This is comprehensive lecture on central banking and its functions.

1. SHAH ABDUL LATIF UNIVERSITY,
GHOTKI CAMPUS
DEPARTMENT OF BUSINESS ADMINISTRATION
ONLINE LECTURES JUNE 2020

2. MONEY AND BANKING
Lecture Topic: Central banking and its functions
Course instructor: Nadia Memon
Class: BBA-part II
Semester: 3rd
COURSE TITLE

3.  Topics of discussion
• Origin
• Definition
• Purpose
BANK
• Origin and Definition
• Purpose
• functions
CENTRAL
BANK

4. What is bank?
■ Origin of Bank
■ Italian word;
Derived from “BANCUS” Means “BENCH”
■ German word;
Derived from “BANQUE” Means Firm

5. ■ The merchants
The earliest stage in the growth of banking can be traces to the working of merchants.
These merchants were traders in commodities, it was risky for the traders to carry
metallic money with themselves for payment. The traders with high reputation began to
issue receipts which were accepted as money.
■ The Goldsmith
The goldsmiths also called Seth's in India used to receive gold and silver for safe custody.
The goldsmiths began to issue receipts for the metallic money (gold and silver) kept with
them. These receipts with passage of time become payable to the bearer on demand. In
this way the goldsmiths note become a medium of exchange and a mean of payment.
■ The Money lenders
The third stage in the development of banking arose when the goldsmiths become the
money lenders. They started lending some portion of stored money to those who in need
and charge some extra money as an interest or profit.
What is bank? Evolution of banking

6. What is bank ?
■ Definition
■ According Prof. Crowther;
“One that collects money from those who have it to spare or who are saving it out of
their income and lends the money so collected to those who require it".
■ According to Prof. R. Kent;
“ Bank is an organization whose principle operation are concerned with accumulation of
idle money of the general public for the purpose of advancing to others for expenditures”

7. Purpose Of Bank
■ Bank is a financial institution, an organization whose prime business is to work as an
intermediary between people who have surplus money and those who have deficit
and they are ready exchange their resources. For this purpose banks collect money as
deposits and lend money as loan/advances.
■ Bank also provide other financial services to its customers as protect their money and
assets act as an agent for its customers, transfer of money and other monetary
instruments. Banks play active role in economic development by creating credit for
business and provide huge assistance to government and business sector with its
services.
■ Banks now a days revolutionized with use of technology as customers can avail all
the services at their fingertips, debit and credit cards and mobile applications are
easy way of performing bank transactions.

8. The Central bank?
■ Origin of Central Bank
 In 1548, a financial conference held in Nuremberg, Germany to cover
the loopholes in banking system, where it is decided to establish a
central bank which monitor other banks and solely responsible for
currency issues within the country.
 In 1578, First Central bank was established in Geneva, Switzerland.
 Before WW1 (1914-18),there was few central banks, after WW1 there
are confusions in currency exchanges which become cause of bank
failure.
 In 1920 the conference held at Brussels and it was made a compulsory
requirement for states to have a central banking system.

9. The central bank
■ Definition
 The central bank is Government owned financial institution which is
responsible for the financial and economical stability of country.
 It has a pivotal position in the banking system it regulates and
formulates policies for the scheduled commercial banks and all other
financial institutions in the country.
 It provide protection to public money by regulating consumer
protection laws.

10. Functions of central bank
■ Monopoly of note issue
■ Bankers, Agent and Adviser to the Government
■ Custodian of Cash Reserve of Commercial Bank
■ Custodian of Nation’s Reserve of International Currency
■ Lender of The Last Resort
■ Clearing House Function
■ Credit Control

11. Monopoly of note issue
■ Central banks are sole authority to issue currency within the
boundaries of country no other bank or institution allowed to issue
currency there are several advantage of this function as:
■ It brings great uniformity in the economic system
■ Better control of money supply by the sole authority
■ It Increase public confidence in banking system
■ Growth and Development of Business and Economic Activities in the
country.

12. Methods of currency issue
■ Principles of Note Issue
■ Currency Principle
Under this principle paper money should be 100% backed with metallic gold and silver
reserves, as paper money is reasonable substitute of metallic money, government must
keep gold reserves of the amount issued as paper currency in the economy.
■ Banking Principle
Under banking principle there is no any requirement of backing paper currency with
gold and silver reserves, government can issuer currency as legal tender money up to
specified limit under law.

