How Central Bank controls the Commercial Banks

The various ways by which the central bank regulates the activities of commercial banks are;

1. Open Market Operation (OMO): This is the purchase or sale of securities on the open market so as to expand or restrict the volume of money in circulation. The central bank applies this policy with the aim of regulating the volume of money in circulation.

2. LiquidityLiquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price. Liquid assets refer to cash on hand,... More Ratio/Cash Rate: The commercial banks are mandated by the government to keep a special proportion, e.g. 25% of their total deposit with the central bank in order to control their volume of credit.

3. Bank Rate: Bank rate is the minimum rate of interest charged by the central bank for discounting the bill of exchange. By lowering or raising the rate, the central bank can control the activities of the commercial banks.

4. Special Directives: The central bank can issue direct or specific instructions to the commercial banks and other institutions to restrict their lending or credit policy or on the direction to which lending should follow. Moral suasion takes the form of Directive. Moral suasion is a gentle appeal to commercial banks as to the kind of lending policy to pursue. In economics, central bankers try to influence the market and public sentiment through persuasive techniques that they are in control of the economy and ready to act if needed

5. Special Deposit: Special deposit is also an instrument of monetary policyCentral banks use monetary policy to manage economic fluctuations and achieve price stability, which means that inflation is low and stable. More which is used to restrict lending. The central bank can order the commercial banks for a special deposit, usually, a percentage of the banks’ deposits, to be made with it.

Commercial Banks

This is defined as a financial institution set up for keeping and lending money to people owned by individuals, organizations, or governments for the main purpose of making profits.

Examples of Commercial Banks in Nigeria are Zenith Bank plc, Fidelity Bank plc, United Bank of Africa, Union Bank plc, etc

Functions of Commercial Banks

1. Acceptance of Deposits: The commercial banks accept deposits from members of the public for safe custody through these three accounts – savings, current, and fixed deposit accounts.

2. Safe custody of other Valuable: Valuables like gold, jewelry, wills, deeds, etc are deposited with commercial banks for safekeeping.

3. Lending of Money: Members of the public, businessmen, industries borrow money from banks in form of loans and overdrafts.

4. Agents of Payment: They perform this function to those who deposited money with them through the use of cheques to owners of current accounts.

5. They Issue Travelers Cheques: These cheques enable their customers to have money in any country they travel to.

6. They Solve problems of Foreign Exchange: Commercial banks help their customers to get foreign exchange which enables them to purchase goods and settle their foreign debts.

7. Discounting bills of Exchange: Commercial banks discount, purchase and sell bonds, securities, etc on behalf of their customers.

8. They render Credit Transfer Services: These are methods whereby commercial banks help their debtor customers to transfer certain accounts of money from their accounts to that of their creditors by asking their debtor customers to fill credit transfer forms.

9. They offer advice to their customers: They offer them business advice which is as important as giving them loans.