Download Central Bank - Rahimullah Baryalai

Central Bank
Chapter No # 4
Objectives
Central Bank
Function of Central Bank
Monopoly of Notes Issue and Methods
Monetary Policy
Central Bank
The central bank is the head, the leader, and the
supervisor of the banking and monetary system of a
country. Almost every country of the world has its
own central bank.
A central bank is an institution which is responsible
for safeguarding the financial stability of the country.
Functions of a Central Bank
Sole Right of Note Issue
Bankers, Agent and Adviser to the Government.
Banker to Commercial Banks
Controller of Credit
Clearing Agent
Lender of the Last resort
Development role
Other Functions
Sole Right of Note Issue
Central Bank has the Monopoly of note issue.
The reasons for delegation of Authority to note
issue are as follow.
 It brings uniformity in the system of note issue
 The central bank can exercise better control over
the money supply in the country.
 Increase public confidence in the monetary system
of the country.
 Enables central bank to control the lending
operations of the commercial banks.
Bankers, Agent and Adviser to the Govt.
 The Central Bank acts as banker agent and
adviser to the Government.
1. As Banker to the Government, it receives
deposits, Cheques and drafts deposited in the
government account.
2. It makes short term advances to the Government.
3. It provides foreign exchange to government for
the purchase of foreign goods, repaying external
debts.
4. As Financial Agent it collects taxes and other
payment on behalf of the Government.
Banker to Commercial Banks
1. It holds cash reserves and deposits of
commercial banks.
2. It rediscounts the bills of exchange of
commercial banks to cover temporary
difficulties.
3. Influence the creation of credit by the
commercial banks in the best interest of the
country.
Controller of Credit
 Central bank tries to establish,
i.
Stability in the internal price level of the
country.
ii. Stability in the exchange rates
iii. Instrument of credit control are (i) Bank Rate (ii)
Open Market operation (iii) Cash Reserve Ratio.
Clearing Agent
As commercial banks keep there cash reserves
with the Central bank so Central Bank can
easily Settle the claims of various banks
against each other with least use of cash.
Lender of the Last resort
As central bank is Supreme bank of the country, so if
commercial banks are fail to meet their financial
requirements so commercial bank can approach to the
central bank for financial accommodation. The
central bank as lender of last resort provides financial
help to the commercial banks.
Development Role
Central bank undertakes the responsibility of
economic growth with stability in the
economy. It ensures that the funds available
flow to the various priority sectors such as
agricultures, export sector small scale sector.
Other Function
1. It maintains relation with international
agencies such as IMF, world bank.
2. It provides training facilities to the staff
working in various banking institutions.
3. It conducts seminars, surveys and publishes
and annual reports giving real economic
picture of the economy.
“Annual bulletin report” issued from Da
Afghanistan Bank, which show information
related to economy.
Central Bank’s Monopoly of
Note Issue & Method
Monopoly of Note issue
 Central bank is the only authority to issue
Notes in a country as we discussed early as
well that issuing of notes by the central bank
only have some advantages like;
1.
2.
3.
4.
Uniformity in note circulation.
Control over money supply
Control over commercial banks
Public confidence.
Principle of Notes Issue
Currency Principle
 Central bank of the country should keep 100%
Gold for every note issued. It means full
convertibility of notes.
Banking Principle
 No need to keep 100% gold or silver against notes
issued. The note issued in the country should be
according to the needs of trade and industry.
Cont….
Fixed Fiduciary System
 This is widely recognized as a important method of
note issue. Under this system a limit of volume of
currency has Been fixed by central authority. This
limit is called fiduciary limit. Any note issue in
this fiduciary limit is to be Backed by Government
securities.
Monetary Policy
Monetary Policy is the deliberate exercise of
the monetary authority’s power to induce
expansion or contraction in the money supply.
Objectives




Promoting high employment.
Achieving steady economic growth.
Stable price level as a goal.
Stability in Interest rate.
Tools of Monetary Policy
Tools
Quantitative
Control
Qualitative
Controls
i) Open Market
i) Consumer’s
credit
ii) Bank Rate
iii) Credit
Rationing
iv) Varying
Reserve
ii) Use of moral
persuasion
iii) Direct Action
Quantitative Instrument
Open Market Operation
It refers to purchase and sale of govt. securities
by the central bank in open market,
(Purchase and sale of any kind of paper)
During inflation…
Central bank sells securities which results decrease in supply
of money…
During deflation…
Central bank purchase securities which results increase in
supply of money
Bank Rate Policy
Bank rate is the rate of interest at which
central bank advances loans to the
commercial banks.
When central bank increase the bank rate, commercial
banks raise interest rate in giving out loans ,for decreasing
the flow of money.
When central bank decrease the bank rate, commercial
banks lower the interest rate in giving out loans, for
increasing the flow of money.
Credit Rationing
Under this method Central bank allots credit
quota (portion) to commercial banks on basis
of their business…
In case of inflation…
Central bank decrease credit quota…
In case of deflation…
Central bank increase credit quota….
Varying Reserve Ratios
Central bank also control the credit by
changing the reserve ratios of commercial
banks which is normally 25%....
In times of inflation:
Central bank increase the reserve ratio
In times of deflation:
Central bank decrease the reserve ratio
Qualitative Controls
Consumer Credit Control
The consumer credit control technique of
monetary management can be applied when
there arises a scarcity of certain listed articles
in the country. The central bank will invoke
specific restrains on consumer credit by raising
the required down payment and shortening the
maximum period of repayment.
Direct Action
 If commercial banks are following the policy
that is inconsistent with the monitory policy of
central bank…

It can take direct action by imposing
penalty over commercial banks…Like
banning its new branches.
Moral Persuasion
If the commercial banks are pursuing the
policy which the central bank does not like, it
can call the meeting of the commercial banks
and can explain to them the difficulties which
the central bank of the country is facing.
Central bank can also give them threats that if
they do not follow the policy, so Central bank
would not supply credit in times of crisis to
them. Its only for short period of time.