Commercial banks are banks that are set up for the purpose of making profit. They are financial institutions that provide financial services like issuance of loans, acceptance of deposit and transfer of funds from one bank account to another with the motive of making profits.

Characteristics of a Commercial Bank
  1. Commercial banks are set up for the purpose of making profit
  2. They accept any valuables and money deposits from customers
  3. They give loans to individuals and businesses
  4. The interest loans given are structured in such a way that will provide profits for the bank’s shareholders and owners
  5. Commercial banks must follow all the stipulated laws and regulations of government financial institution
  6. They are usually owned by private individuals or a group of persons acting as shareholders
  7. The banks are usually a limited liability company.
Functions of Commercial Banks
Generally, commercial banks function can be categorized into two
  1. Primary functions
  2. The secondary functions
Primary functions of the Commercial Banks
The primary function is simply referred to as the basic function of the commercial bank. The commercial bank performs two major basic functions:
  1. Accepting deposit
One of the most important functions of the commercial bank is to accept deposits from customers.
There are usually 2 types of deposits
  • Demand deposit
The demand deposit is also known as the current account deposit. These are deposits that can easily be given out by banks upon request by customers. There is no restriction for withdrawals; withdrawals can easily be made through the use of ATM cards, writing of checks or using withdrawal slips provided by the bank. The banks don’t usually add interest to such deposit.
  • Time deposit
Time deposit is also referred to as fixed deposit. In this case, the amounts that are deposited are fixed for a certain period of time. The deposits are not withdrawn easily except till the stipulated time as mentioned during deposit. Banks usually pay high interest to fixed deposits.
  1. Advancing loans
The deposits collected by the commercial banks are given out as advanced loans to people or firms that are needy with a certain amount of interest requested in return.
Below are some of the loans and advances made by the commercial bank:
  • Cash credit
  • Demand loans
  • Short term loans
Secondary Functions of commercial Banks
The secondary functions of commercial banks are those other crucial functions performed by the commercial banks. They include the following:
  • Overdraft
Banks give out advance loans to customers for a certain limit. This is usually given to trusted customers of the bank and the customers must give assurance that they would be able to pay back. Banks usually charge a higher rate of interest in these loans.
  • Discounting Bills of Exchange
In this case, banks can grant loans to customers that have a bill of exchange even if it has not matured. The banks advance loans to firms and traders by discounting their bills. This means that traders can get loans from banks with their bills of exchange.
  • Agency functions.
The commercial banks perform various agency functions like:
  • Transfer of funds
  • Collection and payments of various items
  • Foreign exchange sales and purchase
  • Trustee and executor
  • Income tax consultancy
  • Reference letters
  • Purchase and sales of securitie