Lesson Objectives
By the end of the lesson, students should be able to:
- Explain the functions of commercial banks.
Table of Contents
Functions of Commercial Banks
Commercial banks perform several important functions in the economy. These include:
1. Accepting Deposits:
One of the main functions of commercial banks is to accept deposits from individuals, businesses, and organizations. People keep their money in banks for safety and convenience.
The bank provides different types of accounts for this purpose such as savings accounts, current accounts, and fixed deposit accounts. In a savings account, customers earn interest on the money saved.
A current account allows frequent withdrawals and cheque payments, while a fixed deposit account keeps money for a set period with higher interest. By collecting deposits, banks mobilize funds that can later be used to grant loans and support economic activities.
2. Granting Loans and Advances:
Commercial banks lend money to customers in the form of loans and advances. This is one of their most important functions because it helps individuals and businesses meet financial needs.
A loan is money given for a specific time, often with interest, while an advance is a short-term loan for urgent needs. Banks give loans to businesses to expand their operations, to farmers to buy equipment, and to individuals for personal or educational purposes.
The bank earns income through the interest charged on these loans, and the borrowed funds promote investment and economic growth.
3. Facilitating Payments:
Commercial banks make payments easier and safer for their customers. Instead of carrying large amounts of cash, customers can use cheques, debit cards, bank transfers, and online banking to pay for goods and services.
Banks also help in transferring money from one account to another within the same bank or to other banks, both locally and internationally. This function reduces the risks involved in handling cash and promotes trade by making business transactions faster and more convenient.
4. Agency Functions:
Commercial banks perform several services on behalf of their customers. These are known as agency functions because the bank acts as an agent or representative.
For example, a bank can collect cheques, dividends, or salaries for a customer. It can also pay bills, taxes, or insurance premiums when instructed to do so.
Banks sometimes buy and sell shares or securities for customers and also provide references and credit information to other organizations. Through these services, banks make financial management easier for individuals and businesses.
5. Creating Credit:
Commercial banks help to create credit in the economy through the lending process. When a bank gives a loan, it does not always give out cash directly. Instead, it credits the borrower’s account with the loan amount, which the borrower can withdraw or transfer.
This increases the amount of money in circulation, even though no new physical money is printed. Credit creation allows businesses and individuals to have more funds to spend or invest, which boosts production, trade, and overall economic growth.
6. Foreign Exchange Transactions:
Commercial banks deal in foreign currencies to support international trade and travel. They help customers buy and sell foreign currencies such as the dollar, euro, or pound.
For example, an importer who wants to buy goods from another country can pay through a commercial bank that exchanges the naira for the needed foreign currency.
Banks also issue travelers’ cheques, foreign drafts, and letters of credit to make cross-border transactions easier. This service promotes international business and strengthens a country’s connection with the global economy.
7. Safekeeping of Valuables:
Banks provide secure facilities for keeping valuable items such as documents, jewelry, certificates, and wills. These items are stored in safe deposit boxes or vaults within the bank, protecting them from theft, fire, or loss.
By offering this service, banks help customers protect their valuables in a safe environment. This builds trust between the bank and its customers and encourages people to use other banking services.
8. Advisory Services:
Commercial banks give financial advice to their customers. They guide individuals and businesses on how to save, invest, and manage their finances wisely.
For instance, banks can advise customers on profitable investment opportunities, business expansion, or loan management. Some banks also help clients prepare financial plans or analyze business risks.
This function is very useful because it helps customers make better financial decisions and contributes to the overall stability of the financial system.
Final Thoughts
The main functions of commercial banks include accepting deposits, granting loans, facilitating payments, creating credit, and providing advisory and foreign exchange services.
Tags
Agency Functions, Credit Creation, Payment System, Advisory Services, Origin of Banking, Goldsmiths, ,Economic Growth
Read Also: Balance Of Trade (BOT) And Balance Of Payment (BOP)
