How Can Central Bank Control Commercial Banks In Nigeria?


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Monica Stott answered
First of all, we will define the differences between a central bank and a commercial bank:

  • Central Bank
Also known as a reserve bank or monetary authority, the central bank has a lot of control of money and currency and controls and regulates interest rates.

Central bank also regulates the supply of money that a country has and controls interest rates. The central bank is often used as a last resort during times of financial crisis and can often loan money when other banks cannot.

A central bank also has control over other banks and oversees that they do not abuse their power or become involved in fraud or reckless behavior.

  • Commercial Bank
A commercial bank is the bank where we carry out our regular transactions and hold our savings accounts. It also provides banking for individual customers and businesses.

Loans and overdrafts can be issued from commercial banks and it deals with payments, withdrawals, EFTPOS and other current account needs.

Central banks have much influence over commercial banks in all parts of the world, not just Nigeria. This is due to the fact that they control the interest rates. If the central bank sets their interest rates higher, all other banks much follow which will affect the bank massively. This is something that is completely out of their control as they must follow suit if the central bank alters the interest rate in order to remain profitable.

The central bank may also be responsible for lending commercial banks money when they need it. This gives the central bank more power and control due to their ability to distribute large amounts of money.

The central bank of Nigeria is unlike many other central banks as it has been known to lend directly to customers. It was establish in 1958 and has since worked towards securing the money of the nation.

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