CENTRAL BANK is a financial institution established by government with the sole authority of minting and printing the country’s currency. It is the controller of all banking system and serves as a link between government and other financial institutions.
FUNCTIONS OF CENTRAL BANK
- Banker to the commercial banks.
- Incharge of minting and printing of currencies.
- Serves as lender of last resort to commercial banks.
- Issue of legal tender.
- Deals with foreign monetary policy and banking transactions.
- Management of National debts.
- Regulates the national monetary policy.
- Controls operations of commercial banks.
CONTROL OF COMMERCIAL BANKS BY THE CENTRAL BANK
Central bank controls commercial banks through the following ways:
- Open market operation: This is where government securities are sold and bought E.g. Treasury Bills. This device helps the central bank to increase or decrease the volume of money in circulation. If the central bank wants to increase the amount of money in circulation. It will embark on buying of. securities from the commercial banks and the public. But if there is too much money in circulation, the central bank will embark an selling of securities to the commercial banks and the general public, payment of which will reduce the amount of money in circulation.
- Bank rate: This is the minimum lending rate at which central bank rediscounts first class bills.
- Treasury Directives: The central bank gives direct instruction to the commercial banks to reduce the amount of loans they grant to the public or at times may call for special deposits.
- Reserve Ratio: This is a situation where commercial banks are required by law to keep some percentage of their assets in cash form with the central bank.
CENTRAL BANK AND ITS IMPORTANCE TO ECONOMIC DEVELOPMENT
The central bank promotes/contributes to economic development through the following ways:
- Granting of long-term credit/loans to industries through its command over commercial banks.
- Development of the money and capital market.
- Regulation of adequate money supply.
- Tackling of balance of payment problems.
- Provision of money and structuring of interest rate.
- Creates special financial institution for promoting and facilitating economic development in different sectors such as Nigerian Industrial Development Bank.