10 important functions of commercial banks in Nigeria

Commercial banks are the most important financial institution in any country. They hold country funds from citizens, government, and foreigners. All other institutions do business with their help. Therefore, short-term credits, financial advice, and other necessary information that aid business success are achieved with the help of a commercial banking system. In this article, we will consider the definition and functions of commercial banks.

What is a commercial bank

A commercial bank is a financial institution or intermediary that accepts deposits and other valuables for safekeeping and gives out loans, overdrafts, and other financial services to its clients. In Nigeria, there are 24 commercial banks with National and state-level licenses. To ensure a stable economy, the Central Bank of Nigeria regulates these money deposit banks. This is done through its monetary policy meetings and by guiding its circular. Also, the CBN may increase the minimum capital requirement to keep banks at their best level.

Five main functions of commercial banks

1. Accepting deposits

Commercial banks are known to accept deposits from individuals, organizations, and the government. This is why they are also referred to as money deposit banks. Economic agents with excess funding put their money in the bank for safekeeping. This forms most banks’ current liabilities.

2. Providing loans

Instead of leaving the funds available to them idle, commercial banks provide loan facilities to economic agents with deficit funding. Through the provision of loans to businesses, this financial intermediary can increase the wealth of people in a country. 

3. Granting overdrafts

Another way money deposit institutions aid those with deficit funding is through overdraft facilities. Through this medium, banks help current account holders to withdraw money above the total amount of money in their bank accounts. Loans and overdrafts are the main source of income for commercial banks. 

4. Creating money

The Central Bank of Nigeria create money by printing more money or by increasing the money supply. However, banks can create money not as a single unit but when they work together. This is done when banks issue loans and overdrafts to deficit economic agents. When loans are given out and deposited to another bank, in effect more money has been created. We will discuss more of this in a future article.

Other functions of commercial banks

5. Issuance of debit/credit cards

Commercial banking now involves the issuance of debit and credit cards. This is due to advancements in technology, especially in the area of Internet banking. With debit and credit cards, an individual can make payments for items bought at a store or online without the need to visit his/her bank for cash withdrawal.

6. Money remittance

Another important function of commercial banks is money remittance on behalf of their customers. This is done through standing order, credit advice, and so on. With the development of new technology in the banking system, money remittance has taken a different shape. This is now done via the Internet. 

And banks with agreements with other private institutions through APIs individuals can make payments or remittances to other institutions. For example, recurring subscriptions for various services (for example payment for Netflix) can be done online through automation. Therefore, after enabling automation and at the due date your bank account is debited.

7. Information banking

Through this financial institution, the Central Bank can collect information about customers’ accounts as well as trades, commerce, and industry that can be useful for economic development.

8. Accepting other valuables

Aside from accepting money as deposits, commercial banks also accept other valuables as part of their activities. These valuables include important certificates of individuals and companies as well as expensive gadgets and other jewelry.

9. Letter of credits

Banks support international trade through letters of credits. With this document, an international trader can use it to import goods from other countries without the need to carry money for such trade. The document is proof that the importer can make the payment of the goods upon completion of the trade.

10. Foreign exchange

Commercial banks are granted the right by the country's central bank to carry out foreign exchange transactions. Individuals who want to convert their local currency to a foreign one to aid traveling can do so via a money deposit institution.