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Difference Between Central Bank And A Commercial Bank

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May 8th, 2011
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The organization, pi and functions of a central bank and, a commercial bank are basically different from each other. Though both are monetary institutions, yet their working differs in theory as well as in practice. We list below the main points of difference between the two organizations.

Central Bank
1. The central bank is an apex bank in a country.
2. It is established under an Ordinance or an Act. The SBP in Pakistan is now governed by the SBP Act, 1956.
3. Central bank possesses the monopoly of note issue.
4. It is not primarily a profit making enterprise.
5. Central bank maintains the foreign exchange reserves of the Country.
6. A central bank is normally owned by the State. It can also have a mixed ownership. SBP in Pakistan had a mixed ownership before nationalization of bank in 1974. Now the State holds full ownership by paying compensation to the shareholders.
7. The central bank does not deal directly with public. 
8. A central bank is financial adviser and banker to the government.
9. A central bank is the lender of the last resort. It is the leader of money market. It performs also the clearing house functions.
10. A central bank is the controller of credit in the country.

Commercial Bank
1. Commercial bank is a constituent unit of banking system. It works under the guidance of the central bank.
2. The commercial bank is established under Companies Ordinance 1984.
3. The commercial bank is not authorized to issue notes.
4. The primary objective of the commercial bank is to earn profit for its shareholders.
5. A commercial bank only deals in foreign exchange under the supervision and direction of the central bank.
6. The commercial banks are generally privately owned enterprises. After nationalization of banks in Pakistan the Federal Government assumed ownership of nationalized banks. All now have been denationalized except HBL and UBL.
7. A commercial bank has direct dealing with the public.
8. A commercial bank is an adviser and banker to the general public.
9. A commercial bank maintains cash reserve with the central bank. It acts in accordance with the directives issued by the central bank.
10. A commercial bank is only a member of the money market. It has no right or power to control credit.

 


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