its other functions.
This goes without saying, both monetary and price stability are vital to the Nigerian economy.
The CBN ensures this by developing sound monetary policies and successfully implementing them to work optimally.
Open Market Operations (OMO) in conjunction with discount window operations and reserve requirements are the major monetary management tools applied by the CBN in ensuring liquidity management.
OMO is a market-based mechanism for the control of monetary policy, introduced on June 30, 1993.
Liquidity management in Nigeria involves the routine control of liquidity levels in the economy in a bid to maintain monetary stability.
The CBN also determines target growth rates of money supply compatible with overall policy targets.
In addition to this, the CBN aims to align merchant and commercial banking systems with the overall goal.
The CBN supervises all financial activities of all banking and non-banking financial institutions in Nigeria to ensure a sound financial system in the country.
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Act as Banker and Provide Economic and Financial Advice to the Federal Government.
One can refer to the CBN as the bank of the Government.
It oversees the majority of all financial transactions of the Federal Government, whether it be domestic or foreign.
Federal, State, and Local Governments use the CBN’s financial services, but so also do companies, institutions, and funds set up by these levels of Government.
The CBN is also involved in financing certain governmental projects when budget allocations fall through for a short period.
It does this via Ways and Means Advances in compliance with the rules and limits stated by the law.
The Central Bank, in collaboration with the treasury, coordinates the financial needs of the government to determine appropriately the term, timing of issue, and volume of instruments to raise funds for government financing.
Banker and Lender of Last Resort to Banks
The CBN regulates current accounts for deposit money banks.
Its services to other banks in Nigeria include;
- Providing clearing house facilities through which instruments from the banks are processed and settled
- Undertaking trade finance functions on behalf of banks’ customers, and
- Providing temporary accommodation to banks as lender of last resort.
Development Financing
Development Financing in Nigeria is a CBN initiative that involves the drafting and implementation of various policies, innovation of appropriate products.
It also involves the creation of motivating environments for financial institutions to deliver excellent services in an efficient, effective, and sustainable pattern.
These initiatives target mainly the agricultural sector, rural development, and micro, small and medium enterprises.
This is one of the major developmental functions of the Central Bank of Nigeria.
Frequently Asked Questions (FAQs) on the Functions of Central Bank of Nigeria
What are the 3 functions of a Central Bank?
The Central Bank of any nation is the governing monetary body that is responsible for the state of the nation’s economy.
It performs various functions so that the economic state of the nation experiences stability for as long as possible.
Here are three of the major functions of a Central Bank:
Issuance and regulation of currency
Central Banks are responsible for the printing/minting and issuance of currency notes, as well as their regulation.
They oversee the entire currency printing/minting process and ensure that the currency notes/coins being produced are of standard quality.
By regulating printing/minting and destruction of old currency, Central Banks are indirectly responsible for the money flow and supply within the country.
Banker and Adviser to the Government
Central Banks serve as Government banks.
They make and receive payments on behalf of the government, and give short-term loans during temporary fallout of budget allocations.
They are also in charge of the balance and banking accounts of the government after carrying out disbursements and remittances.
Central Banks also give counsel to the government concerning all monetary and economic issues of the nation.
Lender of Last Resort to Banks
Central Banks serve as lenders of last resort to banks by giving out loans.
They can help other banks strengthen their cash reserves by simply rediscounting first-class bills during periods of crisis.
Central Banks can help banks turn their assets to cash at short notice, which in turn promotes quality banking and credit system economy, liquidity, and elasticity.
Other functions include:
- Provision of clearinghouse services
- Protection of Depositors’ Interests
- Controller of Credit
- Custodian of Foreign Balances
- Custodian of Cash Reserves
- Stabilizing the nation’s currency
- Prevent inflation in the economy
What is not a Function of the Central Bank?
Accepting Deposits of the General Public
The Central Bank has no business accepting deposits from the general public.
