Home Finance What is central bank-Top 8 objectives and Importance of central bank

What is central bank-Top 8 objectives and Importance of central bank

Central bank is the bank of bankers so it facilitates the banks. All the banks are worked under the central bank because they provide loans and suggest the terms and conditions to other banks.

This bank maintain the reserves of all scheduled banks therefore and secure the future of these banks. The central bank controls the inflation and deflation to clarify in bad economic conditions and backbone of other all banks.

Briefing about these topics:

  1. Introduction
  2. Organization of central bank
  3. Evolution and growth
  4. Definitions
  5. Objectives of the central bank
  6. Importance of central bank
  7. Conclusion
  8. FAQ’s

INTRODUCTION:

The central banking system was originated in different countries during the 19th century. But it was in a very crude form during that time. 

The modern system of central banking particularly developed in the 1st half of the 20th century (i.e. 1901-2000).

The need for a moderate central banking system was strongly felt during the financial crisis caused by the First World War (1914-1918).

After the war, therefore, there was complete disorder in currency and exchange markets. There were large withdrawals similarly to money from banks.

 The bank reserves fell below to clarify the needed level. There was no organization which could manage the working of banks and also work as a fiscal agent.

 In addition to the above difficulties, there was rigidity or lack of elasticity in the supply of currency.

In command to find a solution to the financial difficulty as a result of the countries and set them on a healthy secure position, a discussion was held at Brussels in 1920.

central bank

It was clear in that discussion so that to control the supply of money and credit in the economy and preserve stable business conditions, each country must introduce its own central bank.

Now the central bank is a symbol consequently of financial sovereignty and economic stability of a country. It is an institution which is responsible that is to say for safeguarding the financial stability of a country.

Firstly It handles the extreme reserves of the nation. Supervision the flow of purchasing power-whether currency or credit and acts as a banker to the state.

In the modern age therefore, this importance of central banks has enormously increased.

This has been due to various causes; the growing interdependence of economic life so within and between countries; the greater necessity of management to clarify and control of currency system etc.

Source: Wikipedia

ORGANIZATION OF CENTRAL BANK:

The institution of central bank however different from country to country. So it is difficult to speak of a single type as a standard.

There are banks which are owned and conduct by the private shareholders, such as, the Federal Reserve System of the U.S.A.

organization of central bank

There are other central banks therefore, such as, the Bank of England; the Bank of France declared so which are fully owned and managed by the government.

Again, there may be central banks therefore which are together owned and supervise by the government and private shareholders.

The Governor and Directors in whose hands effective power so is concentrated are often.

Appointed by the government or their appointment is made subject because to the approval of the government.

In the U.S.A. all the members of the Board to clarify of Governors are appointed by the President.

In Pakistan, France and England, the Governor, therefore, the Deputy Governors and all Directors are appointed by the Government.

The Government also retains control over other matters of the central bank.

Many functions of central bank to perform to clarify in economy.

EVOLUTION & GROWTH:

The Riksbank of Sweden was set up in 1656 and declared that is to say as a central bank in 1668 and is considered to be the oldest of the central banks.

The Bank of England therefore was established in 1694. It is also called the nurture of central banks.

 The Bank of France certainly was invented in 1800. The National Bank of Denmark consequently was invented in 1818 and the National Bank of Belgium was established in 1850.

 The Reich’s Bank of Germany subsequently was made in 1876. So in U.S.A. Federal Reserve System certainly was set up in 1914.

The Reserve Bank of India was formed during in 1935 and the State Bank of Pakistan was established on July 1, 1948.

DEFINITIONS:

 “A central bank subsequently is a bank of bankers. Its duty is to control the monetary policy and through control of this high-powered money therefore to control the community’s supply of money”.

(Samuelson)

 “Central Bank means a bank, established to strengthen the monetary system, therefore, to enhance the pace of economic development and to raise public welfare.

” It carries out the business of the Government and maintains so its account.

It controls the issue of notes because the country’s reserves and takes steps to preserve the value of the country’s currency and the foreign exchange.”

(Comprehensively)

Main Points of Definition

  • An institution.
  • Authorized by government.
  • To control the amount of credit.
  • To supervise the commercial banks.
  •  That act in the public interest

PRINCIPLES/OBJECTS OF CENTRAL BANK

Central bank is provide principles so to the help of others that are follow:

1. Economic Stability:

Central bank basically works for the fulfilment of financial needs economic stability and for the growth of the banking system.

If any sector of economy appearance difficulties, therefore, specific behaviour is provided by the central bank to comfort its financial position.

2. National Interest:

The main object of the central bank to clarify is not to earn the profit slightly to work in the positive interest of the nation.

Central Bank always prefers so national interest to all other things. Beside it, the central bank also strive for the other member banks to work sincerely in the valid interest of the nation.

