How Does The Central Bank Of Nigeria Work? – Piggyvest Blog (2024)

Remember the cash scarcity of early 2023? It was definitely one of the most stressful periods of the year. It had many Nigerians talking about the CBN and its governor — for months! But what exactly is the CBN?

The Central Bank of Nigeria (CBN) is the highest monetary authority in the country and is responsible for formulating and implementing monetary policies that promote price stability, ensure financial system stability and support the economic growth of Nigeria.

In this article, we’ll look at the various functions and roles of the CBN in Nigeria’s financial landscape. But first, let’s explore some history!

History of the CBN

The Central Bank of Nigeria was founded on July 1, 1959, under the CBN Act of 1958. At the time, the CBN’s primary purpose was to act as the sole issuer of legal tender; it also maintained the external reserves of the country.

During its early years, the CBN faced numerous challenges — including the need to stabilise the Nigerian economy after we gained independence from colonial rule in 1960. The bank played a crucial role in developing policies to manage inflation, stabilise the national currency and promote economic growth.

But as the Nigerian economy grew and diversified post-independence, the CBN’s responsibilities expanded. It began to focus on monetary policy formulation and implementation as well as financial system regulation and development (we’ll discuss these later). Ultimately, the bank became a key player in ensuring the stability and soundness of the Nigerian financial system — a role it’s still popular for today.

Over the years, the CBN has adapted to changing economic conditions and global financial trends by implementing various reforms. These reforms have included modernising payment systems, strengthening banking supervision and promoting financial inclusion — primarily through institutions like the Nigeria Inter-Bank Settlement System Plc (NIBSS) and instruments like the Bank Verification Number (or BVN).

Structure of the CBN

The CBN operates under a well-defined organisational structure, consisting of various departments and units. This structure ensures efficient coordination and implementation of sound policies across the institution.

The key departments in the CBN are:

• Monetary Policy Department
• Banking Supervision Department
• Financial Markets Department

In addition to these departments, the CBN has several other units and divisions that focus on specific areas such as research, legal services, corporate communications and internal audit. Each unit plays a vital role in supporting the overall functioning of the CBN and achieving its objectives.

Monetary policy department

The Monetary Policy Department is responsible for formulating and implementing monetary policies that aim to achieve price stability and promote economic growth.

It conducts research, analyses economic data and makes recommendations to the Monetary Policy Committees on interest rates, exchange rates and other monetary policy instruments.

Banking supervision department

Another important department is the Banking Supervision Department. This department is responsible for regulating and supervising banks and other financial institutions in Nigeria.

It ensures that banks comply with prudential regulations, manages risks in the banking system and promotes financial stability. This department also conducts regular inspections, assesses the financial health of banks and takes appropriate actions to address any weaknesses or risks identified.

Financial markets department

The CBN’s Financial Markets Department oversees the development and regulation of financial markets in Nigeria. This department plays a crucial role in ensuring the efficiency and integrity of the financial markets — including the money market, capital market and foreign exchange market.

It formulates policies, establishes market infrastructure and monitors market activities to promote transparency, fairness and stability.

What are the roles of the CBN?

As we’ve discussed, the CBN is a key institution that plays a crucial role in shaping the Nigerian financial landscape.

The roles of the CBN include:

• Monetary policy formulation
• Currency issue and management
• Financial market regulation

Let’s delve deeper into each of these roles to understand their significance.

Monetary policy formulation

One of the primary roles of the CBN is to design and implement monetary policies aimed at maintaining price stability in the economy. This involves careful analysis and management of economic indicators, such as inflation rates, GDP growth and exchange rates.

Remember when the CBN decided to float the Naira? That was a monetary policy aimed at exchange rates. The move attempted to unify Naira exchange rates and allow the value of Nigeria’s currency to be determined by market forces.

Currency issue and management

As the sole issuer of legal tender, the CBN is responsible for the production, distribution and overall management of Nigeria’s currency — the naira. This is a crucial part of ensuring a smoothly functioning of the economy and maintaining public confidence in the monetary system.

The CBN ensures an adequate supply of currency to meet the demands of the public — managing the production and distribution of banknotes and coins, as well as monitoring the circulation of currency to ensure its availability across the country.

The bank also works to maintain the integrity and security of the currency by implementing measures to prevent currency counterfeiting and fraud.

Financial market regulation

The CBN plays a vital role in regulating and supervising Nigeria’s financial system. It formulates and enforces regulations to maintain the stability, soundness and integrity of banks and other financial institutions.

Through its regulatory framework, the CBN ensures that banks and financial institutions operate in a safe and efficient manner. It sets standards — like capital adequacy requirements (a measure of a bank’s ability to protect depositors’ money and cushion potential losses) — to ensure that Nigeria’s banks have sufficient buffers to absorb potential losses.

It also conducts regular inspections and audits to assess the financial health and compliance of these institutions.

Additionally, the CBN promotes the development of efficient and transparent financial markets. It oversees the operations of various market participants — including stock exchanges, bond markets and money market institutions. By ensuring fair and orderly market conduct, the CBN fosters investor confidence and facilitates the mobilisation of funds for productive investments.

What are the functions of the CBN?

Aside from its specific roles, the CBN performs broader functions aimed at safeguarding the stability of the monetary and financial system.

Here are some of the key functions of the CBN:

• Maintaining monetary stability. The CBN ensures the stability of the monetary system through its control and regulation of money supply. By managing inflation and maintaining price stability, the bank creates an environment conducive to sustainable economic growth and development.
• Ensuring financial system’s stability. It safeguards the stability and soundness of the financial system by supervising banks and other financial institutions. The CBN enforces prudential regulations, conducts regular inspections and takes corrective actions when necessary to prevent financial crises and protect depositors’ funds.
• Acting as a banker and financial adviser to the government. The CBN acts as the banker and financial adviser to the Nigerian government. It manages the government’s accounts, processes payments, and provides financial advice on issues like debt management, economic planning and budget implementation.

These key functions also work to support the Nigerian government’s fiscal policies.

How does the CBN influence the Nigerian economy?

The Central Bank’s policies and actions have a significant influence on Nigeria’s economic well-being. However, the two key areas the CBN significantly impacts are inflation and financial inclusion.

Most of the CBN’s monetary policies (like interest rate adjustments) aim to manage inflation effectively. By keeping inflation rates within acceptable levels, the CBN fosters price stability — providing a conducive environment for sustainable economic growth. Stable prices also encourage investment, consumption and overall economic activity.

The CBN also strongly emphasises financial inclusion by promoting policies that ensure access to affordable financial services for all Nigerians — especially those in rural and underserved areas. By expanding financial access and literacy, the CBN supports inclusive economic development, reduces poverty and promotes entrepreneurship.

Final thoughts

Nigeria’s central bank plays a crucial role in the country’s economic development and stability. It has evolved over the years to become an influential institution that oversees the country’s monetary and financial system.

Understanding the history and structure of the CBN provides insights into its functions and effectiveness in fulfilling its mandate.