COMMERCIAL ACTIVITIES IN NIGERIA

Commercial activities involves the buying, selling and distribution of goods and services in Nigeria. It involves trading, transportation and communication within and outside the country.

 

Types of Commercial Activities

The types of Commercial activities in Nigeria include the followings:

1) Trade:

• Local trade.
• National trade.
• International trade.
• Stock exchange.
• Money market.
• Foreign exchange market (FOREX).

 

2) Transportation.

3) Communication.

 

Trade in Nigeria

Trade in Nigeria involves the buying and selling or exchange of goods and services between one region of Nigeria and another or between Nigeria and other countries.

Types of Trade: There are two types of trade in Nigeria. These are:

1) Local Trade: Local trade involves the buying and selling of goods in the local markets in villages and towns. Local trade deals mostly with the buying and selling of foodstuff, clothing and other materials in the local market where people provide and get the basic necessities of life. Most items traded in local market are mainly to meet family need and not for commercial purposes.

 

2) Internal or Domestic Trade: This is the type of trade which involves the buying and selling or exchange of goods and services within the country or between one region in Nigeria and another. The pattern of internal trade in the country is usually between southern and northern Nigeria.

 

3) External or International Trade: This is the type of trade between Nigeria and other countries like Britain, U.S.A ., Japan and other African countries.

 

FACTORS WHICH FAVOUR INTERNAL TRADE IN NIGERIA

The following factors account for the favourable internal trade in Nigeria.

1. Difference in products: As a result of the differences in products produced by different regions, internal trade is therefore boosted e.g. kolanut in the south and groundnut in the north.
2. Good transportation network: The different regions are linked together by good roads and railways.
3. Differences in climate: Differences in climate enable different regions to produce different products thereby, creating room for internal trade.
4. Fertile soils: Different regions have different level of soil fertility which ensures the production of different crops.
5. Wide market/demand: Wide market exists within the country which can consume or buy these products.
6. Common currency: The different regions in Nigeria have the same currency – Naira and Kobo which makes sales and purchases easy.
7. Government Encouragement: Government may decide to encourage internal trade by the provision of infrastructure e.g. road and electricity.
8. Presence of minerals: Presence of different minerals in different places or locations do encourage internal trade.
9. Differences in local technology: As a result of differences in local technology in different parts of the country, internal trade is bound to take place.
10. Availability of credit facilities: The availability of credit facilities e.g. bank loans do help to increase internal trade.

 

LIMITATIONS OR PROBLEMS OF INTERNAL TRADE

The following limitations or problems retard the level of internal trade in Nigeria.

1. Unfavourable climate which can lead to low yield and harvest.
2. High rate of rural-urban migrations.
3. High level of pests and disease attack on crops, leading to low harvest.
4. Poor transportation network like bad roads.
5. Perishability of some products due to poor storage and long distances e.g. vegetables, meat and tomatoes.
6. Smuggling of the products to neighbouring countries thereby, causing artificial scarcity.
7. Similarity of products do limit internal trade in Nigeria.
8. Inter communal strife or political instability do slow down internal trade
9. Low technology generally does not improve internal trade.

 

COMMODITIES INVOLVED IN INTERNAL TRADE

Major commodities involved in internal trade include yam, garri, groundnuts, beans, tomatoes, kolanuts, palm oil, sugar cane, plastics, textile and cement.

 

IMPORTANCE OF INTERNAL TRADE

1. Fosters regional cooperation: Internal trade fosters regional cooperation.
2. Availability of new products: Some new products that is not originally available in an area are made available through internal trade.
3. Provision of Job opportunity: It also provides employment to many people involved in trade.
4. Growth of ancilliary services: Internal trade ensures the growth of ancillary services like agro-allied industries and banking.
5. Provision of raw material: Internal trade provides raw materials for industries e.g. tomato juice/paste industries.
6. Diffusion of Ideas: Internal trade also promotes the diffusion of ideas when people from different regions come together.
7. Source of Income: Internal trade provides income to individuals and the nation.

