Fundamentals of Banking Operations

1.1. Functions of Commercial Banks

Commercial banks perform critical intermediation functions within the economy.

1. Deposit Mobilization

They collect savings from surplus units (households) and make funds available for lending.

2. Credit Creation

Through fractional reserve banking, commercial banks create credit by lending multiples of their reserves.

3. Payment Facilitation

They operate clearing systems, electronic transfers, cheques, debit/credit cards, and mobile banking.

4. Agency and Utility Services

• Standing orders

• Foreign exchange services

• Custodial services

• Trade finance (letters of credit)