The document provides an overview of banking and central banking. It defines a bank as a financial institution that accepts deposits and makes loans. A central bank is responsible for monetary policy and regulating other banks. It has several key roles, including issuing currency, acting as a bank for the government, overseeing the banking system, controlling money supply and credit, managing foreign exchange, acting as a lender of last resort, collecting banking data, and facilitating check clearing between banks. The central bank uses various tools for monetary policy including adjusting interest rates, conducting open market operations, changing reserve requirements, and employing moral suasion or direct actions with other banks.

1. Chapter 1
Overview of Banking & Central Bank
Overview of Bank:
Definition Of Bank: A bank is a financial institution which performs the deposit and
lending function.
 A bank allows a person with excess money (Saver) to deposit his money in the
bank and earns an interest rate.
 Similarly, the bank lends to a person who needs money investor/borrower) at an
interest rate.
 Thus, the banks act as an intermediary between the saver and the borrower.
 The bank usually takes a deposit from the public at a much lower rate called
deposit rate and lends the money to the borrower at a higher interest rate called
lending rate.
 The difference between the deposit and lending rate is called ‘net interest
spread’, and the interest spread constitutes the banks income.
Banking: Banking is an industry that handles cash, credit, and other financial
transactions.
 Banks provide a safe place to store extra cash and credit.
 They offer savings accounts, certificates of deposit, and checking accounts.
 Banks use these deposits to make loans.
 These loans include home mortgages, business loans, and car loans.
Role of Bank:
1. Acceptance of deposits, by opening different kinds of bank accounts
2. Advancing of loans to needy persons through different methods and
requirements
3. Provisions of agency and general utility services to his customers
4. Making new investments in different organizations and increasing the productive
capacity of the country
5. Promote capital formation in the country by mobilizing and collection of savings
for the purpose of investments
6. Development of industries in the country according to the requirements of the
economy
7. A balanced development in the economy is achieved in different sectors &
regions through the resources of bank funds
8. Development in agricultural production is made possible by providing different
kinds of loans

2. 9. These banks help in reducing reliance in foreign assistance by their efforts in the
mobilization of domestic savings
These banks help in the implementation of an effective monetary policy according to the
objective to central bank.
10. Commercial banks also help in the creation and distribution of money through the sales
and purchase of securities.
11. Commercial banks are the custodian and distributor of liquid capital of the country,
which is the life blood of all commercial and economic activities of a country.
Overview of Central Bank:
Definition of central Bank: A central bank is a financial institution given privileged
control over the production and distribution of money and credit for a nation or a
group of nations. In modern economies, the central bank is usually responsible for
the formulation of monetary policy and the regulation of member banks.
Role and Function of Central Bank:
1. Issue of Currency:
The central bank is given the sole monopoly of issuing currency in order to secure
control over volume of currency and credit. These notes circulate throughout the
country as legal tender money.
2. Banker to Government:
Central bank functions as a banker to the government—both central and state
governments. It carries out all banking business of the government. Government keeps
their cash balances in the current account with the central bank. Similarly, central bank
accepts receipts and makes payment on behalf of the governments.
3. Banker’s Bank and Supervisor:
There are usually hundreds of banks in a country. There should be some agency to
regulate and supervise their proper functioning.
Central bank acts as banker’s bank in three capacities:
(i) It is the custodian of their cash reserves. Banks of the country are required
to keep a certain percentage of their deposits with the central bank; and in
this way the central bank is the ultimate holder of the cash reserves of
commercial banks.

3. (ii) Central bank is lender of last resort. Whenever banks are short of funds,
they can take loans from the central bank and get their trade bills
discounted. The central bank is a source of great strength to the banking
system.
(iii) It acts as a bank of central clearance, settlements and transfers.
4. Controller of Credit and Money Supply:
Central bank controls credit and money supply through its monetary policy which
consists of two parts—currency and credit. Central bank has monopoly of issuing notes
and thereby can control the volume of currency
5. Exchange Control:
Another duty of a central bank is to see that the external value of currency is
maintained. For example, in Bangladesh, The Bangladesh Bank takes steps to ensure
external value of a Taka. It adopts suitable measures to attain this object. The exchange
control system is one such measure.
6. Lender of Last Resort:
When commercial banks have exhausted all resources to supplement their funds at
times of liquidity crisis, they approach central bank as a last resort. As lender of last
resort, central bank guarantees solvency and provides financial accommodation to
commercial banks
(i) By rediscounting their eligible securities and bills of exchange and
(ii) By providing loans against their securities. This saves banks from possible
failure and banking system from a possible breakdown.
7. Custodian of Foreign Exchange or Balances:
A central bank is the custodian of foreign exchange reserves and nation’s gold. It keeps a
close watch on external value of its currency and undertakes exchange management
control. All the foreign currency received by the citizens has to be deposited with the
central bank; and if citizens want to make payment in foreign currency, they have to
apply to the central bank.
8. Clearing House Function:

