Functions of Central Bank

A Central Bank is an institution established by the government of a given country to manage and control the supply of and demand for money in the country’s economy. It can also be defined as the highest institution in a country’s banking system which regulates and controls the economy financial activity to ensure stability and prosperity. Some of the functions of a Central Bank are:

  • Issuance of currency: The Central Bank of any country usually issues currencies in notes and coins, in correct amounts to check on inflation.
  • Acts as government’s banks: Another function of the Central Bank is that it keeps governments accounts, manages government borrowing as well as a financial advisor to the government.
  • Bankers to commercial banks (banks banker): As a bank of the last resort, a Central Bank provides banking services to other banks. In this case, a Central Bank:
    • Acts as a custodian of the reserves held by commercial banks.
    • Supervises the operations of commercial banks.
    • Advises commercial banks on financial matters.
    • Offers a central clearing house-this is where banks settle debts due to each one of them which arise from their daily operations.
    • Statutory management during financial crisis.
    • Licensing operations of commercial banks.
    • Repatriation of excess foreign currency/profits on behalf of commercial banks.
    • Acts as a lender of last resort
  • Controlling commercial banks: Central Banks also control commercial banks and other financial institutions by giving instructions to them on lending procedures and proper banking practices to prevent overexploitation of clients.
  • Lender of last resort: Another important function of a Central Bank is to act as a lender of last resort. This means that commercial banks may obtain loans from the central bank to meet their daily financial obligations when need arises.
  • Exchange control (maintaining stability in exchange): A Central Bank also plays an important role of being responsible for maintaining a suitable exchange rate between the local currency and foreign official agent to government dealings.
  • Act as link bank to external financial institutions: this facilitates international financial relationships as well as linking financial institutions e.g. the I.M.F with the World Bank.
  • Facilitates clearing of cheques: A central bank facilitates clearing of cheques between different commercial banks through its clearing house.
  • Administering public debt: it is responsible for management and repayment of the debt (internally or externally) when it matures.
  • Implementation of monetary system/policy: this is so as to regulate the economy by using several instruments of monetary policy to either expand economic activities or depress them i.e. O.M.Os, bank rates, cash ratio, margins, deposits, selective credit control and directives.

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