 

STOCK EXCHANGE

Stock exchange market is a highly organised market where investors can buy and sell existing securities like shares, stocks, debentures, gilt edge etc. This is a market where those who are interested in purchase of securities are brought into contact with the sellers. The stock exchange is an essential part of the capital market. It serves as a source of raising capital as well as forum for financial investment. The market deals in old existing shares only, i.e ., new ones are not traded in it.

The stock exchange market ensures that every transaction must follow prescribed set of rules and regulations which are complex in nature. Quoted companies are organisations whose shares are quoted in the stock exchange market. The Nigerian stock exchange market is in Lagos with branches in Abuja and PortHarcourt. It was established in 1960 through the Act of Parliament. Some of the companies quoted in the market are: Nestle Food Nigeria Plc ., Nigeria Breweries Plc ., Guinness Plc ., Union Bank Plc. and First Bank Plc.

 

Importance of Stock Exchange

1. An Avenue for Raising Capital: Capital can be raised by companies and government through the stock exchange.
2. Provides Employment Opportunities: The stock exchange provides employment for brokers, jobbers, clerks and others.
3. Provides Information to Investors: Investors, especially foreign investors, can obtain necessary information about the investment situation of a country.
4. Facilitates Transfer of Investment: An investor can withdraw his investment from a company to invest in another company.
5. It is a Market for Investment: The stock exchange provides an avenue for people to invest in any sector of the economy.
6. It provides Yardstick for Measuring Performance of Companies: The price quoted can be used to measure performance of a business as only sound and efficient companies are quoted on the stock market.
7. It leads to Increase in the Standard of Living: Investment opportunities will lead to more income, which will affect consumption, thereby increasing the standard of living of the people of a country.

 

Functions of the Stock Exchange

1. Fund Mobilisation: Through the stock exchange market which is a part of the capital market, fund or capital can be raised or mobilised by companies and investors.
2. Sales of Securities: Investors can buy and sell old securities like stock, shares etc.
3. Financial Market for Investment: It is a market where people can invest their money in shares of companies.
4. It Facilitates the Transfer of Shares: Stock exchange facilitates the transfer of ownership of shares between investors. Investors who want to withdraw from one company to another can do so without any hindrance.
5. Provides Avenue for Government to Raise Fund: Government can raise fund by selling bond or gilt-edge in the stock market.
6. Valuation of Price of Securities: The market, through the forces of demand and supply can fix price for securities.
7. Provision of Professional Advice: The stock market provides professional advice to investors on sales and management of securities.
8. Provision of Rules and Regulations: The market is charged with the responsibility of providing rules and regulations that will ensure smooth operation on the floor of the stock exchange.
9. Encourages Companies to be More Efficient: The market ensures that companies quoted in the exchange have good reputation; this will gear up companies to perform well so that they can be listed.

 

Procedures of Transaction at the Stock Exchange

Buying and selling at the stock exchange is facilitated by the brokers and jobbers. Not everybody is permitted to trade directly at the exchange except the members. The actual dealer in securities are the jobbers who tend to specialise in particular types of stock while the brokers act as agents for potential buyers. A broker working on behalf of a client will approach the jobber with the intention of knowing the price. The jobber will then quote for him two prices: higher price as the selling price and lower price as the buying price. The difference is the jobbers’ turn. When the broker signifies his intention to buy, the necessary documents will be prepared.

Share of well known companies are known as blue chips while gilt-edge refers to government stock. Prices of shares are quoted cum div or ex div. Cum div denotes price at which the holder of such shares has the right to receive the next dividend payable while ex div denotes price at which the holder of such shares has no right to receive the next dividend. Two documents will be prepared to facilitate transactions. The documents are contract note and transfer form (note).

a) Contract Note: This is a document sent by a broker to his client to confirm a purchase or sale made on his behalf. Contract note will give details on:

• Purchase or sale of shares.
• Broker’s commission.
• Date of payment.
• Stamp duty that has been incurred.

 

b) Transfer Form: After settlement of payments, a document called, transfer form will be prepared. The transfer form is a document used to transfer ownership of shares. The seller of the shares must sign the form which authorises the removal of his name from the share registration records of the company. The broker, acting for the buyer will complete the form and send to the company’s registrar. This will be sent with the share certificate of the seller and on that strength, a new certificate will be issued to the new shareholder.

