The Business of Banking and Financial Institutions Overview

Comprehensive vocabulary terms and concepts covering the nature of banking, organizational structure, capital management, liquidity theories, and the global financial system.

Banking

A business in which money is borrowed from the public in the form of deposits and used to make loans and purchase securities.

Demand deposits

Chequable deposits held as working balances for daily business transactions that cannot be invested even temporarily.

Automated Clearing House (ACH)

A system established in major cities to handle electronic fund transfers, such as payroll deposits and pre-authorized insurance payments.

Reader-Sorter Machines

Specialized equipment used by banking institutions to sort the cheques they receive by payer bank for clearing purposes.

Unit Banking

A banking system where a single commercial bank firm operates a single banking office and is completely independent and locally managed.

Branch Banking

A system where a single banking firm offers a full line of banking services in two or more offices, often consisting of a head office and a network of branches.

De novo branching

A method of bank expansion where a new branch is developed from scratch rather than through merger or acquisition.

Accounting Definition of Capital

The difference between the book value of a bank's assets and its liabilities, expressed as $Capital = Assets - Liabilities$.

Primary Capital (Core Capital)

Regulatory capital consisting of common stock, surplus (share premium), perpetual preferred stock, undivided profits, and capital reserves.

Secondary Capital

Regulatory capital comprising limited-life preferred stock, subordinated notes, and debentures.

Loan-To-Deposit Ratio (LDR)

An indicator of a bank's liquidity position that shows the degree to which it has used available resources to accommodate credit demands.

Commercial Loan Theory

A liquidity theory stating that banks should only lend on short-term, self-liquidating commercial papers to maintain a continual flow of cash.

Shiftability Theory

The proposition that a bank's liquidity depends on its ability to shift or sell assets to other lenders at a predictable price.

Anticipated Income Theory

A theory holding that bank liquidity can be planned if scheduled loan payments are based on the future income of the borrower.

Liability Management Theory

An approach where banks meet liquidity requirements by bidding in the market for additional funds through instruments like CDs and inter-bank funds.

Financial Asset

A claim against the income or wealth of a business firm, household, or government unit, usually related to the lending of money.

Money Market

A collective network of markets dealing in short-term financial instruments with maturities of one year or less.

Capital Market

A market segment designed to finance long-term investments with financial instruments having original maturities of more than one year.

Primary Market

A market for trading new securities whose principal function is raising financial capital for new investments.

Secondary Market

A market dealing in previously issued securities that provides liquidity by allowing investors to convert financial instruments into cash.

Derivatives

Unique financial claims, such as futures or options, whose market value is tied to or influenced by the return on a debt or equity asset.

Central Bank of Nigeria (CBN)

The apex regulatory body established in 1959 responsible for monetary policy, bank examinations, and managing foreign exchange transactions.

Nigeria Deposit Insurance Corporation (NDIC)

A supervisory authority established in 1988 to insure bank deposits and protect the financial system from the effects of bank failures.

Merchant Banks

Wholesale banking institutions focusing on investment banking, corporate finance, and providing medium to long-term financing for businesses.

Provision for loan losses

An amount charged against earnings on an income statement to provide a reserve sufficient to absorb expected loan losses.