CENTRAL BANK SYSTEM AND BANKING BUSINESS

Central Bank System and Banking Business

CENTRAL BANK SYSTEM AND BANKING BUSINESS

Establishment of Central Bank System

It is the institution that issues and manages the legal currency and acts as the banker of banks. It also controls the monetary (money), credit (interest rates) and exchange (the exchange rate) in the country. Initially, the commercial banks issuing money and accept deposits and make loans. In the light of the simplicity and humility of economic and financial activity in that period, there was not a need for a supervisory body shall draw a general policy or establish regulations for the work of the banks. But too much of some of these banks and expansion in the issuance of money has led to financial crises reflected negatively on the economy, which summoned an institution dedicated to the organization of the banking activity and the organization of the process of issuing money to control the money supply. With the increasing economic activity and the growing needs of governments for funding, and the increasing movement of goods and money across the border, the banking transactions more complex, the need arose to the existence of a body outside the banks to take over the process of supervising the work of those banks and organization of work the morphological, as well as to regulate the issuance of cash, was the emergence of central banks. (Smith, 1990)

After the Second World War, due to the large volume of capital needed to rebuild shattered economies, developed the objectives and functions of the central banks of the role of the simple, as noted, in the process of issuing money and organization of commercial banks, to the role of development supported by economic literature at the time, especially those issued by institutions such as the International and the IMF. To achieve this, it was natural to expand the central banks in the financing of budget deficits of the governments, and to resort to influence the credit policies of banks through selective measures to direct credit to sectors that the country wants its own development and the private sectors of commodity production such as industry and agriculture. After walking in this direction for more than three decades, experience has shown the error of this process approach, where the monetary expansion amounts to high. (McCarthy, 1999) In sum, this approach failed to achieve the goal of increasing the rate of economic growth. While contributing to increased inflation and led eventually to a deep financial crises in many countries of the developing world, especially Latin American countries. It is no secret to you, that Arab countries were not immune to such negative consequences. Has dictated that a significant change in the role of central banks since the early eighties, where he became the role of the Central Bank based on the establishment of a new sound monetary policy highly effective in achieving monetary stability in first class. (McCarthy, 1999)

The functions of central bank

The main financial institution in a market ...