Meaning of Bank: Different Types of Banks

Banks are financial institutions that are licensed to accept deposits and loans. Banks may also offer financial services such as wealth management, currency exchange, and safe deposit boxes. There are different types of banks, including Development banks, Commercial bank, Merchant banks, and Mortgage banks etc. In most countries, banks are regulated by the national government or central bank.

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In this topic, we are going to discuss somethings about development banks, Commercial bank, Mortgage Bank, functions of development bank, Development bank of Nigeria, Development Bank of United State, difference between Development bank, Definition of Merchant bank, and functions of Merchant bank.

DISCLAIMER: This post is written with the sole aim of educating the Economics and Finance Students in Nigeria and United States.

Definition of Development Bank and Merchant Bank | functions of development bank

Meaning of Development Bank

A development bank is a financial institution specifically established to provide long-term capital for investment in specific productive areas of the economy such as Industry, Agriculture and Commerce e.g.

  • Nigerian Bank for Commerce and Industry (NBCI),
  • Nigerian Agricultural and Cooperative Bank (NACB),
  • Ghana National Investment.

Example of Development of bank in the United States of America

  • Notable community development banks Beneficial State Bank in Oakland,
  • CA.Carver Federal Savings Bank in New York,
  • NY.Central Bank of Kansas City in Kansas City,
  • MO.City First Bank of D.C. in Washington,
  • D.C.First NBC Bank in New Orleans,
  • LA.Hope Community Credit Union in Jackson,
  • MS.Bank, (GNIB), etc

All these are the examples development banks of United States USA. Now let’s move on to the functions of development bank below.

Functions Of Development Bank

All these are the functions of development bank try to read and understand them one after the other.

  1. They provide long-term capital investment.
  2. Offering financial and technical advice to investors
  3. They have experts in various fields who provide the advice investors may require to run successful businesses.
  4. Direct investment in productive sectors: They may carry out investment in areas such as industry, agriculture, and commerce either wholly or in joint partnership with other investors.
  5. Conducting studies or research on the economy: They carry out research or studies in the relevant areas of the economy.

That is all for the functions of development bank, the next subtopic is to discuss about the differences between development bank and commercial bank.

Differences Between Development Bank And Commercial Bank

Definition of Development Bank and Merchant Bank | functions of development bank
functions of development bank

The two types of banks differ in the following aspects:

  1. Development banks are usually government owned while commercial banks are usually owned by shareholders.
  2. Development banks provide a long-term loan while commercial banks provide mainly short term loans.
  3. Development banks usually provide finance for investors in specific sectors while commercial banks service many sectors.
  4. Development banks do not deal in foreign exchange while commercial banks do.
  5. Development banks do not perform the role of trustees and executors while commercial banks perform these functions.
  6. Development banks do not keep customers
  7. valuables such as expensive jewelry, etc.
  8. while commercial banks perform these functions.

Definition of Merchant bank

A merchant bank is a ‘wholesale bank’ that deals in larges sums of money and whose main functions are: Issuing of shares and dealing in discounting and acceptance of bills.

Examples merchant banks in Nigeria

  • Chase Merchant Bank,
  • Nigeria Acceptance Limited,
  • ICON Limited, etc.

Examples of Merchant Bank in USA

  • Citigroup,
  • J.P. Morgan
  • Goldman Sachs

Functions Of Merchant Bank

  1. Underwriting of shares: They guarantee buying of shares that may not be subscribed by the public.
  2. Acceptance of bills of exchange: They accept bills and undertake to pay the discount if the debtor (the drawee and importer) defaults on the maturity of the bill. This function is important in international trade financing.
  3. Provision of medium and long-term loans: They provide loans for investment thereby helping to stimulate economic development.
  4. Provision of financial and technical advice: They provide advice to investors on matters relating to investment which could be financial, technical, or managerial.

Central Bank

A Central Bank is a Federal Government owned apex financial institution which controls and supervises the entire monetary system of a country. It assists, directs, and regulates the activities of other financial institutions to make them comply with government monetary and economic policies.

