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Commercial Banks in Nigeria and Their Functions

June 25, 2020 by Finance

The Nigerian banking system is one of the essential parts of the financial sector; one that is probably the most significant part. A vital component of the banking system is the commercial bank. We’ll be taking a look at what commercial banks are; and why they’re so important. 

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What is a Commercial Bank? 

A commercial bank is a financial institution that provides a wide range of banking services, including accepting deposits and providing loans to individuals and businesses. 

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Functions of Commercial Banks in Nigeria

Commercial banks carry out several activities. Their most prominent roles are; 

  • Accepting deposits: Commercial banks are mostly recognized for one essential function; accepting deposits from the general public. It is the most traditional function of all. There are three types of deposits — savings, current, and fixed. Existing account holders can withdraw their cash whenever they choose at their convenience. Savings accounts operate on a longer termed basis and attract interests because the deposits are investments. Fixed deposit accounts, on the other hand, work on a set period, and draw a fixed interest rate. See how to calculate the fixed deposit interest rate in Nigeria.
  • Provision of loans: besides accepting deposits, another function of commercial banks is the provision of loans. The provision of funds to those who require them for transactions is a vital role commercial banks play. Nowadays, customers can now have access to instant loans from commercial banks.
  • Transfer of funds: the transfer of funds from a customer’s account to another account is another vital function of banks. Fund transfer is a valid means of paying for transactions, as well as other financial activities. Transfer of funds can be carried out through several ways such as drafts, standing orders, cheques, USSD platforms, and electronic banking. 
  • Credit Creation: commercial banks are perhaps the only financial institutions with this unique function. Commercial banks create credit through accepting deposits and providing loans — pushing money into the economy. 
  • Agency functions: commercial banks are already agents of the banking system, but they can also be personal agents to their customers. An agent is an individual or institution that carries out activities, in this case, financial operations, on behalf of the principal (who is the customer) for a few known as a commission. Commercial banks playing this agency banking role means banks help in collecting cheques, bills and drafts; the receipt of interests and dividends from a customer’s investments; and paying interests and instalments of loans or insurance premiums. They can also help to buy and sell securities or transfer funds from one account to the other.
Read this -  Top Investment Firms in Nigeria
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Commercial Bank Lending Rates in Nigeria

If you’re looking to borrow a loan from banks in Nigeria, then you should consider first what you could be paying back in interest rates. Nigeria’s Bank lending rates 14.920%  per year, as at April 2020. You can find out specific bank lending rates from your commercial bank. 

On the other hand, the current interest rate on savings accounts deposits in 2020 is at 8.61% per annum and 6.84% for six months. However, a full interest rate is not applicable to customers who have made more than four withdrawals in a month.

Commercial banks are a crucial player in the financial sector. From the provision of loans (either personal or business) to the provision of investment options to accepting deposits— their importance cannot be overemphasized. 

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