Meaning and functions of Bank

What is bank

Bank can simply be defined as an entity that is engaged in the banking business.

However In the case of United Dominions Trust Ltd V. Kirkwood bank is defined to mean cooperation which accepts money on current, accounts, paycheques to drown upon such account on demand and collect cheques for customers.

Read also: History of banking

Types of Bank

Generally, there are two major types of banks i.e Central banks and Commercial Banks.

It is true that a bank is a place where people keep their money. However, it will be wrong for us to confine ourselves to that view because apart from that there are a lot more functions which banks can perform.

Meaning and functions of Central Bank?

There is no single definition of what is a Central Bank; a Central Bank can well be defined based on its functions. The following are the functions of a Central Bank.

  1. The central bank is the bank that has the mandate to issue the national currency.
  2. The central bank regulates and supervises banks and financial institutions including mortgage financing, development financing, lease financing, licensing, and revocation of licenses.
  3. The central bank formulates, implements, and be responsible for monetary policy, including exchange rate policy
  4. The central bank is the lender of the last resort. When saying the lender of the last resort it implies that the central bank assumes the responsibility of meeting all reasonable demands for accommodation of commercial banks in time difficulty and crisis.
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Meaning and functions of Commercial Banks

Commercial Banks are all banks that are engaged in functions that are distinct from the functions of the central bank. The major aim of commercial banks is to generate profit for their shareholders.

Commercial banks perform both primary functions (banking services) and secondary functions (non-banking services)

Primary Functions of commercial banks

Primary functions of commercial are those functions that are strictly banking services and can be done by the bank only and not other financial institutions.

Primary Functions of commercial banks includes;

  1. To collects deposits from the public i.e Saving Deposits, Fixed Deposits, Current Deposits, and Recurring Deposits. These are what are sometimes referred to as accounts in banking.
  2. To grant loans and Advances in form of the Overdraft facility, Cash Credits, or Discounting of the Bill of Exchange.

Secondary Functions of commercial banks

Secondary functions of commercial banks are those functions that are non-banking services that can also be done by other financial institutions.

The common secondary functions of commercial banks are agency functions and general utility functions.

Agency functions of  commercial banks

Commercial banks perform the following agency functions.

  1. Collection of Cheques
  2. Periodic Payments
  3. Portfolio Management
  4. Periodic Collections
  5. They act as trustees, executors, advisors, and administrators on behalf of their clients.

General Utility Functions of commercial banks

  1. Issue of Drafts and Letter of Credits
  2. Locker Facility
  3. Underwriting of Shares
  4. Dealing in Foreign Exchange
  5. Project Reports
  6. Participate in different Social Welfare Programmes
  7. It acts as a referee to the financial standing of customers. It collects creditworthiness information about clients of its customers.
  8. It provides market information to its customers, etc. It provides travelers’ cheques facility.
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Ellinger & Lomnicker(1994) “Modern banking law”; 2nd ed Publ. info. – Oxford: Clarendon Press,

Hapgood, M.(2007),  Pagert’s law  of Banking, 13th  ed; Lexis Nexis Butterworths, London

Khubchandan, B.S(2007), Practice & Law of Banking for Macmillan   India Ltd, New Delhi.

Isack Kimaro

Editor-in-chief and founder of Holder of Bachelor of Laws (LL.B) from Mzumbe University and Post Graduate Diploma in Legal Practice from the Law school of Tanzania. Lawyer by profession and blogger by passion.

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