2.3.2.1 Definition of commercial banks

Commercial banks are financial institutions that provide a wide range of banking services to individuals, businesses, and other organizations. They are the most common type of banks and play a crucial role in the economy by facilitating financial intermediation between savers and borrowers. Commercial banks operate under regulatory frameworks and are licensed to carry out various banking activities, including accepting deposits, granting loans, and offering other financial services. Here’s a comprehensive definition of commercial banks:

Definition of Commercial Banks: Commercial banks are financial institutions that are authorized to operate as banks and provide a variety of financial services to the public. They function as intermediaries between depositors (individuals and businesses) who have surplus funds and borrowers (individuals, businesses, and governments) who need funds to finance their projects or activities. Commercial banks play a critical role in the financial system by accepting deposits and using those funds to provide loans and credit to borrowers.

Key Characteristics of Commercial Banks:

1. Accepting Deposits: Commercial banks accept deposits from individuals and businesses, which can be in the form of current accounts, savings accounts, fixed deposits, and other deposit products. Depositors earn interest on their deposits, and the funds held in these accounts can be withdrawn by the depositors as needed.
2. Granting Loans and Credit: One of the primary functions of commercial banks is to provide loans and credit facilities to borrowers. They lend money for various purposes, such as personal loans, business loans, mortgages, and working capital financing.
3. Credit Creation: Commercial banks have the unique ability to create credit through the process of fractional reserve banking. When banks receive deposits, they are required to keep only a fraction of those deposits as reserves, allowing them to lend out a portion of the deposits, effectively creating new money in the form of loans.
4. Payment Services: Commercial banks offer payment services, such as issuing checks, providing debit and credit cards, and facilitating electronic fund transfers, which allow customers to make transactions and payments conveniently.
5. Foreign Exchange Services: Many commercial banks offer foreign exchange services to facilitate international trade and foreign currency transactions.
6. Investment and Wealth Management: Some commercial banks also provide investment and wealth management services, offering customers opportunities to invest in various financial products, such as mutual funds, stocks, and bonds.
7. Safekeeping of Valuables: Commercial banks may offer safe deposit boxes to customers for the secure storage of valuables, important documents, and other items.
8. Interest and Fees: Commercial banks generate revenue from the interest earned on loans and the fees charged for various services provided to customers.

Commercial banks are regulated by central banks and other financial authorities to ensure compliance with banking laws and maintain financial stability. They are subject to prudential regulations to safeguard depositors’ funds and maintain the overall stability of the banking system. The services provided by commercial banks are essential for the functioning of the modern economy, as they facilitate the allocation of funds and support economic activities and growth.