Bank - Its Origin, Meaning, Objectives & Function
Bank - Its Origin, Meaning, Objectives & Function
Bank - Its Origin, Meaning, Objectives & Function
Functions and Roles of Central Bank and Commercial Bank and their relationship.
Definition of Bank:
Different Authors and Economists have given some structural and functional definitions on Bank
from different angles: “Bank is a financial intermediary institution which deals in loans and
advances”--- Cairn Cross.
“Bank is an institution which collects idle money temporarily from the public and lends to other
people as per need.”----R.P. Kent.
“Bank provides service to its clients and in turn receives perquisites in different forms.” P.A.
Samuelson.
“Bank is such an institution which creates money by money only.” W. Hock.
“Bank is such a financial institution which collects money in current, savings or fixed deposit
account; collects cheques as deposits and pays money from the depositors‟ account through
cheques.” Sir John Pagette.
Objectives of Bank:
1. To establish as an institution for maximizing profits and to conduct overall economic activities.
2. To collect savings or idle money from the public at a lower rate of interests and lend these public
money at a higher rate of interests.
3. To create propensity of savings amongst the people.
4. To motivate people for investing money with a view to bringing solvency in them.
5. To create money against money as an alternative for enhancing supply of money.
6. To build up capital through savings.
7. To expedite investments.
8. To extend services to the customers.
9. To maintain economic stability by means of controlling money market.
10. To extend co-operation and advices to the Govt. on economic issues.
11. To assist the Govt. for trade& business and socio-economic development.
12. To issue and control notes and currency as a central bank.
13. To maintain and control exchange rates as a central bank.
Commercial Bank and Central Bank: Their functions and mutual relationships
In common parlance, Bank means Commercial Bank and its functions. Central Bank is a separate
entity and plays distinctive roles. The function of a Bank is to collect deposits from the public and
lend those deposits for the development of Agriculture, Industry, Trade and Commerce. Bank pays
interest at lower rates to the depositors and receives interests on loans and advances from them at
higher rates. In modern banking, Bank carries out many other activities, e.g. creation of debts and
money, transmission of money from one country to another country, increase of foreign trade,
preservation of valuables in safe custody etc. Thus, Bank earns profits through executing various
types of activities.
Commercial Bank:
Historically, commercial bank came into being for its commercial purpose. The inception of modern
banking is the outcome of commercial bank. In the words of Professor Roger, “ the bank which deals
with money and money‟s worth with a view to earning profit is known as ``Commercial bank.”
Professor Hart says, “ A banker is one who, in the ordinary course of business, honors cheques drawn
upon him by persons for and for whom he receives money on current account.”
The objectives of a commercial bank:
1. To establish as an institution for maximizing profits and to conduct overall economic activities.
2. To collect savings or idle money from the public at a lower rate of interests and lend these public
money at a higher rate of interests.
3. To create propensity of savings amongst the people.
4. To motivate people for investing money with a view to bringing solvency in them .
5. To create money against money as an alternative for enhancing supply of money.
6. To build up capital through savings.
7. To expedite investments.
8. To extend services to the customers.
9. To maintain economic stability by means of controlling money market.
10. To extend co-operation and advices to the Govt. on economic issues.
11. To assist the Govt. for trade& business and socio-economic development
The functions of commercial bank are given below:
Receiving Deposits:
The first and foremost function of commercial bank is to receive or collect deposits from the public
in different forms of accounts e.g. current, savings, term deposits. No interest is charged in the
current account, lower rate of interest is charged in the savings account and comparatively higher
interest rates charged in fixed deposits. Thus, commercial bank builds up customer network.
Accommodation of loans and advances:
Commercial Bank attaches much importance to providing loans and advances at a higher rates than
the deposit rates and thus earns profits on it. Working capital is accommodated to the borrower for
expansion and smooth running of business. In the similar manner, commercial bank extends financial
accommodation for the development of agriculture and industry. Credit accommodation is provided to
the entrepreneurs for reviving sick and old industries as per Govt. directives. Thus, commercial bank
also extends welfare services to the people at large.
Creation of Loan Deposits:
Commercial Bank not only receives deposits from public and accommodates loans to public but also
creates loan deposits. For example: while disbursing loans as per sanction stipulation, the amount of
loan is credited to the borrower‟s account. The borrower may not withdraw the full amount at a time.
The residual amount i.e. balance left in the account creates loan deposits.
Creation of medium of exchange:
Central Bank has got exclusive right to issue notes. On the other hand, Commercial Bank creates
medium of exchange by issuing cheques. Like notes, cheque is transferrable being popularly used in
the banking transactions.
Contribution in foreign trade:
Commercial Bank plays a vital role in expediting foreign exchange and foreign trade business e.g.
import, export etc. It contributes greatly in the economy through import finance and export finance
and thus, earn foreign exchange for the country.
Formation of capital:
Commercial Bank extends financial assistance for the formation of capital in the trade, commerce and
industry in the country which expedites its economic development.
Creation of Investment Environment:
Commercial Bank plays a significant role in creating investment environments in the country.
In modern banking, commercial bank executes public utility services:
Remittance of Money:
Remittance of money to the public from one place to another is one of the functions of commercial
bank. Remittance is effected in the form of demand draft, telegraphic transfer etc. through different
branches and correspondents home and abroad.
Help in trade and commerce:
Commercial Bank helps expand trade and commerce. In inland and foreign trade customers are
allowed credit accommodation in the form of letter of credit , bill purchased and discounted etc.
