Bangladesh Bank

Bank and Central Banking: A Brief Concept

Concept in Brief

A central bank, reserve bank, or monetary authority is a banking institution granted the exclusive privilege to lend a government its currency. Like a normal commercial bank, a central bank charges interest on the loans made to borrowers, primarily the government of whichever country the bank exists for, and to other commercial banks, typically as a 'lender of last resort'. However, a central bank is distinguished from a normal commercial bank because it has the monopoly on creating the currency of a nation, which is loaned to the government in the form of legal tender. It is a bank that can lend money to other banks in times of need. Its primary function is to provide the nation's Money Supply, but more active duties include controlling subsidized-LoanInterest Rates, and acting as a lender of last resort to the Banking Sector during times of financial crisis (private banks often being integral to the national financial system). It may also have supervisory powers, to ensure that banks and other financial institutions do not behave recklessly or fraudulently.


Strengthening the financial sector is a vital concern for an economy. Efficient banking or sound financial system serves as an effective channel for mobilizing funds from savers to productive sectors and thus helps to achieve economic growth. However, the idea of ‘Bank’ is so ancient and this concept is evolving over time. Around the time of Adam Smith (1776) there was a massive growth in the banking industry. Within the new system of ownership and investment, the state's role as an economic actor changed substantially. The Jews in Jerusalem introduced a kind of banking in the form of money lending before the birth of Christ. The word 'Bank' was probably derived from the word 'bench' as during ancient time Jews used to do money lending business sitting on long benches. First modern banking was introduced in 1668 in Stockholm as 'Svingss Pis Bank' which opened up a new era of banking activities throughout the European Mainland.

In the South Asian region a major landmark was the establishment of the Hindustan Bank in 1700 at Kolcutta. Dhaka Bank started to operate in1806. Banks established in this region during the British period include Kurigram Bank (1887), Kumarkhali Bank(1896), Mahalaxmi Bank, Chittagong bank(1910), Dinajpur Bank(1914), Comilla Banking Corporation (1914) and Comilla Union Bank(1922). Major Indian Banks also had branches in this territory. In Europe prior to the 17th century most money was Commodity Money, typically Gold or silver. However, promises to pay were widely circulated and accepted as value at least five hundred years earlier in both Europe and Asia. The medieval European Knights Templar ran probably the best known early prototype of a central banking system. At about the same time, Kublai Khan of the Mongols introduced Fiat Currency to China, which was imposed by force by the confiscation of Specie. Although central banks are generally associated with fiat money, under the international Gold Standard of the nineteenth and early twentieth century’s central banks developed in most of Europe and in Japan, though elsewhere Free Banking or Currency Boards were more usual at this time. Problems with collapses of banks during downturns, however, was leading to wider support for central banks in the respective nations which did not as yet possess them, most notably in Australia.

As the first public bank to "offer accounts not directly convertible to coin", the Bank of Amsterdam established in 1609 is considered to be the "first true central bank". This was followed in 1694 by the Bank of England, created by Scottish businessman William Paterson in the City of London at the request of the English government to help pay for a war.

With the collapse of the gold standard after World War II, central banks became much more widespread. The banking system at our independence consisted of two branch offices of the former State Bank of Pakistan established in July 1948: one was in Bangladesh (former East Pakistan) and the other was in West Pakistan (present Pakistan).