Functions of the Central Bank

Central Bank performs certain roles in an economy. These include:

  1. Serves as government’s bank and financial adviser: The Central Bank collects all revenues accruing to the government from taxation and other sources. It makes payments on the government’s behalf and advises the government on monetary matters.
  2. Banker to other banks: The commercial banks and other financial institutions keep
    up a percentage of their deposits with the Central Bank as legal reserves or special deposits. It also offers clearing house facilities for settling interbank indebtedness.
  3. A lender of last resort: It makes loans to commercial banks and other financial
    institutions to enable them to meet unusual cash demands by customers. This helps to prevent a monetary crisis.
  4. Issuing of currency: The Central Bank is the sole authority permitted by law to issue currency (coins and banknotes) which is then put into circulation through the commercial banks.
  5. Implementation of government monetary policy: It assists the government in executing its monetary policies by the use of various instruments such as open Market Operations, Bank rates, directives, and Cash deposit ratio etc. This helps regulate the money,y supply and stabilize prices.
  6. Servicing of the national debt: It helps to manage the national debt. Apart from helping the government to secure loans (both from within and outside the country) it helps to service the loans.
  7. Promotion of economic development: It does this either directly or indirectly. It finances projects directly on behalf of the government. By Encouraging the growth of financial institutions, judicious application of monetary policy, and undertaking economic research, etc indirectly encourages economic development.

Meaning of Commercial Bank

A commercial bank is a joint-stock financial institution that trades in money with the sole aim of raising profits for its shareholders. At the end of the consolidation period, that is December 31, 2005, only twenty-five (25) consolidated banks out of the existing eighty-nine (89) banks were able to meet the capital base of N25 billion.

Examples of Commercial Banks in Nigeria

  1. First Bank of Nigeria PLC
  2. Union Bank of Nigeria PLC
  3. Guaranty Trust Bank PLC
  4. Wema Bank PLC
  5. Skye Bank PLC
  6. United Bank for Africa PLC
  7. Intercontinental Bank PLC
  8. Afribank Nigeria PLC
  9. Access Bank PLC
  10. Oceanic Bank PLC
  11. Bank PHB Plc
  12. Diamond Bank PLC
  13. Ecobank Nigeria PLC
  14. Fidelity Bank PLC
  15. First City Monument Bank PLC
  16. Finbank Nigeria PLC
  17. Stanbic IBTC Bank PLC
  18. Sterling Bank PLC
  19. Unity Bank PLC
  20. Zenith Bank PLC

Examples of Commercial Banks in United States of America (USA)

J.P. Morgan Chase
Bank of America Corp.
Wells Fargo
Goldman Sachs Group
Morgan Stanley
Capital One Financial
U.S. Bancorp
PNC Financial Services Group
Bank of New York Mellon Corp

Sizes of commercial banks

Size matters in the banking industry because:

  • It helps to disseminate marginal banking.
  • It protects against shocks and volatility.

Functions of commercial banks

Bank of New York Mellon Corp
  • Acceptance of Cash Deposit: They offer facilities for safe-keeping of money belonging to their customers. Such money may be deposited in current, savings, or fixed deposit accounts.
  • Agents for making payments: They make payments on behalf of their customers.
  • Lending agents: They make short-term loans to customers through several ways granting direct loans, granting overdrafts, discounting.
  • Safe-keeping of customers’ valuables: Customers can deposit their important documents (e.g.wills, shares, certificates) or treasured ornaments with the bank for safe-keeping.
  • Acting as trustees and executors of wills: They can manage the assets of the deceased and distribute same among his heirs, according to his will.
  • Acting as referees and investment advisers: They can recommend their customers to foreign firms that require indigenous business partners. They also advise their customers on matters relating to investment.

Meaning of Mortgage Banks

A Mortgage bank is specifically set up for the purpose of providing long-term loans for building houses. E.g. Federal Mortgage Bank or Imani Mortgage Mortgage Finance Ltd.

Functions of Mortgage Banks

  1. Provision of long-term housing loans: They
  2. make loans to people and organizations who wish to build their own houses.
  3. Acceptance of money deposits: They accept deposits from people and organizations, especially those who wish to save part of the money required for setting up their own houses.
  4. Encouragement of the growth of industries which produce building materials: By encouraging the setting up of houses by individuals and organizations, there is a higher demand for building materials, this in turn encourages the industries’ output.
  5. Provision of advice: They advise investors (those wishing to set up their own houses) on how to invest meaningfully- how to raise capital, how to cut down costs etc.

I hope this topic is able to provide solution to the search queries like development banks, functions of development bank, development bank of Nigeria and United States of America, difference between Development bank, Merchant bank, definition of Merchant bank, and functions of Merchant bank? If there any question regarding functions of development bank or any other, drop it in the comments section.

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Introduction to Money and Trade by barter

Meaning of Inflation in Economics

Business Organization

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