The role of banks in the economy

Question 1

What are the 3 well known banking licenses?

Answer 1

1. Commercial banks – provide financial services to the general public.
2. Investment banks – act as a bridge between large enterprises and investors.
3. Merchant banks – they provide banking financial solutions to high net-worth individuals (HNIs) and large corporations.

Question 2

What are the primary functions of Commercial banks?

Answer 2

• Current Account - Insurance services
• Savings Account
• Fixed / term deposit
• Loans and Advances
• Payments / Remittances
• Withdrawals
• Cards services
• Custody services

Question 3

What are the secondary functions of Commercial banks?

Answer 3

1. insurance services
2. investment services
3. advisory services
4. treasury services
5. cash management services

Question 4

Describe the role of banks as a financial intermediary

Answer 4

Banks act as financial intermediaries by collecting deposits from individuals and businesses with excess funds and lending them to those in need of financing. They pool these deposits and borrowed funds (liabilities) and use them to provide loans, advances, and investments (assets). This process, known as intermediation, allows banks to connect savers—ranging from small individual depositors to large corporations—with borrowers, from individuals using credit cards to businesses funding major projects. Through intermediation, banks facilitate the flow of money in the economy without depositors and borrowers having to meet directly.

Question 5

How do banks facilitate the creation of credit?

Answer 5

Banks create credit through maturity transformation and the multiplier effect. They use short-term deposits to issue long-term loans, as depositors and borrowers transact continuously. When banks lend, the money is spent and redeposited, allowing further lending and expanding credit in the economy. This process funds development projects, drives production, creates jobs, and accelerates economic growth.

Question 6

How do banks contribute to economic growth?

Answer 6

1. they help with capital formation
2. they help to finance the government
3. they help generate employment
4. banks help to promote entrepreneurship
5. they help in the development of trade
6. they help develop agriculture

Question 7

What are some causes of bank failures?

Answer 7

1. higher proportion of short-term liabilities (current accounts) used to finance longer-term loans
2. run on deposit as depositors and creditors can demand payment of deposits and funds immediately

Question 8

How do banks support the implementation of monetary policies and regulations?

Answer 8

Banks support the implementation of monetary policies by facilitating money movement and adjusting liquidity based on central bank regulations. While central banks control the national money supply, banks help regulate cash flow in the market. By increasing or decreasing reserve requirements, central banks influence how much banks can lend. Additionally, banks manage liquidity by adjusting their holdings of liquid assets like bonds and securities. Through these mechanisms, banks help control inflation, support economic growth, and ensure financial stability.