Functions of Central Bank ខែមេសា 18, 2009Posted by Captain Cambodia in Study.
Tags: Central Bank, Economic, Functions of Central Bank, Macro Economic
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Function of Central Bank
In the monetary and banking setup of a country, central bank occupies central position and perhaps, it is because of this fact that this called as the central bank. In this way, this bank works as an institution whose main objective is to control and regulate money supply keeping in view the welfare of the people. Central bank is an institution that fulfills the credit needs of banks and other credit institution, which woks as banker to the banks and the government and which work for the economic interest of the country.
Function of a central bank
1. Monopoly of note issue
Note issue primarily is the main function of a central bank in every country. These days, in all the countries where there is a central bank generally it has got the monopoly of the sole right of note issue. In the beginning this was not the function of central bank, but gradually all the central bank gas acquires this function.
There are many advantages of the note issue by central banks some important ones are as follow:
1. Central bank controls the credit creating power of commercial bank. By controlling the amount of currency in circulation, the volume of credit can be controlled to quite a large extent.
2. People have more confidence in the currency issued by the control bank because it has the protection and recognition of the government.
3. In the event of monopoly of note issue of central bank, there will be uniformity in the currency system in the country.
4. The currency of the country will be flexible if the central bank of the country has the monopoly of note issue because central bank can bring about changes very early in the volume of paper money according to the needs of business, industry and messes.
5. The system of note issue has some advantages. If the central bank of the country has the monopoly of note issue, all such advantages will accrue to the government.
2. Bankers, Agent and Adviser to the Government
As banker to the government, central bank provides all those service and facilities to the government which public gets from the ordinary banks. It operates the account of the public enterprise. It mangers government departmental undertaking and government funds and where there is a need gives loan to the government. From time to time, central bank advice the government on monetary, banking and financial matters.
3. Custodian of Cash Reserve of Commercial Bank
Central bank is the bank of banks. This signifies that it has the same relationship with the commercial banks in the country that they gave with their customers. It provides security to their cash reserves, give them loan at the time of need, gives them advice on financial and economic matter and work as clearing house among various members bank.
4. Custodian of Nation’s Reserve of International
Central bank is the custodian of the foreign currency obtained from various countries. This has become an important function of central bank. These days, because with its help it can stabilize the external value of the currency.
5. Lender of The Last Resort
Central bank works as lender of the last resort for commercial banks because in the time of need it provides them financial assistance and accommodation. Whenever a commercial bank faces financial crisis, central bank as lender of the last resort comes to its rescue by advancing loans and the bank is saved from being failed.
6. Clearing House Function
All commercial bank have their accounts with the central bank. Therefore, central bank settles the mutual transactions of banks and thus saves all banks controlling each other individually for setting their individual transaction.
7. Credit Control
These days, the most important function of a central bank is to control the volume of credit for bringing about stability in the general price level and accomplishing various other socio economic objectives. The significance of this function has increased so much that for property understanding it. The central bank has acquired the rights and powers of controlling the entire banking.
A central bank can adopt various quantitative and qualitative methods for credit control such as bank rate, open market operation, changes in reserve ratio selective controls, moral situation etc.
Besides the 7 functions explained above, central banks perform many other functions that are as follows:
8. Collection of Data
Central banks in almost all the countries collects statistical data regularly relating to economic aspects of money, credit, foreign exchange, banking etc. from time to time, committees and commission are appointed for studying various aspects relating to the aforesaid problem.
9. Central Banking in Developing Countries
The basic problem of underdeveloped countries is the problem of lack of capital formation whose main causes are lack of saving and investment. Therefore, central bank can play an important role by promoting capital formation through mobilizing saving s and encouraging investment.