Distinguish the role of commercial bank from that of central banks in an economy.

The role of commercial banks is:

• They accept deposits from the public on various accounts such as current accounts, saving accounts and fixed accounts. This money is repaid on demand
• They provide credit facilities and mortgages to the deficit spending units (borrowing) who in turn pay interest on the borrowed fund
• They provide safe custody for clients’ valuables such as education certificates, land titles, etc.
• They operate foreign exchange bureaus which facilitate international trade and foreign aid.
• They provide facility to transfer money from one place to another, from one bank to another, from one account to another and so on.
• They receive payments from employers on behalf of employees and distribute it to the accounts of the employers
• They assist the central bank in implementation of monetary policy through various policy instruments
• They discount bills; commercial banks can cash their customers and hold bills of exchange until they mature to be presented for payment in their own business names
• They offer advisory services and training to their customers with regard to business
• They provide facilities to pay customers tax and bills
• The assist government in tax collection since taxes are paid through banks
• Credit Creation: Whenever a loan or credit is provided to the customer, he/she is not given any cash. In fact, a bank account is opened in the name of that person and amount is transferred to that account. Through this process, the bank is able to create money.
• Purchasing and Selling of the Securities: For this function, banks give you a facility for purchasing and selling the securities.
• Bullion Trading: the commercial banks trade with many countries in the world. They trade in gold and silver and provide the same facility for their customers.
• Information Banks: commercial banks are primarily an information bureau, that collects the economic, statistical, and financial data related to the trade, commerce, and industry.
• Merchant services: Most commercial banks offer merchant services that include credit card processing, mobile payment solutions, gift cards, and electronic check services.
• Leasing: Many companies use leasing as a financing method for acquiring real estate, automobiles, factory equipment, and other major fixed assets.
• Treasury management services: Commercial banks offer funds collection, disbursement, and fraud prevention.
• They accelerate trade by offering agency services, overdraft facilities, and other solutions to wholesale and retail businesses.

Functions of central bank

• It issues currency, it is the only financial organ responsible for issuing and renewing all notes and coins in an economy and to make sure that there is no counterfeit money in the circulation.
• It designs money that is hard to counterfeit
• Banker, Agent and Adviser to the Government: Central bank, everywhere, performs the functions of banker, agent and adviser to the government. It keeps all government deposits and makes sure that it effects all payments due to both internal and external on behalf of government
• It advises government concerning financial matters
• It manages external debts
• It links the government or economy to other international financial institution notably the world bank and others
• It is a banker’s bank. All regal reserves requirements by banks are kept by the central bank
• Lender of Last Resort: Central bank is the lender of last resort, for it can give cash to the member banks to strengthen their cash reserves position by rediscounting first class bills in case there is a crisis or panic which develops into ‘run’ on banks or when there is a seasonal strain. Member banks can also take advances on approved short-term securities from the central bank to add to their cash resources at the shortest time.
• Clearing House: Central bank also acts as a clearing house for the settlement of accounts of commercial banks. A clearing house is an organisation where mutual claims of banks on one another are offset, and a settlement is made by the payment of the difference.
• It keeps country’s foreign exchange reserves.
• Protection of Depositors Interests: The central bank has to supervise the functioning of commercial banks so as to protect the interest of the depositors and ensure development of banking on sound lines.
• Implementation of the monetary policy: The essential job of central banks is to formulate monetary policy, which entails engaging in actions (like controlling interest rates and conditions of credit) to impact the amount of money supplyin the economy. The policy ensures price stability, protect the value of the native currency, maximise employment, and establish a long-term growth environment.