The bank which builds up banking system and money market is a central bank. The primary function of a central bank is to assist government in formulating economic policy and its implementation, to control and conduct money-market and banks’ credit.

The functions of central bank are different from other banks. The following functions of central bank are stated below-

  1. A.    General functions:

1. Issue of notes and coins: the first and foremost function of central bank is to issue notes and coins as per needs of the public and requirement of business and commerce. As per rule, notes are issued against gold, silver and foreign currency. Bangladesh bank keeps foreign currency reserve as security against issuance of notes. Bangladesh bank unilaterally reserves right to issue notes. The arguments in its favor are as follows-

a)   To maintain equilibrium in quality between notes and currency issues.

b)   To maintain equilibrium in size, types and values of notes and currency.

c)    To maintain stability in rates of exchange both inland and foreign.

d)   To create confidence on the people.

e)    To control money market.

2. Government bank: central bank acts as a banker and economic adviser of the government. The central bank conducts and maintains government accounts for all government receipts and payments.

3. Banker’s bank: central bank acts as a banker’s bank. As a rule, all scheduled commercial banks have to maintain SLR (Statutory Liquidity Reserve) 18% with Bangladesh bank. (CRR 5.5% and Bond securities 13.5%)

4. Lender of the last resort: in case of crisis situation of commercial banks, central banks acts as lender of the last resort by lending against first class securities, bill of exchange etc.

5. Reservoir of foreign currency: central bank maintains foreign currency reserve. For the purpose of control of foreign currency, the following factors are responsible-

a. For issuance of notes.

b. For payments of liabilities of banks.

c. for payment of foreign debts.

6. Clearing house: Central bank acts as a clearing house for settlement of inter-bank receipts and payments.

7. Credit control: credit control is one of the major functions of central bank. The following are the ways to control credit-

a. Change in bank rate.

b. open market operation.

c. Increase or decrease of reserve ratio.

d. selective credit.

e. Direct influence.

f. Moral suasion.

g. propaganda.


B. Purposeful functions:

1. Control currency market: Central bank acts as a guardian of the currency market. For the purpose of formation, control and maintenance of currency market and overall development, central bank is responsible.

2. Stabilize exchange rate: Central bank maintains stability of the foreign currency exchange rate by means of controlling credit. Stable exchange rates position helps to create favorable balance of trade.

3. Maintain gold standard: central bank is responsible for maintenance and control of gold reserve.

4. Stabilize price level: Fluctuations and frequent changes of price-level affect economic growth. With a view to making good of the economic imbalance and crisis situations, central bank takes necessary measures for stabilizing the price level.

5. Employment opportunities: Central bank takes initiatives for creating employment opportunities by means of credit control mechanism.

C. Expansion and development functions:

1. Development of agriculture sector: Central bank formulates policy for expansion of agricultural-sector for the purpose of economic up-liftments in the country.

2. Development of industrial sector: For the overall growth and development of industry, central bank formulates policy.

3. Development of natural resources: Central bank plays a vital role for tapping natural resources which may lead to economic growth.


D. Other functions:

1. Adviser and representatives of government: central bank advises government on economic issues and sometimes acts as a representative of the government.

2. Economic research: Central bank conducts various economic research works and formulates policies for economic development. It also conducts survey on different economic issues for knowledge of the general public of the country.