Banking – Central And Commercial Banks

Banking helps people to borrow and lend and carry out a range of other financial activities. By doing so, banking enables more efficient use of resources and encourages the growth of output of economies.

Central Bank:

Central bank is a government owned bank which provides banking services to the government and commercial banks. They are also responsible for implementing government policies and supervising the conducts of commercial banks.

Functions of Central Bank:

Acts As a Banker To The Government (Government’s Bank):

It receives the government’s income from taxation and other sources.

Central bank makes payment on behalf of the government i.e. spending on public education

It provides loans to the government (National Debt)

Acts As A Bankers Bank:

Each commercial bank in an economy has to keep its account in the central bank.

It helps to settle debts between each other (clearing cheques).

It also regulates each commercial bank in the economy.

Acts as a lender of last resort:

It will lend to commercial banks which are temporarily short of cash.

 Holds The Country Reserves For Foreign Currency:

The central bank keeps foreign and gold to influence the exchange rate.

Issues Bank Notes:

Central bank is responsible for printing notes and destroying notes which are no longer suitable for circulation (minting of coins).

Manages The Monetary Policy:

The central bank controls the monetary policy in order to achieve economic growth, full employment and control inflation.

Commercial Bank:

These are private sector banks mostly public limited companies, which aim to make a profit by providing a range of banking services.

Types Of Bank Deposits In a Commercial Bank:

Current Account:

Cash can be withdrawn in parts or in full, without giving the bank any notice, no interest is paid on money – high liquidity.

Liquidity: ability of any asset to be converted into cash without a loss in value.

 Saving Account:

Money kept in saving account, can’t be taken out. Only small amount of money can be withdrawn on demand.

Interest is paid on any money held in the saving account.

Deposit / Time Account:

It is similar to saving account but earn the maximum interest.

Loan:

It is the sum of money given by the bank to their customers and interest is charged on the amount borrowed. It is regarded as an asset to the bank as individuals owe the money.

 Overdraft:

It is a facility provided to current account holders where they can over spend up to a certain limit. High interest is charged on the amount borrowed.