Roles and Functions of Commercial Banks


COMMERCIAL BANK

Commercial banks are financial institutions charged with safeguarding our money. They keep our money safe, facilitate funds transfer, and accept deposits. Of course, these are the common functions of banks. But are there more? What are the other roles and functions commercial banks play?

Common functions of commercial banks are:

  • Accepting deposits
  • Agency functions
  • Credit creation
  • Advancing credit facilities.

If asked the functions of a commercial bank, many of us will chorus the only function we know: provision of loans and accepting deposits. Only a few individuals know that the functions of banks aren’t just limited to those two tasks. Below I have highlighted some important things about banks, including their functions and roles.

List of the Most Useless Jobs in the World

Roles and Functions of Commercial Banks

Many of us own one or multiple accounts in several commercial banks. But unfortunately, we don’t even know what these banks do, what they are, or how they function. If you have zero knowledge of commercial banks, this article will bring you up to speed. First off, let’s start with what a commercial bank is.

What Is a Commercial Bank?

A commercial bank is a financial institution that offers loans to the general public, takes deposits, and provides basic financial products like savings accounts and certificates of deposit to businesses, compared to a retail bank that provides similar financial products to people. In a nutshell, commercial banks offer various services to the general public. But do they do all these for free? If not, how do they make money?

How Do Commercial Banks Make Money?

Commercial banks make money by providing different loans to customers and charging interest. The bank’s funds are derived from money deposited by the bank customers in savings accounts, checking accounts, money market accounts, including certificates of deposit (CDs). The depositors earn interest on their bank deposits. But, the interest paid to depositors is not up to the interest rate charged to borrowers.

Common types of loans offered by a commercial bank are:

  • Motor vehicle loans
  • Mortgages
  • Business loans
  • Personal loans

Role of a Commercial Bank:

Commercial banks play a significant role in the economy. The general role of these banks is to offer financial services to the public and businesses, ensuring economic and social stability and lasting growth of the economy. In this regard, credit creation is the most important function of commercial banks.

Here are some of the functions of commercial banks:

Accepting deposits:

Commercial banks are very popular for one essential function: accepting deposits from the public. It is the most traditional and common function of all. There are three types of deposits, savings, current, and fixed.

Current account holders can withdraw their money whenever they want to. Savings accounts operate long-term and attract interests as the deposits are considered investments. On the flip side, fixed deposit accounts work on a set period and draw a fixed interest rate.

Agency functions:

Commercial banks are already agents of the banking system. However, they can also assume the role of personal agents to their customers. An agent is a person or institution that conducts activities, in this case, financial operations, on behalf of the principal (the customer) for a few, known as commission.

Commercial banks taking the role of an agency means banks help collect checks, bills, and drafts; the receipt of interests and dividends from a customer’s investments; and paying interest and instalments of loans or insurance premiums. They can also help purchase and sell securities or transfer funds from one account to the other.

Credit creation:

While offering loans to customers, banks don’t grant loans in cash to the borrower. Rather, the bank creates a deposit account from which the borrower can tale funds. This allows the borrower to withdraw money by check based on his needs. By creating a demand deposit in the borrower’s account without printing extra money, the bank raises the amount of money in circulation.

Advancing Credit Facilities:

Banks’ financing is an important function since it accounts for the highest percentage of revenue earned yearly. Banks mostly provide short-term and medium-term loans from a portion of the cash deposits at a premium interest rate. They don’t offer long-term financing because they need to maintain the liquidity assets.

Before advancing loans to customers, banks often check the borrower’s creditworthiness, business profitability, nature and size of business, basically everything that can help them determine if the customer will pay the loan or end up defaulting on it.

Funds Transfer:

Transferring funds from a customer’s account to another is another important function of commercial banks. Fund transfer is a genuine means of paying for transactions, including other financial activities. Transfer of funds can be conducted via multiple ways like draft, standing orders, checks, e-banking, etc.

How Long Do Banks Take to Release Money After Probate?

Other Functions of Commercial Banks:

Aside from the functions mentioned above, banks also perform many other functions. They provide foreign exchange services to clients in import and export businesses by buying and selling foreign currency. But, banks must get the go-ahead from the regulatory body, mainly the central bank, before dealing with foreign exchange.

A commercial bank also acts as a guardian of precious stones and other valuables. They give customers lockers to safely store their precious metals, jewellery, and important documents. Such items are safer when stashed in the bank than storing them at home, where they may be stolen or destroyed.

Recent Posts