Commercial Banks As A Type Of Traditional Financial Institution

Commercial banks are financial institutions that accept deposits from individuals, businesses and other organisations and use part of these funds to provide loans and other financial services to customers. 

They help people and businesses save money, make payments, transfer funds and obtain credit for personal, commercial, and investment purposes. 

Commercial banks also provide services such as foreign exchange, overdrafts, electronic banking and safe custody of valuable items. In this way, commercial banks help to move funds from people who have surplus money to individuals and businesses that require money for productive activities. 

 Functions of Commercial banks 

• Accept Deposit:

One of the major functions of commercial banks is to accept deposits from individuals, businesses, and organisations. Customers can keep their money in different types of accounts, such as savings accounts, current accounts and fixed deposit accounts. 

This provides a safe place for people to keep their money while also making it available for future use. Banks use part of these deposits to provide loans and other financial services. By accepting deposits, commercial banks also encourage people to save.

• Provide Loans 

Commercial banks provide loans to individuals, businesses, and organisations that require money for various purposes. For example, a farmer may obtain a loan to buy farm inputs, while a business may borrow money to purchase equipment or expand its operations. The bank charges interest on the money borrowed, which provides income to the bank. 

Loans help increase economic activities because borrowers can use the funds for consumption, production, and investment.

• Provide Overdraft Facilities 

Commercial banks provide overdraft facilities to certain customers, especially those who operate current accounts. An overdraft allows an approved customer to withdraw more money than the amount available in the account, up to a specified limit. 

For example, if a customer's account has ₦50,000, but the bank has approved an overdraft of ₦100,000, the customer may be able to withdraw up to ₦150,000. This facility is particularly useful to businesses that experience temporary shortages of cash. Interest is normally charged on the amount overdrawn.

• Provide transfer from one account to another 

Commercial banks provide facilities that enable customers to transfer money from one person or account to another. Transfers may be made within the same bank or between different banks.

Customers can use bank transfers, electronic banking platforms, mobile banking and other payment channels to send money. This makes business transactions easier, faster and safer than carrying large amounts of physical cash. Banks therefore help money move efficiently between individuals, businesses, and organisations.

• Provide services to make and receive payment 

Commercial banks provide different services that make it possible for individuals and businesses to make and receive payments. These services include cheques, debit cards, electronic transfers, direct debits and other electronic payment methods. 

For example, a customer can use a debit card to pay for goods without carrying cash. Businesses can also receive payments directly into their bank accounts. These services make buying and selling easier and reduce the risks associated with carrying large amounts of cash.

• Provide Foreign exchange services 

Commercial banks provide foreign exchange services to individuals, businesses, and organisations that need foreign currencies. They may buy and sell currencies such as US dollars, British pounds and euros, subject to applicable regulations. 

These services are important for international trade, foreign travel, education and other transactions involving foreign currencies. For example, an importer may need US dollars to pay for goods purchased from another country. Banks therefore help facilitate international financial transactions.

• Provide safe custody of valuables

This reduces the risk of loss, theft, or damage. Some banks provide safe-deposit boxes for this purpose. Safe custody therefore gives customers an additional means of protecting valuable property.

• Provide Third party services

This saves customers time and makes the management of their financial affairs more convenient.

• Provide investment-related services 

Commercial banks may provide investment-related services to customers and businesses, depending on the services they are licensed to provide. These may include investment advice, arranging certain investments and helping customers manage financial assets. Such services enable customers to make better use of their surplus funds. 

Investment services can also help businesses raise or manage funds for expansion and other activities.

Commercial banks can create credit through the process of accepting deposits and granting loans. When a bank grants a loan, the money may be credited to the borrower's account and subsequently used for payments, resulting in deposits elsewhere in the banking system. 

Through this process, commercial banks increase the availability of credit in the economy. However, credit creation is influenced by factors such as reserve requirements, liquidity conditions, monetary policy and customers' demand for loans.

Summary

Functions of Commercial Banks: