The central bank has several key functions: 1) It issues currency and regulates the money supply to promote economic growth and stability. 2) It acts as a lender of last resort to commercial banks and governments to maintain confidence in the financial system. 3) It implements monetary policy by setting interest rates to target low inflation and steady growth. In developing countries, the central bank works to promote economic development in addition to its traditional roles. It supports growth through investment and credit expansion. It also aims to establish a stable banking system and expand access to rural areas to aid the agricultural sector.

1. FUNCTIONS OF CENTRAL BANK
&
ROLE IN DEVELOPING COUNTRIES

2. “A Central Bank is the bank in any country to which has been
entrusted the duty of regulating the volume of currency and
credit in that country”
-Bank of International Settlement.
According to Kent :
“Central Bank may be defined as an institution which is
charged with the responsibility of managing the expansion
and contraction of the volume of money in the interest of
general public welfare.”
Bank of England was the world’s first effective central bank that was
established in 1694. As per the resolution passed in Brussels Financial
Conference, 1920, all the countries should establish a central bank for interest
of world cooperation. Thus, since 1920, central banks are formed in almost
every country of the world. In India, RBI operates as a central bank and was
formed in 1935.
DEFINITION

3. FUNCTIONS OF
CENTRAL BANK
1. Issue money: The Central Bank will have
responsibility for issuing notes and coins and ensure
people have faith in notes which are printed, e.g.
protect against forgery. Printing money is also an
important responsibility because printing too much
can cause inflation.

4. 2. Lender of Last Resort to Commercial banks:
If banks get into liquidity shortages then the Central
Bank is able to lend the commercial bank sufficient
funds to avoid the bank running short. This is a very
important function as it helps maintain confidence in
the banking system. If a bank ran out of money, people
would lose confidence and want to withdraw their
money from the bank. Having a lender of last resort
means that we don’t expect a liquidity crisis with our
banks, therefore people have high confidence in
keeping our savings in banks. For example, the US
Federal Reserve was created in 1907 after a bank panic
was averted by intervention from J.P.Morgan; this led
to the creation of a Central Bank who would have this
function.

5. 3. Lender of Last Resort to Government:
Government borrowing is financed by selling bonds
on the open market. There may be some months
where the government fails to sell sufficient bonds
and so has a shortfall. This would cause panic
amongst bond investors and they would be more
likely to sell their government bonds and demand
higher interest rates. However, if the Bank of
England intervene and buy some government
bonds then they can avoid these ‘liquidity
shortages’. This gives bond investors more
confidence and helps the government to borrow at
lower interest rates. A problem in the Eurozone in
2011, is that the ECB was not willing to act as lender
of last resort – causing higher bond yields.

6. 4. Operate monetary policy/interest rates:
The Central Bank set interest rates to target low
inflation and maintain economic growth. Every
month the MPC will meet and evaluate whether
inflationary pressures in the economy justify a rate
increase. To make a judgement on inflationary
pressures they will examine every aspect of the
economic situation and look at a variety of
economic statistics to get a picture of the whole
economy.

7. 5. Banker, Fiscal Agent and Adviser to
the Government:
Central banks everywhere act as bankers, fiscal agents
and advisers to their respective governments. As
banker to the government, the central bank keeps
the deposits of the central and state governments
and makes payments on behalf of governments. But
it does not pay interest on governments deposits. It
buys and sells foreign currencies on behalf of the
government.

8. 6. Custody and Management of Foreign
Exchange Reserves :
The central bank keeps and manages the foreign
exchange reserves of the country. It is an official
reservoir of gold and foreign currencies. It sells gold at
fixed prices to the monetary authorities of other
countries. It also buys and sells foreign currencies at
international prices. Further, it fixes the exchange rates
of the domestic currency in terms of foreign currencies.
It holds these rates within narrow limits in keeping with
its obligations as a member of the International
Monetary Fund and tries to bring stability in foreign
exchange rates. Further, it manages exchange control
operations by supplying foreign currencies to importers
and persons visiting foreign countries on business,
studies, etc. in keeping with the rules laid down by the
government.

9. 7. Controller of Credit:
The most important function of the central bank is to
control the credit creation power of commercial bank
in order to control inflationary and deflationary
pressures within this economy. For this purpose, it
adopts quantitative methods and qualitative methods.
Quantitative methods aim at controlling the cost and
quantity of credit by adopting bank rate policy, open
market operations, and by variations in reserve ratios
of commercial banks. Qualitative methods control the
use and direction of credit. These involve selective
credit controls and direct action. By adopting such
methods, the central bank tries to influence and control
credit creation by commercial banks in order to
stabilise economic activity in the country.

10. ROLE OF CENTRAL
BANK IN DEVELOPING
COUNTRIES

11. 1. FUNCTIONS :
The central bank in the developing countries perform both traditional
and non traditional functions. The traditional functions performed by
central bank are- having the monopoly of note-issue, acting as banker to
the government, serving as banker’s bank , functioning as the lender of
the last resort, controlling and regulating the credit, and maintaining the
external stability.
2. ECONOMIC GROWTH :
Economic growth requires sufficient financial resources. The central
bank can ensure adequate monetary expansion in the country. The
central bank can provide funds for initiating investment in the public
sector.

12. 3. INTERNAL STABILITY:
The central bank should also attempt to maintain internal price stability. The
developing countries are susceptible to inflationary pressures mainly due to
supply inelasticities in the short period.
4. DEVELOPMENT OF BANKING SYSTEM :
The central bank should not only take measures to develop an integrated
commercial banking system , but also should not hesitate undertaking directly
the commercial banking functions.
5. BRANCH EXPANSION:
The commercial banks generally concentrate their branches in the urban areas
. In order to extend credit facilities to the agriculture sector , they should
prepare programmes for branch expansion in the rural areas as well.

13. 6. DEVELOPMENT OF FINANCIAL INSTITUTIONS :
Development of the leading sectors of the economy such as agriculture,
industry , foreign-trade, etc requires long- term finances. These specialized
financial institutions should be established which provide term-loans to these
sectors.
7. DEVELOPMENT OF BANKING HABITS:
Through its various credit control instruments and by providing discounting
facilities to the commercial banks, the central bank exercises full control over
the activities of commercial banks. This creates public confidence in the
banking system and helps in the development of banking habits of the people.
8. TRAINING FACILITIES :
A major difficulty in developing the banking system in developing countries is
the lack of trained staff . The central bank can provide training facilities to
meet the personnel requirements of the bankers .

14. THANK YOU