13. Methods of currency issue
■ Fixed fiduciary System
 Under fixed fiduciary system, the government fixes a fixed amount of
notes without keeping any metallic reserve, but this portion of
currency must be backed by government securities, which is called
fiduciary Limit.
 The notes issued other than fiduciary limit must be fully backed by
gold or silver reserves.
 This system was introduced in England in1844 in the Bank charter Act
of 1844.
 This system acted as a brake on the undue expansion of currency and
credit in the time of prosperity. This system also provides security for
the convertibility of notes.

14. Methods of currency issue
■ Proportional Reserve System
 Under this system the central bank is required to keep only a certain
percentage of notes issued, in the form of gold or silver.
 The reserve proportion is usually from 30% to 40%, it means a central
bank can issue PKR-100 note after keeping gold silver valuing PKR. 30
or 40.
 This method of currency regulation is the most affordable system of
the present time and is widely used in many countries, it was first
adopted by Germany in 1876 and followed with modifications by U.S.A
in 1914.

15. Methods of currency issue
■ Minimum Reserve System
 Minimum reserve system allows the central bank to keep only a fixed
amount of reserve against whatever the amount of notes will be issued.
 The reserve can be in the form of gold, silver and-foreign exchange or
in the form of any of these type of things.
 This method is being used in Pakistan after December 1965.
 This is the flexible of all systems.

16. Bankers, Agent and Adviser to the Government
■ Central Bank as financial agent and advisor
 Central bank collects taxes and other payments and repaying debts,
payments and salaries to employees on behalf of government, central
bank also manage all the other financial matters like currency
regulations, credit control and economic stability of country.
 Central bank also manage foreign exchange it keeps all the exchange
reserves available for government for sale and purchase.
 Central bank controls and manage public debts buying and selling of
financial securities.
 Central bank advise government about international financial
institutions and manages their bilateral relationship.

17. Central bank as Governments Bank
 As banker of Government:
 Central bank has sole authority of note issue
 Central bank is the Controller of credit in the country
 Central bank is the Custodian of foreign exchange
 Issue and management of public debts
 Responsible for development of other financial institutions

18. Custodian of Cash Reserve of Commercial Bank
 Central Bank requires to deposit fixed amount of money as cash
reserve from customers deposits by all commercial banks.
 Every bank is bound to deposited a certain percentage of all its deposits
with the central bank in this manner central bank finds itself in better
position to control credit money.
 Central bank protects customers and banks both with reserve policy, it
provide quick monetary aid when banks fall in short of cash.
 Central bank also exercise its monetary policy through cash reserve
requirement.

19. Custodian of Nation’s Reserve of International Currency
 Central Banks keeps foreign exchange/international currency reserves.
 These reserves used as currency backup and to clear foreign trade
payments and to pay interest and instalments of foreign debts.
 Central bank also reserves foreign currency in order to balance
demand and supply of that currency.
 International currency reserves are also useful to maintain exchange
rate between foreign and local currency.

20. Lender of Last Resort
 Central Bank provide necessary financial help and support to its
member register commercial banks.
 Central bank act as guardian for those banks in crises and are unable
to pay their debts and payments which are due.
 The responsibility of central bank is to provide necessary guidelines
and counseling to member banks and to protect them from being
bankrupt.

21. ■ Every bank receives cheques drawn on other bank, because of which every bank
becomes creditor or debtor of other banks.
■ All these cheques are sent to the central bank where it settles all the accounts of the
bank through NIFT national institutional facilitation technologies.
■ Clearing services is possible because the central bank possess cash reserves of
commercial bank.
Clearing House Services

22.  The central bank controls and regulates credit money in the country in order to
expand or contract it to maintain the requirement of economy.
 Central bank exercise its control over credit through different operations as:
 Bank rate policy
Inter bank offering rate and interest rate for loans
 Open market operation
buying and selling financial instruments
 Bank reserve ratio
 Cash reserve requirements by central bank
Controller of Credit

23. HOPE YOU FIND IT USEFUL
HAVE A GREAT DAY!