Introducing the role and function of a central bank

1. Central Bank : An
Introduction
Wahono Diphayana

2. Definition
• The bank which is responsible for the financial
and economical stability of country.
• It has a pivotal position in the banking system
and regulates and formulates policies for the
scheduled commercial banks in the country.

3. Role of Central Bank
• A central bank has become a must for every
country and its economy.
• It controls other banks, inflation and formulates
its economic and fiscal policies and advises the
government on foreign trade, development of
financial and capital market, balance of trade,
foreign aids etc.

4. Continue….
• The world bank (IBRD) and international
monetary funds (IMF) have their full control over
all central banks, especially those in the Third
World countries.
• Every country, being the member of the UN, has
no option except to follow the dictates of the IMF
and the World Bank.

5. Functions of Central Bank
• Central bank can be placed in two broad
categories.
• 1- Government’s bank
• 2- Banker’s bank

6. 1- Government’s Bank
• 1- Monopoly of note issue
• 2- Controller of credit
• 3- Custodian of foreign exchange
• 4- Issue and management of public debts
• 5- Development of financial institutions

7. 1- Monopoly of note issue
• Issue currency notes for the country.
• Notes are issued on certain principal including a
fixed ratio of a reserve of gold, silver and
approved foreign exchange.

8. 2- Controller of credit
• The central bank controls and regulates credit
money in the country in order to expand or
contract it to maintain the requirement of
economy.
• It controls:
• Bank rate policy
• Open market operation
• Bank reserve ratio

9. 3- Custodian of foreign exchange
• Every country exports goods and services to
earn profit.
• This earned and other foreign exchange is held
in the custody of the central bank

10. 4-Issue and management of public debts
• Central bank manage issue of debts, payment of
interest and retirement.
• Pay annual interest and return the principal
amount on maturity.

11. 5-Development of financial institutions
• Central bank is responsible to develop financial
institution which play vital role in industrial,
agriculture and capital development of economy.
• It also facilitates the establishment and running
of money market and stock exchange.

12. 2- Banker’s bank
• Capacity to performs valuable services to its
scheduled commercial banks.
• 1- Lender of last resort
• 2- Rediscounting bill of exchange
• 3- Clearing housing services
• 4- Cash reserve
• 5- Counseling services

13. 1- Lender of last resort
• The central bank provides loan to the bank in
crises to enable it to discharge its obligation and
thus prevents it to go bankrupt.

14. 2- Rediscounting bill of exchange
• Bill of Exchange is a non-interest-bearing written
order used primarily in international trade that
binds one party to pay a fixed sum of money to
another party at a predetermined future date.

15. 2- Rediscounting bill of exchange
Bills of exchange are similar to checks and promissory notes.
They can be drawn by individuals or banks and are generally
transferable by endorsements.
The difference between a promissory note and a bill of
exchange is that this product is transferable and can bind one
party to pay a third party that was not involved in its creation.
If these bills are issued by a bank, they can be referred to as
bank drafts. If they are issued by individuals, they can be
referred to as trade drafts.

16. 3- Clearing housing services
• 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.
• Clearing services is possible because the central bank
possess cash reserver of commercial bank.

17. 4- Cash reserve
• 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.

18. 5- Counseling services
• The central bank offers advice and counseling
services in the light of experts and advice
commercial banks to formulates and readjust
their polices.

19. Advantages
• Money supply is in complete control of the
central bank.
• The currency system become uniform
• The system enjoys complete confidence of
public which is necessary for the success of
currency.

20. Method of issuing currency
• Minimum reserve system
• Fixed fiduciary system.
• Proportional reserve system
• Simple deposit method

21. Minimum reserve system
• Certain level of gold reserve is fixed against
which any amount of currency can be issued.
Advantage
• Facilitates saving of gold
• Flexible and allow contraction and expansion of
money supply.

22. Limitation
• This system cause inflation
• It may lose public confidence for over-issue of
the currency.

23. Fixed fiduciary system
• Currency is issued up to a certain amount
without any reserve of gold.
• Currency is needed more than the fixed level it
must be backed by gold penny for penny.
• This method was adopted by Japan and
Norway.

24. Merits
• It is safe system
• Inflation is well controlled
• It enjoys public confidence to the highest.

25. Demerits
• The system is inelastic
• It adversely affects industrial growth.
• It lacks frugality because it requires much gold
• It is a costly system

26. Proportional reserve system
• This system call for a proportionate gold and
silver reserve to the total issue of currency.
• Due to its strong benefits it has become
internationally accepted currency-issuing
system.

27. Counties deposited reserve ratio
• U.S 40%
• France 35%
• Germany 40%
• Russia 25%
• Pakistan 30%
• India 40%

28. Advantage
• It is flexible.
• It is helpful in industrial growth.
• Gold and silver are required in comparatively
small amount.

29. Disadvantage
• Inflation to some extent is possible
• Keynes declared it an extravagant and wasteful
system
• Government have tendency to violate the
system.

30. Simple deposit system
• This system requires a hundred percent gold
reserve for the issue of currency.
Pros
• It is safe
• Inflation is not possible

31. Cons
• It is inelastic and cannot be changed to the
requirement.
• It restricts business and industrial growth.
• A large amount of gold and silver is needed.
• Costly and wasteful.
• Risk of deflation.
• It is impracticable.

32. Thank You