How does the Central Bank Control Credit?
Limitations of each technique used in controlling credit by central bank.
The central bank of Kenya is established by the constitution of Kenya 2010 section 231 (1) and an Act of Parliament; “The Central Bank of Kenya Act” Cap 491 of the laws of Kenya. The functions of this central bank as provided for in the constitution are: a) formulating monetary policy,
b) promoting price stability,
c) issuing currency and performing other functions conferred on it by an Act of parliament One of the most important roles of the Central Bank is formulating monetary policy. Before we get to see how it formulates monetary policy, we have to know what is meant by the term monetary policy. Monetary policy can be defined as one of the public interventionist measures aimed at influencing the level and pattern of economic activity so as to achieve certain desired goals. Credit control is a major weapon of monetary policy used to control demand and supply of money (liquidity) in the economy. Central Bank administers control over the credit that commercial banks grants. This method is used by the bank to bring “Economic Development with stability”. It means that banks will not only control inflationary trends in the economy but also boost economic growth which will ultimately lead to increase in real national income with stability. In view of its functions such as issuing notes and custodian of cash reserves, credit not being controlled by Central Bank would lead to Social and Economic Instability in the country. NEED FOR CREDIT CONTROL
Controlling credit in the economy is among one of the most important functions of the Central Bank. The basic and important needs of credit control in the economy are: * to encourage the overall growth of the “priority sector” that is those sectors of the economy which is recognized by the government as “prioritized” depending upon their economic condition or government interest * to keep a check over the characterization of credit so that credit is not delivered for undesirable purposes * to achieve the objective of controlling “inflation” as well as “deflation” * to boost the economy by facilitating the flow of adequate volume of credit to different sectors * to develop the economy.
* OBJECTIVES OF CREDIT CONTROL
As a controller of credit, the central bank attempts to influence and control the volume of bank credit and also to stabilize business conditions in the country. Credit control policy is just an arm of Economic Policy which comes under the purview of the central bank , hence, its main objective being attainment of high growth rate while maintaining reasonable stability of the internal purchasing power of money. The broad objectives of Credit Control Policy have been- Ensure an adequate level of liquidity enough to attain high economic growth rate along with maximum utilization of resource but without generating high inflationary pressure. * Attain stability in exchange rate and money market of the country. * Meeting the financial requirement during slump in the economy and in the normal times as well. * Control business cycle and meet business needs.
METHODS OF CREDIT CONTROL
The various methods or instruments of credit control used by the central bank can be broadly classified into two categories: * Qualitative Method (General Method)
* Quantitative Method (Selective Method)
1. Quantitative or General Methods:
The methods used by the central bank to influence the total volume of credit in the banking system, without any regard for the use to which it is put, are called quantitative or general methods of credit control. These methods regulate the lending ability of the financial sector of the whole economy and do not discriminate among the various sectors of the economy. The important quantitative methods of credit control are: a) bank rate,
b) Open market operations, and...
Bibliography: Constitution of Kenya 2010
Central Bank Act Cap 491 Laws of Kenya
The Banking Act Cap 488 Laws of Kenya
Penn G.A., Penn & Shea: The Law Relating to Domestic Banking, 2nd Edition, Thomson (Sweet & Maxwell) Publishers, 2000;
Mudida Robert, Modern Economics, 2nd Edition, Focus Publishers-Nairobi, 2009;
Online Sources- Journals (MBA Lectures on Banking Law.);
Somashekar N.T., Banking, 1st Edition, New Age International (P) Limited Publishers, 2009;
Please join StudyMode to read the full document