3. Effective Policy:

Central bank execution efficient policies however to control the unfair expansion or contraction of credit in the country.

The central bank uses its powers to defeat the commercial banks in order to intensify the invent policies.

4. Special Authorities:

Central bank has special authorities to perform its functions effectively (e.g.) Issuance of currency notes, so control of credit and different functions being a Govt. Bank etc.

The central bank uses so its authorities to strengthen the economy of the country with great responsibility.

5. Constitutional Limitations:

Central bank works according to the framed rules that is to say and regulations of the government and its all dealings always remain within the said rules.

constitutional limitations

The financial organization not only observes the constitutional limits but also instructs the other banks and financial institutions to observe the said limits.

6. Free From Political Pressure:

Central bank does not accept any kind of pressure of any political party or group while rendering its duties for the better interest of the country.

Unfortunately, if the financial bank becomes an instrument of any subversive group then the country can face an irreparable loss.

7. Custodian of Banking System:

Central bank is reliable but for the safeguarding and development of the banking system.

So the middle bank not only keeps an alert eye on the economic affairs of the country. but also plays a necessary role to encourage and secure the present banking system.

8. Custodian of Credit System:

The central bank is also responsible for the protection and stability of the credit system. So, these factors always kept in view deciding the matters.

IMPORTANCE OF CENTRAL BANK

The central bank plays certainly an important role in the economic development of a country. The role of the middle bank for economic growth so can be described as under Promotion of agriculture sector:

The central bank that is to say sets up a separate agricultural credit department. To clarify for solving the problems of agricultural credit.

The medium bank issues instructions to commercial banks. Therefore, to provide a credit facility in the form of short and medium-term loans to the agriculture sector.

The State Bank of Pakistan has played a leading role to clarify in the establishment of Zarai Taraqiati Bank of Pakistan.

Importance of central bank

Promotion of industrial sector: 

The medium bank of the country consequently helps in solving the problems of industrialists.

The State Bank of Pakistan has played a most important role in the establishment of the Industrial Development Bank to solve the credit problems of industrialists.

Development of financial institutions: 

Financial institution, that is to say, plays an important role in the development of banks and financial institutions.

It takes all possible measures for the establishment to clarify new banks and opening new branches in neglected areas Promotion and development of commercial banks and other financial institutions is very important.

Training facilities:

The main drawback in the promotion to clarify of the banking system is the lack of trained banking staff.

The financial organization provides training facilities because to meet the requirements of banks. It is due to trained staff that the banks are providing modern banking facilities to the community.

Interest rate policy:

The financial organization consequently forms a proper interest rate policy. Subsequently in the country to encourage investment and development activities.

interest rate

Interest rate policy is also adopted to encourage productive investment and discourage unproductive investment.

Developing of saving habits: 

The economic development of the country therefore depends upon the savings of the people.

The financial institution establishes a savings bank and introduces attractive saving schemes. to clarify to promote and develop the saving habits among small savers.

Controller of credit: 

A modern financial institution regulates credit light because of the prevailing economic conditions in the country.

It takes suitable monetary and credit policies and implements so the same to the promotion of development activities.

Balance of payments problems:

Developing countries face a serious balance of payments difficulties because to fit the targets of development 6plans.

The medium bank to clarify manages and control’s the foreign exchange of the country. But and also acts as a technical adviser to government foreign exchange policy.

These measures help to overcome but difficulties of balance of payments.

Assistance to specialized financial institutions:

 The financial organization provides assistance to specialized financial institutions such as agricultural development bank.

Industrial development bank etc to enable them to provide certainly adequate credit facilities to industrialists, exporters, importers and other Farmers.

CONCLUSION:

It can be concluded from the above detail that in order to achieve the objectives of monetary policy. So the bank should use both the quantitative and qualitative methods jointly rather than independently.

FAQ’s

1.What is central bank?

“A central bank subsequently is a bank of bankers. Its duty is to control the monetary policy and through control of this high-powered money therefore to control the community’s supply of money”.

Central Bank means a bank, established to strengthen the monetary system, therefore, to enhance the pace of economic development and to raise public welfare”.

2.What is importance of central bank?

The central bank plays certainly an important role in the economic development of a country. The role of the middle bank for economic growth so can be described as under Promotion of agriculture sector.

The medium bank issues instructions to commercial banks, therefore, to provide credit facility in the form of short and medium-term loans to the agriculture sector.

3.How many objectives of central bank?

Different objectives perform central bank are there:

1. Economic Stability
2. National Interest
3. Effective Policy
4. Special Authorities
5. Constitutional Limitations
6. Free From Political Pressure
7. Custodian of Banking System
8. Custodian of the Credit System

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