(a) Mention and explain five ways… | Commerce

Question 1 Report

(a) Mention and explain five ways by which the Central Bank regulates the activities of commercial banks.

(b) State five factors which a bank manager considers in granting loans to customers.

Answer

(a) Five ways by which the Central Bank regulates the activities of commercial banks

Open market operations (OMO): The Central Bank buys or sells government securities in the open market to increase or reduce the amount of money in the hands of commercial banks, thereby controlling their ability to lend.
Bank (discount) rate policy: By raising or lowering the rate at which it lends to commercial banks, the Central Bank makes credit dearer or cheaper and so controls the volume of lending.
Cash reserve/liquidity ratio requirement: It compels commercial banks to keep a certain proportion of their deposits as reserves, which limits the amount they can lend out.
Special deposits (special directives): The Central Bank may require commercial banks to lodge additional deposits with it, reducing the funds available for lending.
Moral suasion and direct directives: It appeals to or directs banks to follow particular lending policies, such as favouring priority sectors like agriculture.

(Selective credit control and issuing guidelines/regulations are also acceptable.)

(b) Five factors a bank manager considers in granting loans to customers

Character (integrity) of the borrower: The manager considers the honesty and past record of the customer in repaying debts.
Capacity to repay: He assesses the customer's income and ability to repay the loan with interest.
Collateral security: He requires assets such as land, buildings or shares that can be sold to recover the loan if the customer defaults.
Purpose of the loan: The manager examines whether the loan will be used for a viable and lawful venture that can generate returns.
Capital of the borrower: He considers the customer's own contribution or net worth in the venture, as this shows commitment and reduces risk.

(The period of repayment and prevailing economic conditions are also acceptable.)

Answer Details

(a) Five ways by which the Central Bank regulates the activities of commercial banks

Open market operations (OMO): The Central Bank buys or sells government securities in the open market to increase or reduce the amount of money in the hands of commercial banks, thereby controlling their ability to lend.
Bank (discount) rate policy: By raising or lowering the rate at which it lends to commercial banks, the Central Bank makes credit dearer or cheaper and so controls the volume of lending.
Cash reserve/liquidity ratio requirement: It compels commercial banks to keep a certain proportion of their deposits as reserves, which limits the amount they can lend out.
Special deposits (special directives): The Central Bank may require commercial banks to lodge additional deposits with it, reducing the funds available for lending.
Moral suasion and direct directives: It appeals to or directs banks to follow particular lending policies, such as favouring priority sectors like agriculture.

(Selective credit control and issuing guidelines/regulations are also acceptable.)

(b) Five factors a bank manager considers in granting loans to customers

Character (integrity) of the borrower: The manager considers the honesty and past record of the customer in repaying debts.
Capacity to repay: He assesses the customer's income and ability to repay the loan with interest.
Collateral security: He requires assets such as land, buildings or shares that can be sold to recover the loan if the customer defaults.
Purpose of the loan: The manager examines whether the loan will be used for a viable and lawful venture that can generate returns.
Capital of the borrower: He considers the customer's own contribution or net worth in the venture, as this shows commitment and reduces risk.

(The period of repayment and prevailing economic conditions are also acceptable.)

(a) Mention and explain five ways by which the Central Bank regulates the activities of commercial banks. (b) State five factors which a bank manager consid...