Accepting deposits of the general public is the function of commercial banks.
The commercial banks in turn do business with the Central Bank.
What are the Primary Functions of the Central Bank?
The Central Bank is the apex monetary authority in many countries of the world.
They perform many primary functions, some of which are:
- Formulation and implementation of monetary policies
- Regulation of the banking industry
- Lender of last resort
- Custodian of foreign balances
- Banker to the government
- Provision of financial services for commercial banks
- Preventing inflation of the economy
- Maintaining currency value stability
What is Most Likely the Main Function of the Central Bank?
The Central Bank performs many functions to ensure the economic stability of the country and all financial and non-financial banking organizations in the country.
However, its most critical function might just be the Formulation and Implementation of monetary policies.
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What is a Monetary Policy?
A monetary policy is a macroeconomic blueprint formulated and implemented by the monetary authority of a country (often the Central Bank).
In other terms, a monetary policy is how central banks control liquidity to build and sustain a healthy economy.
Every monetary policy aims to ensure proper management of interest rate payable on a short-term basis or money supply.
This in turn helps in reducing inflation and interest rates, ensure price stability, and preserve the value of the nation’s currency.
This means the Nigerian monetary policy is responsible for the interest rate of Nigeria today.
What is Traditional Function?
Traditional function refers to the fundamental and primary functions for which a Central Bank was established.
Here are some of the traditional functions of the Central Bank of Nigeria and other Central Banks across the world:
- Issue of currency notes
- Formulation and implementation of monetary policies
- Banker and Advisor to the Government
- Controller of Credit
- Maintenance of price and currency value stability
- Provision of clearinghouse facilities
What are CBN Treasury Bills and How Do They Work?
Actually, they are known as Nigerian Treasury Bills.
They are securities issued by the CBN at a discount for a period of 91 to 364 days.
Treasury bills are probably the most liquid money market securities and are backed by the credit policy of the Federal Government of Nigeria.
Purchasing a treasury bill is like lending the government some money.
At the end of the maturity period, the government will pay you the amount borrowed, plus the standard interest rate in Nigeria (about 0.5% per annum).
The Nigerian Treasury bill rate 2019 ranged from 9.85% to 14.36% (5 years).
What is the Current Treasury Bill Rate in Nigeria?
The current Treasury bill rate in Nigeria is 0.5% per annum, which is relatively low.
The Treasury bill rate of Nigeria 2018 was 10.940% per annum.
The rate of Treasury bills in Nigeria 2019, was about 1.6% per annum.
The CBN Treasury bills rate of Nigeria today is just a reflection of the economic decline the nation has experienced in the past few years.
When was CBN Established?
The CBN was established in 1958 under the CBN Act of 1958 after the failure of the banking ordinance of 1952 and became operational on the 1st day of July, 1959.
What is the Function of the Development Bank of Nigeria?
The Development Bank of Nigeria is a financial institution that exists to financially assist micro, small, and medium scale enterprises (MSMEs) through loans and technical assistance.
The Development Bank of Nigeria Head Office is at The Clan Place, Plot 1386A, Tigris Crescent, Maitama, Abuja, Nigeria.
Who is the Governor of the Central Bank of Nigeria?
Mr. Godwin Emefiele is the current Governor of the Central Bank of Nigeria.
He received the appointment in 2014 and is now undergoing a second 4-year tenure.
Where is the CBN Office Located in Abuja?
The CBN Abuja branch is located at Zaria Street, Garki II, Nigeria. P.M.B. 0187, Garki, Abuja.
You can find other Central Bank of Nigeria addresses on their website www.cbn.gov.ng.
Conclusion on the Functions of Central Bank of Nigeria
The Central Bank of Nigeria is at the epicenter of the economic state of Nigeria, which means the nation’s best chance at a stable and standard economy and currency rests in its hands.
As the future unfolds, we will discover if the monetary policies formulated and implemented by the CBN are efficient and effective.
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