“A financial institution that accepts deposits, extends credit, and channels the money into lending activities. It generates profits from transaction fees on financial services and on the interest it charges for lending.”
Significance of Banking
Banking is one of the most sensitive businesses all over the world. Banks play very important role in the economy of a country and Pakistan is no exemption. Banks are custodian to the assets of the general masses. The banking sector plays a significant role in a contemporary world of money and economy. It influences and facilitates many different but integrated economic activities like resources mobilization, poverty elimination, production and distribution of public finance. It is purchase of car or building of home banks is always there to serve you better. It is playground or any educational or healthy societal activity the money of banks nurtures them. It is an industrial project or agricultural development of the country the sponsor-ship of banks is very much involved. Banks play very positive and important role in the overall economic development of the country.
“The central bank is the head, the leader and the supervisor of the banking and monetary system of a country”
History and Introduction of Central Bank
Central bank is the most important bank of a country. Its importance increased manifold during past century. It is the symbol of financial sovereignty and stability of the country. It is the head of banking and monetary system. The principles on which a central operates are different from those of the commercial banks. It does not work for profit motive. It acts in the national interest and earning of profit is only a secondary consideration. It does not compete with other banks; rather it is their supervisor. Every country has its own central bank and it must be independent of political influence. Before the First World War the govt. used to authorize a bank to perform the functions of the Central bank. After the First World War there was complete confusion in the currency and exchange market. There were no institutions which could supervise the working of banks and control the money market. So in 1920 it was decided in Brussels conference that all the countries of the world should have central bank in order to establish monetary transactions. Consequently almost all the countries of the world war have central banks.
The first central bank in the world is ‘Risks bank’ of Sweden, which was declared as Central bank in 1668. The bank of England was established in 1694.
Central Banking Principles/ Objectives:
Following are the principle/ objectives of central banking
1. Safeguard Financial Stability:
The main objective of the central bank is to protect and safeguard economical and financial stability. It is established in order to design and implement policies to avoid depressions and unwanted fluctuations in the economy.
2. Working in Public Interest:
Central bank works in the best national interest of the economy and public. It does not give advances, nor it allows any interest on deposits. It performs its functions without any consideration of profit.
3. Supervision of Banking System:
The first and foremost duty of the central bank is to control and supervise ordinary commercial banks. Central bank sets guidelines for commercial banks. It defines parameters in which commercial banks are allowed to perform their operations. This overall supervision ensures stability and also helps in steady growth of banking infrastructure.
4. Control of Credit and Money Supply:
Central bank’s object is to exercise effective control over credit and currency supply in the economy. It has a sole monopoly over note issue and it constantly keeps an eye on the supply of currency in the economy. As commercial banks are creator of credit so another important objective is to watch the credit creation by...