Greetings Everyone,
For today's lecture, we would be looking at every country's apex bank. The biggest bank in a nation and the bank to other banks. School isn't in session, I felt this is the best time to share my finances knowledge. I might be sick but that doesn't stop me from blurting hard and sharing with the family.
What Is A Central Bank
A central bank is an apex bank in a country which controls the inflow and outflow of a country's cash through the use of monetary policies. They are often in control of members banks around the country and each country has one central bank. Not all country's central banks are government owned, some are owned by a group of individuals hence they are free from serious government regulations and sanctions.
Not just anyone can interact directly with the central bank as it's more of a bankers bank and the government bank and not for the general public. In Countries like Nigeria, there are a head office central bank in the state capital and then there are central bank branches spread across the various states. Some countries central bank does the printing & minting of bank notes and coins while some others print it abroad and import it as they do not have the adequate resources to do so.
Functions of the Central Bank
✓It is the Bank of Issue
When we hear this it means they are in-charge of the issuance of bank notes. As I mentioned earlier, the apex bank in the country (the central bank) has a complete monopoly over the printing and issuing of bank notes in the country. For those who might not know, bank notes are simply paper money used as legal tender. The Central Bank determines when to print and the amount to print.
✓Special Advisor to the government based on monetary matters
The Central Bank based on analysis and experience help advice the government on the policies and decisions to make and take and the effects they would have on the economy. If the economy is taking a turn downhill and the government wants to implement a policy to turn things around, they could seek for central bank aid for advice based on the issue.
✓They are in charge of making monetary policies
A monetary policy is a policy made by the apex monetary body in a country (central bank) which is aimed at controlling the money supply of that country. In times of inflation, deflation, stagflation and so on, it is the duty of the central bank to first figure the country's economical crisis then make policies that would aid the situation either by indirectly reducing the money in circulation or increasing it.
✓Bank to commercial banks and government
As I mentioned earlier, central banks don't transact with just anyone, especially the general public. Their business involves the government and commercial banks. They give out loans to the government when in need to clear economic situations and maybe to pay off debts and they also give loans to commercial banks. The Central Banks also accepts deposits from the government and even carryout transactions on their behalf.
✓Control credit and interest rates of other banks
As we might have known commercial banks offer credit facilities to the public and companies and if there is a large amount of people collecting loans, this increases the money in circulation which can cause inflation so the central bank would simply implement a monetary policy to combat this issue. We would be learning how this works later on in this post.
How the Central Bank controls cash flow
The Central Bank mostly utilizes commercial banks under their control around the nation to influence the flow of cash in the economy, this they do to either reduce or increase money supply to stabilize the economy.
✓Open Market Operations
This is situation where the government buys or sells government/ private institution securities from/ to the public to either reduce or increase the money supply. In times when there is excess money in circulation, inorder to prevent serious inflation, the government would sell securities like government bonds and stocks to the public so as they are buying, the money in circulation is significantly reduced.
✓Bank Reserve Ratio
There is a Mandatory amount which commercial banks are required to have as a deposit in the central bank. This minimum amount is Known as a reserve ratio. So if there happens to be an inflation in the country and the central bank wants to curb it, they would increase the ratio hence they force banks to reduce the amount of money they have available to give out to the public. This would definitely reduce money in circulation.
✓Credit Control
If the central bank wants to help a selected part of the economy to grow especially if that sector of the economy isn't doing too well and they need money, the central bank can direct commercial banks to reduce loans from all sectors and channel those loans to the sector in question. For example, they want to help the Agricultural Sector, the central bank would direct that loans should be focused on farmers that want to double up.
Thank you for reading ⭐ Expect an even more interesting lecture in due time.
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