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Difficulty: Very hardNon-Bank Financial Institutions and Traditional Financial Systems

A heavy industrial manufacturing firm in Nigeria requires a 15-year long-term facility with a 3-year grace period on principal repayment to finance the construction of an automated assembly factory. Why are Development Banks specifically suited for providing this facility, whereas commercial banks typically decline such requests?

  1. Development banks utilize long-term equity and government subventions to fund capital projects, unlike commercial banks whose liabilities consist mainly of short-term demand and time deposits.Answer
  2. B
    Development banks possess legal statutory powers to issue currency and regulate the credit creation expansion multiplier across non-bank financial intermediaries.
  3. C
    Development banks operate primarily by discounting short-term treasury bills and commercial bills in the money market to maintain immediate operational liquidity.
  4. D
    Development banks rely on compulsory risk pooling and indemnity contributions collected through life assurance premium policies to absorb project default losses.

Answer

Development banks utilize long-term equity, institutional funds, and government subventions tailored to long-gestation capital projects, whereas commercial banks are constrained by short-term deposit liabilities.
Development banks are specialized non-bank financial institutions established to foster socio-economic development by granting long-term loans with extended grace periods. They derive funds from government grants, international financial agencies, and long-term bonds, allowing them to fund long-gestation industrial projects without experiencing the deposit-withdrawal mismatch that limits commercial banks.

Step-by-Step Solution

1
Analyze the nature of the requested financial facility
The project requires a 15-year tenure with a 3-year moratorium, indicating long-term capital investment with high gestation period.
Matching funding source to investment maturity is essential in commercial financing.
2
Evaluate the structural liabilities of commercial banks vs non-bank development finance institutions
Commercial bank liabilities consist primarily of short-term demand, savings, and fixed deposits that require immediate liquidity. Development banks are funded through long-term government grants, multilateral loans, and specialized capital reserves.
Lending short-term customer deposits for 15-year projects creates severe liquidity mismatch and insolvency risks for commercial banks.
3
Identify the non-bank institution designed for long-term economic development finance
Development banks (such as the Bank of Industry or NEXIM) are explicitly structured to absorb long gestation periods and promote industrial growth through low-interest long-term credit.
This functional distinction separates development banks from commercial money market operators.

Key Concept

Functions and Capital Structure of Development Banks
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Topics

Non-Bank Financial Institutions and Traditional Financial Systems