 

MONEY MARKET

Money market can be defined as a market for short-term loan. The market consists of institutions or individuals who either have money to lend or wish to borrow on a shortterm basis.

 

Instruments used in the money market

• Treasury bills: Treasury bill is normally issued by the central bank of a country, which assists the government to borrow money from the money market on shortterm basis.
• Bill of exchange: Bill of exchange refers to a promisory note which shows the acknowledgement of indebtedness by a debtor to his creditor and his intention to pay the debt on demand or at an agreed time in future, normally ninety (90) days.
• Call money funds: The call money fund or market is a special arrangement in which the participating institutions invest surplus money for their immediate requirement on an overnight basis with the interest and withdrawal on demand. The call money has an advantage of early return and at the same time are withdrawable on demand. It provides solution to the immediate stock of liquidity pressures in the money market.

 

Institutions involved in the money market

Institutions involved in the money market include:

• Central bank.
• Commercial banks.
• Acceptance houses.
• Finance houses.
• Discount houses.
• Insurance companies.

 

Advantages of money market

1. Provision of finance: Money market enables entrepreneurs and investors to raise enough finance through borrowing to run their businesses.
2. Creation of extra income: The money invested in money market is capable of yielding extra income in form of interest.
3. Promotion of economic development: Economic growth and development is enhanced through borrowing from money market.
4. Ability to recall invested funds: Funds invested in the money market are very easy to recall.
5. It enhances savings: Money market provides opportunity for those having surplus fund to invest thereby enhancing savings.

 

CAPITAL MARKET

Capital market is a market for medium-term and long-term loans. The capital market serves the needs of industry and the commercial sector. It comprises all the institutions which are concerned with either the supply of or demand for long-term capital.

 

Instruments used in capital market

Instruments used in capital market are mainly stocks and shares. Stocks and shares are securities purchased by individuals, which is an evidence of contributing part of the total capital used in running an existing industry. At the end of a normal business year, stock and share holders receive dividend as a reward for contributing the money in running the business.

 

Institutions involved in capital market

Institutions involved in capital market include:

• Issuing house.
• Insurance companies.
• Development banks.
• Building societies/Mortgage banks.
• National Provident Fund (NPF).
• Stock Exchange.
• Agricultural bank.

 

Advantages of capital market

1. Provision of long-term loans: Capital market provides long-term loans to the private and public sectors for investments.
2. Mobilisation of savings: Savings are mobilised in the capital market.
3. Growth of merchant banks: The existence of capital market helps the growth and development of merchant banks.
4. General running of the economy: The existence of capital market encourages the general public to participate in the running of the economy of the country.

 

New Issue Market: The new issue market is part of the capital market which deals with new public issues of securities, e.g. stocks and shares.

 

Methods of Issuing Securities

1. Private Placing: Private placing is the taking up by an issuing house, finance house or group of institutions of a new public share issue in its entirety.
2. By Introduction: The company concerned can apply to the stock exchange for sales of their shares. In this case, there will be an offer to the public of a new issue of shares through the stock exchange.
3. By Prospectus: The Company Act requires a prospectus to be issued. The prospectus will show the relevant information about the company’s affairs, its development in the past and future prospects.
4. Right Issue: This refers to the issue by a company of new shares to its existing shareholders in the same fixed proportion as that in which the shareholders own the already existing shares. In other words, it is a right issue to existing shareholders in a company where the shares are already dealt in on the stock exchange. It is a cheap and convenient means of raising capital.
5. By Tender: This is a process of issuing shares in which applicants have to put in a tender, stating the price at which they would be willing to purchase them. They are issued to the highest bidder.

 

FOREX EXCHANGE MARKET (FOREX)

The foreign exchange market is a global decentralized market for the trading of currencies. The main participants in this market are the larger international banks. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market works through financial institutions, and it operates on several levels. Behind-the-scenes banks turn to a smaller number of financial firms known as dealers who are actively involved in large quantities of foreign exchange trading.