Safe custody of valuables:
Commercial Bank introduces „locker‟ services to the customers for safe custody of valuables e.g.
documents, shares, securities etc.
Help in Foreign Exchange business:
While opening letter of credit, commercial bank obtains credit report of the suppliers and thus help
expedite import and export business.
Act as a Referee:
Commercial Bank acts as a referee for and on behalf of the customers.
Act as an Adviser:
Commercial Bank provides valuable advice to the customers on different products, business growth
and development, feasibility of business and industry.
Collect utility service bills:
As a social commitment, Commercial Bank collects utility service bills e.g. water, electricity, gas,
telephone etc.
Help people travel abroad:
Commercial Bank helps customers in traveling abroad through issuance of traveler’s cheques, drafts,
cash etc. in favor of the customers.
Agency Functions:
Besides above stated functions, commercial bank acts as a representative of the customers.
Collection and payment:
Commercial Bank is engaged in collection and payment of cheque, bill of exchange, promissory
notes, pension, dividends, subscription, insurance premium, interest etc. on behalf of the clients.
Purchase and sale of shares and securities:
Commercial Bank is entrusted with the responsibility of purchase and sale of shares and securities on
behalf of the customers.
Maintenance of secrecy:
Maintenance of secrecy is one of the most important functions of commercial bank.
Act as a trustee:
Commercial Bank acts as a trustee on behalf of the customer.
Economic Development and Welfare activities:
Commercial Bank contributes much for the welfare and economic development of the country.
Central Bank:
The bank which governs banking system and money market is Central Bank. The primary function of a central bank is to
assist Government in formulating economic policy, in controlling and conducting money-market and also controlling bank‟
credit. Some specialized Bankers, Economists and thinkers have given different definitions:
“ A central bank is a bank whose essential duty is to maintain stability of the monetary standard.” In the words of Decock,
“ The central bank is a banking system in which a single bank has either a complete or a residuary monopoly of note
issue.” Professor Hatley says, “Central Bank is the lender of the last resort.”
Functions of Central Bank:
The functions of central bank are different from other banks. The following functions of central bank are stated below:
A. Traditional or general functions:
1. Issue of notes and coins:
The first and foremost function of central bank is to issue notes and coins as per needs of the public and requirement of
business and commerce. As per rules, notes are issued against gold, silver and foreign currency. Bangladesh Bank (Central
Bank) keeps foreign currency reserves as security against issuance of notes. Bangladesh Bank unilatarilly reserves the right
to issue notes.The arguments in its favour are as follows:
To maintain equilibrium in quality between notes and currency issue
To maintain equilibrium in size, types and values of notes and currency
To maintain stability in rates of exchange both inland and foreign
To create confidence on the people
To control money market.
Government Bank:
Central Bank acts as banker and economic adviser of the Government. The central bank conducts and maintains
Government accounts for all Government receipts and payments.
Banker’s Bank:
Central Bank acts as banker‟s bank. As a rule, all scheduled and commercial banks have to maintain Statutory
Liquidity Reserve(SLR) 18% with Bangladesh Bank(CRR: 5% and Bonds & Securities 13%).
Lender of the last Resort:
In case of financial crisis of the commercial banks, central bank acts as a lender of the last resort through lending
against first class securities, bill of exchange etc.
Reservoir of foreign currency:
Central Bank maintains Foreign Currency Reserve. For the purpose of control of foreign currency, the following factors are
responsible:
For issuance of notes
For payments of liabilities
For payments of debts.
Clearing House:
Central Bank acts as a Clearing House for settlement of interbank transactions.
Credit Control:
Credit Control is one of the major functions of central bank. The following are the ways of controlling credit:
Change in bank rates
Open market operation
Change (increase or decrease) in reserve- ratio
Selective credit
Direct influence
Moral suasion
propaganda.
Control Currency Market:
Central Bank acts as a controller and guardian of the currency market. For the purpose of formation, control and
maintenance of currency market and for its overall development, central bank is the pioneer.
Stabilize Exchange Rate:
Central Bank maintains stability of the foreign currency exchange rates by means of controlling credit. Stable exchange rates
position helps create favourable balance of trade and acceptability of stable currency gets momentum in the
international market.
Maintain Gold Standard:
Central Bank is responsible for maintenance and control of gold reserve.
Stabilize Price-Level:
Fluctuations and frequent changes of price-level affect economic growth. With a view to making good of the economic
imbalances and crisis situations, central bank takes necessary measures for stabilizing price-level.
Stabilize business activities:
Central Bank formulates credit policy and with this spirit, central bank takes necessary steps to protect economic
depression for stabilizing business activities.
Employment opportunities:
Central Bank takes initiatives for creating employment opportunities by means of credit-control mechanism.
Expansion and Development Functions:
Development of Agriculture Sector: Central Bank formulates policy for expansion of Agri-sector for the purpose of
economic upliftment in the country.
Development of Industry Sector:
Development of natural resources:
Central Bank plays vital role for tapping natural resources which may lead to economic growth.
Other Functions:
Adviser and Representative of Government:
Economic Research:
Distinguish between Central Bank and Commercial Bank:
Central Bank and Commercial Bank are both financial institutions. But they have got distinguishing features. Central Bank is
meant for national welfare and Commercial Bank is meant for earning profits. The following points of distinction
between central bank and commercial bank: