Central Bank and Commercial Banks: Key Differences and Functions
The banking system plays a crucial role in a country’s economic stability. Two major components of this system are the Central Bank and Commercial Banks. While both institutions deal with money, their roles, functions, and objectives are significantly different. This article will help you understand these two banking entities and their importance in the financial system.
What is a Central Bank?
A Central Bank is the apex financial institution of a country that regulates and controls the monetary system. It is responsible for managing the currency, controlling inflation, and ensuring economic stability.
Functions of a Central Bank
1. Issuing Currency
The central bank has the sole authority to print and issue currency.
2. Monetary Policy Implementation
It controls inflation and stabilizes the economy through interest rates and money supply regulation.
3. Regulation of Commercial Banks
It supervises and regulates commercial banks to ensure a stable banking system.
4. Foreign Exchange Control
Manages the country’s foreign currency reserves and exchange rates.
5. Lender of Last Resort
Provides financial support to banks during liquidity crises.
What is a Commercial Bank?
A Commercial Bank is a financial institution that provides banking services to individuals, businesses, and organizations. It focuses on deposits, loans, and financial transactions.
Functions of a Commercial Bank
1. Accepting Deposits
Collects savings and deposits from the public.
2. Providing Loans
Offers personal, business, and mortgage loans to individuals and companies.
3. Credit Creation
Generates money supply in the economy through lending.
4. Facilitating Payments
Provides online banking, fund transfers, and payment services.
5. Investment Services
Assists in investments, insurance, and financial planning.
Key Differences Between Central Bank and Commercial Banks
Conclusion
Both Central Banks and Commercial Banks are essential to a country’s financial system. The Central Bank ensures economic stability and regulates money flow, while Commercial Banks serve individuals and businesses with financial services. Understanding their roles helps in better financial planning and decision-making.
Read More
- Concept and Functions of Money
- Scarcity in Economics: Meaning & Examples
- Micro vs Macro Economics: Understanding the Differences
- Definition of Economics: A Comprehensive Overview
- Basel’s Principles on Corporate Governance
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