WAM-4012 Functions of a Central - PowerPoint Presentation

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WAM-4012Functions of a Central Bank

Muhammad

Azhar

Department

of West Asian and North African Studies

Every country has a particular bank which acts as a leader of the country’s money market. It supervises, controls and regulates the activities of commercial banks and other financial institutions.It does not accept public deposits as commercial banks do.It is part of the Government machinery

It supports and implements Government’s policies concerning banking and finance in the country.

The important functions of a Central bank is discussed in the following pages.

Bank of Issue:The central bank of every country has the exclusive monopoly of note issue.The currency notes issued by the central banks are unlimited legal tender all over the country.

The central banks were originally called Banks of Issue as issue of currency notes has always been associated with the central banks.

The authority to issue currency notes only to the central banks provides uniformity to the note issue in the country.

2.Banker, Agent and

Advisor to the Government

:

The Central Bank of the country maintains the banking accounts of both the state and central Governments.

It performs the same functions for the Government as a commercial bank normally does for its customers.

The central bank makes and receives payments on behalf of the

Governtment

.

It helps the Government with short term loans and advances.

It manages the public debt.

It advises the Government on all monetary and banking affairs.

3. Custodian of the cash reserves:All the commercial banks of a country keep part of their cash balances as deposit with the commercial bank of the country.

It is because of the legal compulsion and its magnitude is decided by the central bank.

In addition to the mandatory cash reserves , the commercial banks deposit their surplus funds into their cash reserves with the central bank.

The commercial banks can withdraw their surplus funds from their cash reserves in the central bank.

Part of these cash balances are meant for cheque clearing purposes as all the commercial banks keep their deposit accounts with the central bank.

4. Custodian of Foreign Balances of the Country:The Central bank of a country has the responsibility to maintain and manage gold, SDRs and foreign currencies reserves of a country.

The central bank also maintains reserves with International Monetary Fund.

The central bank also has the responsibility to manage the exchange rate of the country’s currency visa

vis

other currencies of the world.

The central bank has the responsibility to manage the exchange control and other restrictions ,whenever imposed by the Government of the country.

5. Lender of the last Resort:The Central bank has the responsibility of meeting directly or indirectly all reasonable demands for accomodation

by commercial banks in times of difficulties and crisis.

At certain times of the year commercial banks may face the shortage of cash, then the Central bank, as a lender of the last resort come to the rescue of the commercial banks.

A commercial bank in need of financial assistance from the Central bank can get it through selling of eligible securities with the Central bank.

It can borrow also from the central bank against eligible securities.

6. Central Clearance, Settlement and Transfer:As the banker’s bank ,the central bank keeps the cash balances of all commercial banks.

Various commercial banks adjust their mutual claims in the books of the Central bank.

The central bank is instrumental in clearing of the cheques.

All the electronic transfer of money takes place under the supervision of the central bank.

The electronic payments like ATM work under the central bank’s regulatory framework.

7. Controller of the Credit:

The most crucial function of a central bank is the Control of the credit by commercial banks in the country.

The central bank controls the expansion of credit by the commercial banks.

The central bank can make the commercial banks to expand the credit also.

The central bank uses this power to implement the monetary policy of the government.

ReferenceK P M Sundharam, Money, Banking ,Trade and Finance.