INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The Commercial Bank System shares a very important characteristic with other members of the financial sector and the rest of the business community; the desire to maximize profits and expand its share of the market. Commercial banks are profit-making enterprises and as such they share with other businesses the same set of expectations concerning the health of the economy.
Banks act as financial intermediaries collecting deposits from one group and lending it out to another group. In this role they are able to convert short-term deposits into long-term loans. They bring together people who have money to lend and people who need money. They banks thus act as intermediaries collecting deposits and paying interest on them and making loans and charging interest on the loans made to their customers.
It will be observed that interest is the key element in the performance of this intermediation function of the commercial bank. At high interest rates the cost of borrowing will be increased and prospective borrowers will shy away from borrowing only to show up when the interests are down.
In periods of economic upturn, commercial banks add to the money stock and thereby help to expand the demand for goods and services. However, once the economy arrives at full employment of workers and resources, a continued expansion of loans and deposits simply add to the price level increase.
On the other hand, if banks contract loans in periods of mild economic decline experts hold that there is not likely to be a drop in the price level. Thus banks share the general business outlook on economic conditions. Commercial banks in the absence of regulations tend to intensify whatever phase of the business cycle is current. This, they do through their ability to create and destroy money when making loans and investments.
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