Commercial Banks and their Functions

There are numerous types of banks in the banking sector, including commercial banks. These banks are the most used in communities. Their functions make them a staple in any society. These functions encompass offering loans and accepting deposits. They also have other secondary roles. Commercial banks serve as the bridge between those who have surplus money and those who may require financial incentives to boost their businesses or lifestyles. Therefore, these banks have a significant role in the economy by enhancing capital, credit, and liquidity. They also serve individuals and small businesses. These banks amplify SME growth through their basic banking services.

What is a Commercial Bank?

A commercial bank can be defined as a financial institution that enables consumers to carry out numerous transactions. This type of bank receives deposits, provides checking account services, advances loans, offers savings accounts to individuals and businesses, and provides various financial products such as cheques. They are vital in business transactions. Therefore, they are the most common call a consumer has with the banking industry.

Furthermore, the function of a commercial bank can be directly linked to how it makes money. Commercial banks earn money through loans as they earn interest. There are multiple loans provided by these financial institutions, including mortgages, business loans, and personal loans. Their source of funds that facilitate these loans are customers’ deposits. They also gain income from numerous fees allocated to different financial products. 

Commercial banks and investment banks have many similarities. However, they should not be confused. A major difference lies in their clientele. The former caters to individuals and small and medium-sized enterprises (SMEs), while investment banks serve large corporations and institutional investors.

 The investment banking clientele may feature governments, other financial institutions, hedge funds, pension funds, and large organisations. Their functions include brokerage services for institutions and high net-worth individuals, merger-and-acquisition strategies, and corporation reorganisation facilities. 

What are the Functions of Commercial Banks?

Their primary functions revolve around deposits and loans. However, there is an assortment of secondary roles designed around these functions. Here are the major functions of commercial banks.

Accepting Deposits

Clients can put their money or savings into their accounts as deposits at these financial institutions.

Demand Deposits or Current Accounts

Account owners can withdraw without prior notice. Clients do not incur any interest. Some commercial banks charge a commission for the deposit or withdrawal of these funds. 

Fixed Deposit Services

These financial products are also known as time deposits. Clients who use fixed deposits cannot withdraw this money until the period of expiry lapses. The money also amasses an interest. The interest is higher than in other financial products. Moreover, the interest rate depends on the length of the period and the amount deposited.

Savings Accounts

These deposits share some similarities with both demand and fixed deposits. Withdrawal is restricted. There is a withdrawable amount limit. They also accumulate an interest. However, this interest is rather small.

Advancing Loans

Banks lend to business owners and individuals through various loans for short periods. These loans earn interest, making money for the banks.

Overdraft Facilities

Clients can overdraw their accounts. The exceeded amount is subject to interest. The client has a short period during which they should raise the balance plus interest. 

Safe-Deposit

Commercial banks do not restrict their transactions to money. These also facilitate the safe custody of valuable documents and items in a strong room. This service is available at an annual fee.

References

Businesses looking to collaborate with other corporations and financial institutions rely on banks to supply references for their financial position.

Why are Commercial Banks Important?

These banks are an essential component of the service industry. They provide consumers with many financial routine transactions to promote personal and business success. Furthermore, they are crucial in economic development as they create capital and liquidity. Capital is the money or assets a person or organisation possesses for a particular purpose, such as entrepreneurship or investment. On the other hand, liquidity refers to the simplicity of converting an asset into cash without disrupting its marketplace. The main function of commercial banks is enabling deposits and lending to enhance liquidity.

Commercial banks also have a major role in credit creation. Credit is necessary for the progression of SMEs. Loans also aid in improving people’s lifestyles. Access to mortgages helps people purchase their homes. Additionally, funds for personal loans can be used to pay school fees and unexpected financial demands. 

Conclusion

The recent breakthrough in business growth can be attributed to the role of commercial banks in society. These banks augment economic development and improve the general public’s quality of life. Their functions in loans and deposits are a win-win situation for both the bank and the consumer. The bank gains income from the interest incurred in loans and deposited money. Clients can deposit money in various financial products such as savings accounts, checking accounts, and money market funds. Furthermore, the general public and businesses profit from low-interest loans, overdraft facilities, safe deposits, and letters of credit. The central bank regulates the functions of commercial banks.