Commercial bank

Definition: a commercial bank is a firm (a profit-making institution) with a charter from the government to engage in the business of banking.

1. ACCEPTING DEPOSITS FROM CUSTOMERS. This function is important, because bank mainly depends on the funds deposited to with them by the public.

2. PROVIDING LOANS AND ADVANCES. Commercial bank make profits by advancing loans to the public. There are 3 ways in which banks can give loans; direct loans, overdraft/advance account and discounting of bills

Function of Commercial Bank

3. PROVIDING FINANCIAL SERVICES this includes tax management, purchase of shares, night-safe facilities and automatic taller machine, keeping of valuable and documents and consultation on financial matters

1.CASH REQUIMENT
Cash ratio= ( coins + notes) x 100% (%) total deposits

2. LIQUID ASSET REQUIMENT A minimum level of liquid assets against eligible liabilities.
Liquidity = all liquid assets x 100% Ratio (%)

COMMERCIAL BANKS RESERVE REQUIREMENT

3. STATUTORY RESERVE REQUIMENT The purpose is to control the volume of liquidity in the banking system and the capacity of banks to generate loans. Statutory = reserve ratio reserve in BNM x 100% total deposits

Capital and Reserves

Capital refers to capital of shareholder. Reserve are undistributed profit used for future investment.

Liquid assets
There are assets, which can easily br converted into cash without the loss of value

Coins and notes in Vaults

There are ready cash held by a bank for daily transaction.

Loan and Advances

This is the major component Of assets.

Balance Sheet Of a Commercial Bank

Reserve in BNM and balance with Other banks

There are 100% liquid and yield no profit.

Investment
This includes local and Foreign buying or selling of Shares and government Securities.

Money-at-call and Short notice Special deposits

They are deposited kept in BNM to reduce banks ability to give out loans.

Bill discounted
They include trade bill or bill of exchange and treasury bills.

They are short term loans given to business people and financial investor.

Assumes multiple banks (multi-banking system in The economy)

Cash ratio is fixed by Bank Negara Malaysia and its value is constant Leakage does not exists

Deposits are in the form of current deosits.

Assumption

Public keeps money in the bank.

Bank has only one liability: deposits There are only two type of assets : cash and loan

Bank does not keep excess reserve

1. 2.

A charge in cash ratio/ legal reserve requirement (if ratio is increased, the credit created is reduced) Clearing house (cheque-sorting house/center) . This slows down the process because it involved a lot of physical movements among banks. Also, reserve used to settle cheques in the cleaning house need to be replaced. Availability of collateral security (mortagages, land tittle, etc). Without it, lending cannot take place. BNMs monetary control (e.g control on bank rates) will affect amount of loans. Leakages in the monetary in the banking system (e.g when idle money is held for precautionary motives). When banks keep excess reserves, less credit can be created.

Limits to credit creation

3. 4. 5. 6.

Central bank

The Central Bank is given the responsibility to manage the countrys financial activities and financial bodies in order to maintain economy stability and prosperity in the country.

1. To issued current and to safeguard the external value of the currency

The central bank has been issuing currency since 1967.it is also helps to safeguard the value of the currency.

2. Banker to the government

The central bank keeps the governments principle bank accounts, receives tax and other revenue and maker payments with respect to government expenditures.

5. Promotes monetary stability of the country

The central bank is responsible in achieving monetary stability, control of credit and hence money supply as an essential condition for continue growth.

Function of the Central Bank

3. Banker to other banks.

Banks will deposited any spare cash they posses into their balances at the central bank.

4. Holder of the countrys stock of gold and foreign currency reserve

The central bank manages the nations foreign exchanges reserve, implement the governments exchanges rate.