A Central Bank or Reserve bank is an institution that manages a state’s currency, money supply and interest rates. A Central possesses the monopoly to increase the amount of money in the nation and also prints the national currency – the nation’s legal tender. The major function of the central bank is to manage the nation’s money supply. Central Bank also have supervisory powers intended to prevent bank runs and also to monitor commercial banks in order to prevent fraudulent activities.
The Central Bank of Nigeria was established by the CBN Act of 1958 and commenced operations on July 1, 1959.
The major regulatory objectives of the bank as stated in the CBN Act is to
- Promote monetary stability and a sound financial environment
- Act as a banker of last resort and financial adviser to the federal government
- Maintain the external reserves to safeguard the international value of the legal tender currency
- Ensure monetary and price stability
- Serve as bankers to other banks within Nigeria and abroad
Functions Of Central Bank
- Bank Of Note Issue: The Central Bank has the sole monopoly of issuing bank notes in every country. The currency notes printed and issued by the Central Bank serves as the nation’s legal tender and this will be accepted as a means of exchange for goods and services all over the nation.
Advantages of The Right to Issue Bank Note to the Central Bank are:
a. Central Bank will be able to exercise better control of money supply in the nation
b. It enables the Central Bank to exercise control over the creation of credit by commercial banks.
c. It brings uniformity in note issue and circulation in the country
d. Easier management of paper currency. Being the supreme bank of the country, the central bank has monetary information of the economy and can change the currency accordingly. - Lender of the Last Resort: This means that when a bank is faced with shortage liquid fund, after trying all other sources to obtain loan without success, it can always apply to the Central Bank for loan. This function is an extension of its function as the banker’s bank.
- Banker to other Banks and Financial Institutions: Central Banks act as banker to other commercial banks. The Central Bank keeps bank accounts for commercial and merchant banks and other financial institutions operating within the country. They maintain two types of bank accounts for these banks; statutory deposit – for minimum cash requirement and operational deposit – enough cash to maintain inter-bank settlement. The Central bank functions in 3 capacities as:
a. Lender of Last resort to other banks
b. Clearing agent
c. Custodian of cash - Debt Management: The Central bank manages its domestic debt and services external debt on the instruction of the Federal Ministry of Finance. They are empowered to issue debt instrument and manage Federal Government’s domestic debt in terms and conditions agreed upon by the Government and the bank.
- Banker and Adviser to the Government: The Central Bank performs same functions both to the commercial banks and the Government. The Central bank does the following:
a. Maintains the account of the state government.
b. Accepts deposit from the government
c. Provides foreign exchange for repaying debts or buying foreign goods from outside the country.
d. Gives advise to the government on economic, monetary, financial and fiscal matters such as financing, devaluation, monetary policy.
Another function that the CBN has performed since its inception is aiding the development of the Nigerian economy’s industrial, agricultural and financial sectors. The CBN was also granted overall administrative authority over the Nigerian federal government’s financial and monetary policies.
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