Central Bank

A central bank

A central bank is a financial institution established by the government with the aim of controlling economic activity and ensuring sound and desired monetary policy. It is an institution charged primarily with controlling a country's money and banking system. It is the central monetary authority and other intermediaries (agencies).

Functions of the central bank

1. Currency management. This involves printing notes, minting coins, and replacing worn-out notes.
2. Banker to the government. This means that it accepts deposits of government accounts, makes payments on behalf of the government, and makes temporal advances or loans to the government.
3. Control of money supply. It controls the volume of money supply as well as credit advances in the banking system.
4. Custodian of valuable financial instruments. These are valuable to a country such as gold, Treasury bills, and bonds.
5. Banker to commercial banks. This involves accepting and keeping commercial bank deposits, acting as a lender of last resort, controlling lending activity, training of commercial bank staff, and acting as the clearing house to settle interbank debts.
6. Controller of investment in a country. It regulates the establishment of interest rates to charge commercial banks.
7. Controller of foreign exchange. This includes fixing the exchange rate and controlling foreign exchange reserves.
8. Management of foreign currencies. It manages and keeps foreign currencies.
9. Keeper of funds of international institutions. It keeps the funds of international organizations operating in a country e.g. International Monetary Fund (IMF), Red Cross, etc. It is also a banker to foreign central banks and international organizations.
10. Promotion of economic growth and development. It initiates and accelerates economic growth and development by operating policies aimed at rapid economic growth and development.

Problems facing central bank

1. They experience a lot of government interference and do not act independently e.g. Bank of Tanzania.
2. Some central banks lack trained staff with more power in the field of banking to effectively control commercial banks.
3. There is a lot of corruption and fraud in the banking system and central bank itself.
4. The commercial banks do not surrender all their money which is deposited in the central banks and so, they cannot be monitored by the central banks.
5. Some commercial banks are subsidiaries of foreign banks e.g. Standard Chartered Bank in Tanzania and have other sources of finances in case of unfavourable policies in central bank.
6. Less developed countries have large subsistence sectors whose operation is not influenced by actions of monetary policy as directed by the central bank.
7. LDCs economies have poor record-keeping and lack statistics which are needed in planning and monitoring exercises of commercial banks.
8. Commercial banks are in urban centres which implies a limited geographical scope or contact with economic activities.
9. There is lack of entrepreneurs that the central banks may collaborate with to regulate the investment levels.
10. LDCs lack well-spelled-out term development plans which central banks should follow when formulating policies.