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Main Functions of Commercial Banks

Updated on December 2, 2015

What is a commercial bank?

A commercial bank can be defined as a banking institution whose business is to collect money or other valuable items from the general public for safekeeping, make them available to their respective owners or customers on demand, and also give out loans to businesses and individuals in need of funds.

A commercial bank can also be simply defined as a bank that offers its services to all members of the general public and to businesses and organizations.

Back in the day, commercial banks only provided their services to business organizations, but today they provide financial services to any member of the general public. You can patronize the services of a commercial bank, and so can I. Everybody can.

Are “high-street banks” the same as commercial banks?

Yes they are. Sometimes commercial banks are called “high-street banks” simply because these banks have numerous branches located in cities, towns, and even villages.

All commercial banks are profit making entities; this is why they are also known as profit oriented banks. Their main goal is to make profit from the services they render to the public.

The activities of all commercial banks in a country are monitored by the central bank of the country.

Functions of commercial banks

There are many functions of commercial banks. Below are some of the most common functions that these banks perform:

  1. Accepting deposits from the general public: The basic function of all commercial banks in any part of the world is to accept deposits from customers for safe-keeping. Any member of the public can open an account with a commercial bank and deposit money that he or she does not need immediately. In keeping customers monies, commercial banks have a number of deposit accounts that they make available to their customers. The most common of these deposit accounts are the current account, savings account, and the fixed deposit account.
  2. Lending to customers: This is another very common function of commercial banks. This function is also said to be the most profitable activity of a commercial bank. The reason lending out money to customers is a highly profitable business for commercial banks is mainly because of the interests charged on loans given out. Any individual or business that takes a loan from a bank pays the loan with an interest added to it. And that is where these banks generate their revenue. There are so many ways commercial banks give out loans to their customers. The most common way is by creating a loan account for the borrower and crediting the amount borrowed into that account. Commercial banks also give out loans through overdrafts. In this instance, the banks will allow customers to spend more money than they have in the bank so that they end up owing the bank. For example, if a customer has only $500.00 in his account and yet is allowed by the bank to spend $550.00, then we say that the customer’s account has been overdrawn by $50.00. The bank then calculates interest on the amount by which the customer’s account was overdrawn. In the example above, the interest will be calculated on the $50.00.
  3. Keeping valuable items of customers: Besides keeping the money of their customers, commercial banks also accept valuable items from their customers for safe-keeping. Examples of some valuable items that banks normally keep safe for their customers include: wills, certificates, expensive paintings or artworks, jewelry, etc. These banks have the ability to keep any legal and portable valuable of their customers for a fee.
  4. Providing advisory services to customers: Commercial banks often advise their customers on some business and investment opportunities. They also advise customers on which types of accounts that would be the most helpful to them. For example, if you are going to open an account with a commercial bank, as part of the bank’s advisory services it offers to customers, you’d be advised whether to open a savings account or a current account. A student opening an account with a commercial bank would more likely be advised by the bank to open a savings account instead of a current or fixed deposit account.
  5. Acting as agents for their customers: Commercial banks usually act on behalf of their customers in so many ways. For example, they can make payments on behalf of their customers through the use of checks. They can also receive money on behalf of their customers. In performing this function, the bank can also carry out standing orders. A standing order is an arrangement a customer makes with his bank in which the bank pays a fixed amount of money from his account towards something on a regular basis. For example, a customer can give a standing order to his bank to make regular payments from his account for his monthly insurance premiums, rent, school fees, etc. This helps the customer in so many ways. For example, by authorizing the bank to carry out these payments on his behalf, a customer reduces his likelihood of defaulting in payments of certain important things such insurance premiums and mortgage payments.
  6. Issuing traveler’s check: A traveler’s check is a type of check that can be exchanged for the money of a foreign country. Traveler’s checks are normally used by people traveling to foreign countries to stay for a period of time and come back home. Commercial banks issue traveler’s checks to their customers. Since these checks are cashable everywhere, the traveler doesn’t need to carry large sums of money on him as he or she travels. These checks allow the traveler to obtain foreign currency in whichever country that he finds himself in.
  7. Investing in businesses: Besides keeping the valuables and monies of their customers, commercial banks also undertake direct investments. Commercial banks buy shares in companies and enjoy the dividends that come along with owning shares. This is one of the most common direct investments that commercial banks go into. They also invest directly into the establishment of businesses in various sectors of the economy. This is a very important function of commercial banks because it plays no small role in promoting the economic development of the nation.

Other services of commercial banks

Besides the functions and services above, commercial banks also perform other services such as the following:

  • Commercial banks can buy and sell shares for their customers
  • They can serve as executors of wills
  • They sometimes also operate pension funds for customers
  • They receive dividends on shares and interests on securities on behalf of their customers
  • They provide money transfer services
  • They buy and sell securities
  • They provide cards such as debit cards and credit cards for their customers
  • They also offer telephone and internet banking services to their customers, thereby making it possible for customers to conduct their transactions without physically visiting the banking hall

Conclusion

All these functions, roles, and services that the commercial banks offer come together to play a very important role in ensuring the growth of the economy. This is what makes commercial banks very important financial institutions in every country.

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