Overview of bank
- 1. Chapter 1 Overview of Banking & Central Bank Overview of Bank: Definition Of Bank: A bank is a financial institution which performs the deposit and lending function. A bank allows a person with excess money (Saver) to deposit his money in the bank and earns an interest rate. Similarly, the bank lends to a person who needs money investor/borrower) at an interest rate. Thus, the banks act as an intermediary between the saver and the borrower. The bank usually takes a deposit from the public at a much lower rate called deposit rate and lends the money to the borrower at a higher interest rate called lending rate. The difference between the deposit and lending rate is called ‘net interest spread’, and the interest spread constitutes the banks income. Banking: Banking is an industry that handles cash, credit, and other financial transactions. Banks provide a safe place to store extra cash and credit. They offer savings accounts, certificates of deposit, and checking accounts. Banks use these deposits to make loans. These loans include home mortgages, business loans, and car loans. Role of Bank: 1. Acceptance of deposits, by opening different kinds of bank accounts 2. Advancing of loans to needy persons through different methods and requirements 3. Provisions of agency and general utility services to his customers 4. Making new investments in different organizations and increasing the productive capacity of the country 5. Promote capital formation in the country by mobilizing and collection of savings for the purpose of investments 6. Development of industries in the country according to the requirements of the economy 7. A balanced development in the economy is achieved in different sectors & regions through the resources of bank funds 8. Development in agricultural production is made possible by providing different kinds of loans
- 2. 9. These banks help in reducing reliance in foreign assistance by their efforts in the mobilization of domestic savings These banks help in the implementation of an effective monetary policy according to the objective to central bank. 10. Commercial banks also help in the creation and distribution of money through the sales and purchase of securities. 11. Commercial banks are the custodian and distributor of liquid capital of the country, which is the life blood of all commercial and economic activities of a country. Overview of Central Bank: Definition of central Bank: A central bank is a financial institution given privileged control over the production and distribution of money and credit for a nation or a group of nations. In modern economies, the central bank is usually responsible for the formulation of monetary policy and the regulation of member banks. Role and Function of Central Bank: 1. Issue of Currency: The central bank is given the sole monopoly of issuing currency in order to secure control over volume of currency and credit. These notes circulate throughout the country as legal tender money. 2. Banker to Government: Central bank functions as a banker to the government—both central and state governments. It carries out all banking business of the government. Government keeps their cash balances in the current account with the central bank. Similarly, central bank accepts receipts and makes payment on behalf of the governments. 3. Banker’s Bank and Supervisor: There are usually hundreds of banks in a country. There should be some agency to regulate and supervise their proper functioning. Central bank acts as banker’s bank in three capacities: (i) It is the custodian of their cash reserves. Banks of the country are required to keep a certain percentage of their deposits with the central bank; and in this way the central bank is the ultimate holder of the cash reserves of commercial banks.
