Where do the big boys lend their money? Who prints all the money? Â And what are the differences between a commercial bank and a central bank? These questions probably come up if you analyze the banking system. Theoretically, you could find the answer fast. A commercial bank is a financial institution that provides investment products to individuals and businesses. They pay low interest to the depositors and earn high interest from the borrowers. So they make profits through passing. As the Federal Reserve Bank, Central Banks are the superordinate institutions that regulate economics.
If it were so easy, we could close the article now. But the banking system is much more complicated. Let’s find out the details together.
Types Of Commercial Banks
There are two types you can classify Commercial banks:
- Scheduled commercial banks
- Non-scheduled commercial banks
Scheduled Commercial Banks
You can further divide the scheduled commercial banks into three types.
Private Bank
A bank is a private bank when private individuals own more than 51% of the share capital. It would be best to keep in mind that these banks perform as public companies in a recognized exchange.
Public Bank
A bank is classified as a public bank when the Government holds more than 51% of a banking company’s share capital. This bank also performs publicly. So you can call the bank a Public sector bank.
Foreign Bank
Foreign banks establish in foreign countries. They operate their branches in their home country and do their business in foreign countries.
Regional Rural Banks
These banks are established in rural areas and provide financial assistance for agriculture activities and other small scale industrial activities. They are known as rural banks. In short, these commercial banks support businesses in rural areas, which mostly originate from the agriculture industry.
Features Of A Commercial Bank
The following are the features that help identify a commercial bank:
Financial Institutions
Commercial banks are financial institutions that conduct financial transactions, including deposits, advances, loans, investment, and credit creation. They provide a variety of services to both individuals and corporations.
They Have Either Public Or Private Ownership
You can classify these banks into public and private banks. They are not solely Government and can be private too.
They Are Dealers Of Foreign Currency
Commercial banks support and speed up foreign trade by helping foreign exchange buying and selling.
They Have A Profit Motive
Commercial banks operate intending to earn a profit and generating income by providing financial services to the public through interest charging.
What Is A Central Bank?
A central bank is a national bank that provides financial and banking services for its Government and commercial banking system and helps implement the Government’s monetary policy and issuing currency.
Features Of A Central Bank
The following are some of the distinguishing features of central banks that will help you identify them.
They Are Legal Entities
Central banks are legal entities established under the provisions of a particular act by the Government, and they hold special significance and rights.
They Are Clearing Houses
The central banks can be seen as clearinghouses since they initiate the settlement of bills, cheques, and other kinds of financial instruments among two or more banks to ensure their banking system’s smooth functioning.
They Can Be Considered The Bankers Of Other Banks And The Government
The central banks provide essential banking services like deposits and withdrawals to different commercial banks and Governments.
They Are The Note Printing Authorities
The central banks are the only banks of a country with authority to print new notes. There are a few minor exceptions to this, though.
They Act As The Nation’s Gold And Foreign Exchange Reserves
These banks are also considered the keepers or custodians of a country’s foreign exchange. They are also custodians of the country’s gold reserves, and they keep these assets under their supervision.
They Act As The Backbones Of The Country’s Banking System
As central banks are like an apex body, they act as the country’s banking system’s backbone. They work by performing all the vital financial functions. A central bank’s duties also include framing the banking rules and regulations, circulation of currency in the market, and advising the Government on major and minor economic issues.
They Enjoy The Power Of Being In A Monopoly
There is only one central bank in every country, so all the central banks want the authorities and privileges of being in a monopoly. They appreciate different monopolistic rights.
They Are Apex Bodies
Central banks are the supreme and leading bodies of the country’s banking system. As mentioned before, they act as a backbone of the country’s economy. They work by regulating all the other banks and supporting and supplementing the nation’s whole banking structure.
Central Banks Are Always Government-Owned
Central banks are still strictly owned by the Government, and therefore, they only belong to the public sector.
They Have A Monetary Authority
Central banks control the flow of money through a country. They achieve this through the implementation of various policies and regulations.
Main Differences Between Central Banks And Commercial Banks
The Ownership
- The central bank is almost always a publicly owned institution owned by many countries. In contrast, commercial banks can be both public and private.
- The former is the apex institution of the banking system. In comparison, a commercial bank is a financial institution that operates under the central bank’s authority.
- The central bank is an apex institution that administers and controls its whole monetary and banking system. A commercial bank is a financial institution that earns its profits by initiating deposits, making investments, and advancing.
- The chief of the central bank is the governor of the central bank. In comparison, the head of the commercial bank is the chairman of the respective commercial bank.
The Ministre
- Central banks serve the other banks alongside the Government, while commercial banks serve the general public, including individuals and corporations.
- The central bank is the only bank of its kind in the country, whereas commercial banks have many different types.
- The central bank’s main objective is credit control and economic stability. In contrast, commercial banks’ primary goal is to earn a profit.
The Regulator
- While the central bank is the custodian of the foreign currency and regulator of the foreign exchange operations, commercial banks are dealers of foreign currency. They work by facilitating such transactions for their customers.
- Central banks provide loans to commercial banks when needed or in an emergency, whereas commercial banks regularly offer their customers loans to earn profits.
- The other functions of the central banks involve the issuance of government bonds, formulation and drafting of various banking regulations, and the clearance of funds among member banks. In comparison, commercial banks’ features and duties include safe depositing services, provision of foreign exchange, and issuance of letters of credits.
The Bottom Line
The banking system is very vast and complex. But there are some counter stones to orient, such as the central banks. They are the regulators of the currencies and the system in the abstract. On the other hand, the commercial banks whose primary goal is profit. Both types of banks make deals but on different levels. The main focus of the central bank is economics. Simultaneously, the center of attention of a commercial bank is capitalistic growth. They manage this by selling financial products such as current accounts, savings accounts, loans, etc. Both banks are a part of the big system, and they need each other for a functioning circular money system.
