(a) Outline five functions of commercial banks. (b) List and explain five ways the central bank controls the commercial banks.

(a) Five functions of commercial banks

1. Accepting deposits: They receive money from the public into current, savings and fixed deposit accounts for safekeeping.
2. Lending money: They grant loans and overdrafts to individuals and businesses at interest.
3. Facilitating payments: They provide cheques, standing orders, credit transfers, cards and electronic transfers that enable customers to make and receive payments.
4. Agency services: They act on behalf of customers by paying bills, collecting dividends, buying and selling shares and executing standing instructions.
5. Safe custody of valuables: They keep documents, jewellery and other valuables safe in strong rooms and safe deposit boxes.

(Other acceptable functions: foreign exchange dealings, advisory services, issuing travellers cheques.)

(b) Five ways the central bank controls the commercial banks

1. Open market operations (OMO): The central bank buys or sells government securities in the money market. Selling securities reduces the cash available to commercial banks and their ability to lend, while buying increases it.
2. Bank (discount) rate: By raising the rate at which it lends to commercial banks, the central bank makes borrowing costly, forcing banks to raise their own lending rates and reduce credit; lowering it has the opposite effect.
3. Cash reserve ratio: It fixes the minimum percentage of total deposits that each bank must keep with the central bank. Raising the ratio reduces the money available for lending.
4. Liquidity ratio: It fixes the proportion of a bank's assets that must be held in liquid form. A higher liquidity ratio restricts the volume of credit banks can create.
5. Special directives and moral suasion: The central bank issues instructions and appeals to banks to expand or restrict lending to particular sectors of the economy, and may impose selective credit controls.