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Central Bank; Meaning, History, and Functions

Central Bank; Meaning, History, and Functions 
 Central Bank 

            The central bank is the highest monetary authority of a country that has monopoly power of note issue and controls the whole financial system of the country. In other words, the central bank is a non-profit making financial institution that controls the whole financial system of the country. It works as a Bankers' Bank and Government bank. The central bank control and manages the balance of payment. Central banks conduct open market transactions through necessary tools for liquidity management. The objective of the central bank is not to earn profit. The central bank provides financial assistance to the government to carry out development works and the central bank is also called the advisor of government.
Read More: Commercial Bank; Meaning, Functions

History of Central Bank

Every country in the world has its central bank and it is essential to every country for the proper functioning of the economy. Risk Bank of Sweden was the first and oldest central bank in the world, it was established in 1668 A.D. with 20 employees. In 1694 Bank of England, was established and formulated as the first true central bank in 1844 A.D. Nepal Rastra Bank (NRB) is the central bank of Nepal and it was established on April 26, 1956 A.D.(Baisahk 14, 2013 B.S)  
Some definition of the central bank was given by some economists;
According to De Kock, "A bank which constitutes the apex of monetary and banking structures of the country in the central bank."
According to Vera Smith, "Central banking is a banking system in which a single bank has been entrusted the duty of regulating the volume of currency and credit in that country."

Function of Central Bank

i. Monopoly of Note issue: Monopoly of note issue is an important function of the central bank. The central bank has the right to be authorized to issue currency notes and to secure control over the currency. Monopoly note issue rights had been given to the only central bank. In 1921, England, the Bank of England got the monopoly right of note issue, Nepal, Nepal Rastra Bank (NRB) had started to the right of the monopoly of note issue from 1959 A.D. (2016 B.S).

ii. Government's Bank: Central Bank works as an agent, and advisor of the government, because the central bank provides the necessary information to the government about the economy, from this definition, it is clear that the central bank is a government's bank.
    The central bank manages to control and transfer funds of the government to another account. The government provides all the necessary facilities to the central bank. It provides long-term, and short-term finance for the government through the sales of securities.

iii. Bankers' Bank: Central bank is also known as the Banker's bank and it is the important function of the central bank. Central banking provides banking services to other banks like; Commerical banks, Development banks, Finance companies, and Microfinance companies. So, it is also knowns as a bankers' bank. Banking and financial institution can be established with the approval of the central bank only. 

iv. Development functions: The development function is the major function of the central bank, Central bank plays a very important function in developing and promoting economic development in developing countries. It helps to develop money and capital markets. It helps in developing a balance system and banking behaviors in the country.

Some other functions of the central bank are mentioned below;
  •  To formulate and implement policy to maintain price stability.
  • To formulate foreign exchange policy and implement the policy.
  • To regulate the issue of currency notes.
  • To arrange the circulation of currency throughout the country.
  • To stabilize the exchange rates of the currency to safeguard the economic interest of the general public.
  • To develop the financial structure of the country on sound lines consistently with national socio-economic objectives and policies.
  • To establish a good relationship with an international financial institution like; World Bank, International Monetary Fund, etc. 
  • To advise the government in the formulation of fiscal, and economic policies.
  • Central banks conduct an open market transactions through necessary tools for liquidity management.
  • To provide training facilities to the staff worker of the various banking institutions.

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