4. Banks receive cheques drawn on the other banks from their customers which they have
to realize from drawee banks. Similarly, cheques on a particular bank are drawn and
passed into the hands of other banks which have to realize them from the drawee banks.
Independent and separate realization to each cheque would take a lot of time and,
therefore, central bank provides clearing facilities.
9. Collection and Publication of Data:
It has also been entrusted with the task of collection and compilation of statistical
information relating to banking and other financial sectors of the economy.
Monetary Policy: The Monetary Policy is a process whereby the monetary authority,
generally the central bank controls or regulate the money supply in the economy.
Policy Instruments of Central Bank: The instruments or methods of credit control or
instruments of monetary policy are of two kinds:
(i) Quantitative Control: It seeks to control the total quantity of money and bank
credit or to make the bank lend more or less. These are four ways of quantitative
control.
1. Bank Rate policy: The bank rate is the rate at which the central bank is willing to
discount first class bill of exchange. Bank rate is different from “Market Rate”. Market
rate is that rate of which the money market is willing to discount bill of exchange.
Market rate is influenced by the banks rate. A rise in bank rate is generally followed by
a rise in market rate and similarly, a fall or rise in the bank rate is followed by increase
and decrease in the borrowing, and the volume of credit will be adjusted accordingly to
the requirements of the market.
2. Open Market Operation: Open market operation is the most important instrument
of monetary policy. It refers to purchase or sale of government securities, short term as
well as long term, at the initiative of central bank, as a deliberate credit policy.
These Bonds and securities are purchased or sold from or to the commercial banks and
the general public in the country.
3. Change in Reserve Ratio: The commercial banks are required to keep a limited
percentage of their deposits by law with the central bank. The central bank charges the
ratio according to the need of controlling the credit. If the ration is raised, the cash
available with the bank will be reduced, which will compel them to contract the volume
of credit. Similarly when the ratio will be lowered, the credit power will expand.
4. Credit Rationing: This instrument of monetary policy is applied only in time of
financial crises. The bank can collect by re-discounting bill of exchange, when credit is
rationed by fixing the amount. This method of controlling credit can be justified only as

5. a measure to meet exceptional emergencies, because it is open to serious abuses.
There can be a danger, the rationing may not be satisfactory and the central bank may
abuse the power by giving preferential treatment to favorite customers.
(ii) Qualitative Control: It aims to influence the special type of credit, or to divert bank
advances into certain channels, or to discourage from lending for certain purpose. These
methods managing monitory policy are as below.
1. Consumer Credit Rationing: The consumer credit method of monetary management
can be applied only when there is a rise of the scarcity of certain listed articles in the
country. The central bank will impose specific restraints on consumer credit by raising
the required down payments and shorting the maximum period of payment.
2. Moral Persuasion: The central bank of the country also implies a minor instrument of
moral persuasion to influence the total borrowing at the central bank. Moral Persuasion,
refer to the appeal to the commercial bank to act according to the directive of the
central bank. The central bank may issue directives to commercial banks to follow the
policies of the central bank.
3. Direct Action: Central bank may take direct action, if his policies are not followed by
the commercial banks. Direct action involves direct dealings of central bank with the
commercial banks. Direct action may be a refusal on the part of central bank to re-
discount the bill of exchange or it may be in the shape of penalty rate of discounting for
the banks not following the required policies.
There are 8 Shariah compliant Islamic Commercial Banks in Bangladesh.
1. First Security Islami Bank
2. Al Arafah Islami Bank
3. Islami Bank Bangladesh
4. ICB Islamic Bank
5. Union Bank
6. Shahjalal Islami Bank
7. Exim Bank
8. Social Islami Bank
There are 10 commercial Bank
1. AB Bank
2. SoutheastBank
3. CityBank
4. Dhaka Bank
5. Pubali Bank
6. Bank Asia
7. Prime Bank
8. Trust Bank
9. JamunaBank
10. PremierBank