Theory question 111
Financial Institutions(a) What is a commercial bank?
(b) Describe any four ways by which the Central Bank controls the amount of credit given by the commercial banks.
Show the model answer
Model answer
(a) A commercial bank is a profit-making financial institution that accepts deposits from the public, lends money and provides other services such as payment by cheque.
(b) Any four: open market operations (selling securities to reduce banks' cash); bank rate/monetary policy rate (raising the rate to make borrowing dearer); cash reserve ratio; liquidity ratio; special deposits; selective credit control (directing loans to priority sectors); moral suasion; credit ceilings.
Explanation
Explain how each tool reduces (or increases) banks' ability to lend.