Commercial banks perform several key functions that are essential for a functioning economy. These functions can be broadly categorized as follows:

• Accepting Deposits: Banks accept deposits from individuals and businesses, providing a safe place to store money. These deposits are typically offered with interest.
• Making Loans: Banks lend money to individuals and businesses for various purposes, such as buying houses, starting businesses, or expanding operations. They charge interest on these loans.
• Payment Services: Banks provide payment services, including cheques, debit cards, credit cards, and online banking, facilitating transactions and trade.
• Credit Creation: By lending out a portion of their deposits, banks create credit, expanding the money supply and contributing to economic growth. This is a crucial function.
• Safeguarding Assets: Banks provide safe deposit boxes for customers to store valuables.
• Foreign Exchange: Banks facilitate international trade by providing foreign exchange services.

In summary, the functions of commercial banks are vital for channeling savings into productive investments, facilitating payments, and managing risk within the economy.

Central banks perform several key functions that are crucial for maintaining economic stability. These functions can be broadly categorized as monetary policy, financial stability, and government functions.

The following table summarizes these functions and their impact:

How these functions contribute to economic stability:

• Monetary policy helps to keep inflation under control and promote sustainable economic growth.
• Lender of last resort prevents financial crises from spiraling out of control.
• Banker to the government supports government fiscal policy and ensures the stability of the financial system.
• Regulation and supervision reduces the risk of financial crises and protects consumers and investors.

In conclusion, the diverse functions of a central bank are interconnected and essential for maintaining a stable and prosperous economy. Each function plays a vital role in mitigating economic risks and promoting long-term economic growth.

Commercial banks play a crucial role in supporting economic growth during a period of rapid expansion. They do so primarily through their lending activities and their role in credit creation.

How banks support economic growth:

• Increased Loan Availability: During economic growth, businesses often require capital to expand their operations, invest in new equipment, and hire more workers. Banks can increase the availability of loans to meet this demand.
• Credit Creation: When banks lend money, they create credit, which increases the money supply. This provides more funds for businesses to invest and expand.
• Reduced Borrowing Costs: During periods of growth, banks may offer lower interest rates on loans to encourage investment and stimulate economic activity. This makes borrowing more attractive to businesses.
• Efficient Allocation of Capital: Banks assess the creditworthiness of borrowers and allocate capital to the most productive sectors of the economy. This ensures that resources are used efficiently.
• Facilitating Trade: Rapid economic growth often involves increased international trade. Banks provide foreign exchange services and facilitate trade finance, supporting this growth.

Example: If a manufacturing company wants to expand its production capacity, it can obtain a loan from a commercial bank. This loan allows the company to purchase new machinery, hire more workers, and increase its output, contributing to overall economic growth. The bank's lending activity directly fuels this expansion.