NABTEB Economics 2022 Theory — Question 7

Model answer

(a)(i) A mortgage bank is a financial institution established for the acceptance of fixed deposits from members of the public, with the aim of encouraging them to build their own houses by offering them long-term loans; mortgage banks are also known as building societies. A merchant bank, in contrast, is a financial institution that provides medium- and long-term loans, accepts large deposits, bills and deals in stocks. Merchant banks deal with companies, government and other financial institutions, and offer wholesale banking services, with the primary objective of making profit. (a)(ii) A commercial bank is a financial institution which carries out retail banking services, set up for keeping and lending money to people, with the primary objective of making profit. Commercial banks deal with companies, government and individuals, and can be owned by any of them (examples in Nigeria include GTB, UBA, First Bank Plc, etc). A development bank, on the other hand, is a financial institution set up primarily to offer long-term loans meant for the implementation of development projects that will facilitate the economic growth and development of a country, such as roads, schools, electricity, airports, seaports etc (examples of development banks in Nigeria include the Nigerian Bank for Commerce and Industry (N.B.C.I) and the Nigerian Industrial Development Bank (N.I.D.B)). (b) Functions of Commercial Banks: (i) Credit Creation: commercial banks are the only financial institutions that have this unique function, which they perform through their lending and borrowing activities, i.e. the use of loans and overdrafts. (ii) Lending of money: commercial banks lend money to industrialists, businessmen and other members of the public, in the form of loans and overdrafts. (iii) Transfer of funds: commercial banks assist their customers in transferring funds from one place to another. This is done in several ways, such as drafts, standing orders, cheques and electronic banking, etc. (iv) Acceptance of deposits: commercial banks accept deposits from members of the public for safe custody, by the operation of three methods, which include savings, current and fixed deposit accounts.