Most foreign exchange dealers are banks, so behind- the-scenes market is sometimes called the ‘interbankmarket’, although a few insurance companies and other kinds of financial firms are involved. Trades between foreign exchange dealers can be very large, involving hundreds of millions of dollars and pounds. Because of the sovereignty issue when involving two currencies, Forex has little (if any) supervisory entity regulating its actions.

The foreign exchange market assists international trade and investment by enabling currency conversion. For example, it permits a business in the United States to import goods from the European Union member states, especially Euro zone members, and pay euros, even though its income is in United States dollars. It also supports direct speculation in the value of currencies, and the carry trade, speculation based on the interest rate differential between two currencies.

In a typical foreign exchange transaction, a party purchases some quantity of one currency by paying some quantity of another currency.

The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Breton Woods System of monetary management established the rules for commercial and financial relations among the world’s major industrial states after World War II), when countries gradually switched to floating exchange rate regime, which remained fixed as per the Breton Woods System.

The foreign exchange market is unique because of the following characteristics:

1. The huge trading volume representing the largest asset class in the world leading to high liquidity.
2. Its geographical dispersion.
3. Its continuous operation; that is twenty-four hours a day except weekends.
4. The variety of factors that affect exchange rates.
5. The low margin of relative profit and loss margins and with respect to account size.

 

Structure of Nigeria’s foreign exchange market 

The evolution of the foreign exchange market in Nigeria up to its present state was influenced by a number of factors such as the changing pattern of international trade, institutional changes in the economy and structural shifts in production. Before the establishment of the Central Bank of Nigeria (CBN) in 1958 and the enactment of the exchange control Act of 1962, foreign exchange was earned by the private sector and held in balances abroad by commercial banks which acted as agents for local exporters.

During this period, agricultural exports contributed the bulk of foreign exchange receipts. The fact that the Nigerian pound was tied to the British pound sterling at par, with easy convertibility, delayed the development of an active foreign exchange market. However, with establishment of the CBN and the subsequent centralization of foreign exchange authority in the bank, the need to develop a local foreign exchange market became paramount.

The increased export of crude oil in Nigeria in early 1970s, following the sharp rise in its prices, enhanced official foreign exchange receipts. The foreign exchange market experienced a boom during this period and the management of foreign exchange resources became necessary to ensure that shortage did not arise.

However, it was not until 1982 that comprehensive exchange controls were applied as a result of the foreign exchange crisis that set in that year.

The Nigerian foreign exchange market has witnessed great exchanges. The secondtier foreign exchange market (SFEM) was introduced in September, 1986, the unified official market in 1987, the autonomous foreign exchange market (AFEM) in 1999.

Bureaux De Change was licensed in 1989 to accord access to small users of foreign exchange and enlarges the officially recognized foreign exchange market. Exchange rates in the Bureaux de Change are market determined. A parallel market for foreign exchange has been in existence since the exchange control era. It has been established that scarcity in the official sector and bureaucratic procedures necessitated the growth and development of the parallel market.

 

MAJOR COMMERCIAL AREAS IN NIGERIA

Major commercial areas involved in commercial activities especially in trading, transportation and communication in Nigeria are found in major towns and in all the state capitals. These cities include Lagos, Benin City, Ibadan, Akure, Oshogbo, Onitsha, Awka, Aba, Port-Harcourt, Kano, Lokoja, Abeokuta, Katsina and Ilorin.

 

IMPORTANCE OF COMMERCIAL ACTIVITIES IN NIGERIA

1. Fosters regional cooperation: Internal trade fosters regional cooperation.
2. Availability of new products: Some new products that is not originally available in an area are made available through internal trade.
3. Provision of Job opportunity: It also provides employment to many people involved in trade.
4. Growth of ancilliary services: Internal trade ensures the growth of ancillary services like agro-allied industries and banking.
5. Provision of raw material: Internal trade provides raw materials for industries e.g. tomato juice/paste industries.
6. Diffusion of Ideas: Internal trade also promotes the diffusion of ideas when people from different regions come together.
7. Source of Income: Internal trade provides income to individuals and the nation.