- 3. (ii) Central bank is lender of last resort. Whenever banks are short of funds, they can take loans from the central bank and get their trade bills discounted. The central bank is a source of great strength to the banking system. (iii) It acts as a bank of central clearance, settlements and transfers. 4. Controller of Credit and Money Supply: Central bank controls credit and money supply through its monetary policy which consists of two parts—currency and credit. Central bank has monopoly of issuing notes and thereby can control the volume of currency 5. Exchange Control: Another duty of a central bank is to see that the external value of currency is maintained. For example, in Bangladesh, The Bangladesh Bank takes steps to ensure external value of a Taka. It adopts suitable measures to attain this object. The exchange control system is one such measure. 6. Lender of Last Resort: When commercial banks have exhausted all resources to supplement their funds at times of liquidity crisis, they approach central bank as a last resort. As lender of last resort, central bank guarantees solvency and provides financial accommodation to commercial banks (i) By rediscounting their eligible securities and bills of exchange and (ii) By providing loans against their securities. This saves banks from possible failure and banking system from a possible breakdown. 7. Custodian of Foreign Exchange or Balances: A central bank is the custodian of foreign exchange reserves and nation’s gold. It keeps a close watch on external value of its currency and undertakes exchange management control. All the foreign currency received by the citizens has to be deposited with the central bank; and if citizens want to make payment in foreign currency, they have to apply to the central bank. 8. Clearing House Function:
- 4. Banks receive cheques drawn on the other banks from their customers which they have to realize from drawee banks. Similarly, cheques on a particular bank are drawn and passed into the hands of other banks which have to realize them from the drawee banks. Independent and separate realization to each cheque would take a lot of time and, therefore, central bank provides clearing facilities. 9. Collection and Publication of Data: It has also been entrusted with the task of collection and compilation of statistical information relating to banking and other financial sectors of the economy. Monetary Policy: The Monetary Policy is a process whereby the monetary authority, generally the central bank controls or regulate the money supply in the economy. Policy Instruments of Central Bank: The instruments or methods of credit control or instruments of monetary policy are of two kinds: (i) Quantitative Control: It seeks to control the total quantity of money and bank credit or to make the bank lend more or less. These are four ways of quantitative control. 1. Bank Rate policy: The bank rate is the rate at which the central bank is willing to discount first class bill of exchange. Bank rate is different from “Market Rate”. Market rate is that rate of which the money market is willing to discount bill of exchange. Market rate is influenced by the banks rate. A rise in bank rate is generally followed by a rise in market rate and similarly, a fall or rise in the bank rate is followed by increase and decrease in the borrowing, and the volume of credit will be adjusted accordingly to the requirements of the market. 2. Open Market Operation: Open market operation is the most important instrument of monetary policy. It refers to purchase or sale of government securities, short term as well as long term, at the initiative of central bank, as a deliberate credit policy. These Bonds and securities are purchased or sold from or to the commercial banks and the general public in the country. 3. Change in Reserve Ratio: The commercial banks are required to keep a limited percentage of their deposits by law with the central bank. The central bank charges the ratio according to the need of controlling the credit. If the ration is raised, the cash available with the bank will be reduced, which will compel them to contract the volume of credit. Similarly when the ratio will be lowered, the credit power will expand. 4. Credit Rationing: This instrument of monetary policy is applied only in time of financial crises. The bank can collect by re-discounting bill of exchange, when credit is rationed by fixing the amount. This method of controlling credit can be justified only as
- 5. a measure to meet exceptional emergencies, because it is open to serious abuses. There can be a danger, the rationing may not be satisfactory and the central bank may abuse the power by giving preferential treatment to favorite customers. (ii) Qualitative Control: It aims to influence the special type of credit, or to divert bank advances into certain channels, or to discourage from lending for certain purpose. These methods managing monitory policy are as below. 1. Consumer Credit Rationing: The consumer credit method of monetary management can be applied only when there is a rise of the scarcity of certain listed articles in the country. The central bank will impose specific restraints on consumer credit by raising the required down payments and shorting the maximum period of payment. 2. Moral Persuasion: The central bank of the country also implies a minor instrument of moral persuasion to influence the total borrowing at the central bank. Moral Persuasion, refer to the appeal to the commercial bank to act according to the directive of the central bank. The central bank may issue directives to commercial banks to follow the policies of the central bank. 3. Direct Action: Central bank may take direct action, if his policies are not followed by the commercial banks. Direct action involves direct dealings of central bank with the commercial banks. Direct action may be a refusal on the part of central bank to re- discount the bill of exchange or it may be in the shape of penalty rate of discounting for the banks not following the required policies. There are 8 Shariah compliant Islamic Commercial Banks in Bangladesh. 1. First Security Islami Bank 2. Al Arafah Islami Bank 3. Islami Bank Bangladesh 4. ICB Islamic Bank 5. Union Bank 6. Shahjalal Islami Bank 7. Exim Bank 8. Social Islami Bank There are 10 commercial Bank 1. AB Bank 2. SoutheastBank 3. CityBank 4. Dhaka Bank 5. Pubali Bank 6. Bank Asia 7. Prime Bank 8. Trust Bank 9. JamunaBank 10. PremierBank