Economics » Financial Institutions » Types and Functions of Financial Institutions

Central Bank

A Central Bank is the apex institution of the monetary and banking system of every country. It is owned by the government but the responsibility of its management is usually rested in the Board of Directors whose members are appointed by the government. The Bank of Ghana (BOG) and the Central Bank of Nigeria (CBN) are among the earliest Central Banks established in the West African sub-region.

Functions of the Central Bank

  1. Currency Issue and Distribution: The Central Bank is the only institution empowered by law to issue currency notes and coins that are used as a medium of exchange in the country. The monopoly power of issuing legal tender currency is important to control the supply of money in order to prevent inflation.
  2. Banker to the Government: The Central Bank keeps the accounts of the government and of all its corporations and agencies. It receives all payments due to the government, as well as undertakes borrowing on behalf of the government through the issuance of short-term and long-term securities e.g. treasury bills, treasury certificates and long term securities e.g. development stocks. The Central bank is also responsible for the management of domestic and external debts of the government.
  3. Foreign Exchange Management: To ensure that foreign exchange disbursement and allocation are consistent with economic priorities, the Central Bank acquires, allocates and monitors the use of scarce foreign exchange resources as well as maintains the country`s foreign exchange reserves.
  4. The Bankers’ Bank: The Central Bank provides facilities for other banks, especially commercial banks, to keep their cash reserve and clear their balance through the clearing house. It also grants loans to or discount the bills of commercial banks when they are short of fund; hence the Central Bank is referred to as ‘lender of last resort’.
  5. Promotion of Monetary Stability: The Central Bank controls money supply in the economy to promote price stability. This involves the use of instruments of monetary policy such as Open Market Operations (OMO), reserve requirements, discount rate, etc.
  6. Supervision of Finance Houses: In every modern economy, the Central Bank is backed by law to monitor and supervise the activities and practices of financial houses in order to promote effective execution of monetary policies.

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