3 WEEK THREE CENTRAL BANKING

 Introduction  The history of central banking  The objectives of central bank  The main functions of central banks  Policies of the central bank  How the central bank monetary policies work  Goals of monetary policies OUTLINE

 To understand the crucial role of central banks in the financial sector  To describe the main functions of the central bank  To understand the monetary policy functions of central banks  To understand the arguments put forward by the free banking theorists  To discuss the arguments for and against an independent central bank. OBJECTIVES

 The history of central banking can be dated back to 1894, when the Present day “Bank of England” was established.  Acts as government’s bank and bankers’ bank  Primary objective was to maintain economic stability through effective monetary policy  CBs are not profit oriented. Profits realized are generally turned over to the government  CBs have emerged to help immunize monetary issues from political pressures. INTRODUCTION

 Traces its roots to the Bank of the Gold Coast (BGC) established by the British to facilitate exchange and trade in then Gold Coast.  Was established by Bank of Ghana Ordinance (No. 34) of  Principal functions as enshrined in the 1957 ordinance include  To issue and redeem bank notes and coins  To keep and use reserves  To influence the credit situations  To maintain monetary stability in Ghana  To maintain the external value of the Ghana Pound  To act as banker and financial advisor to the Government HISTORY OF THE CENTRAL BANK OF GHANA

 The CB commenced formal business operations on 1 st August, 1957 with six (6) departments:  The Governors’ office  The Administration or Personnel Department  The Banking Department  The issue department (commenced operations in July, 1958)  Accounts or Audit department  Economics and Statistics Department  Administration of the bank was entrusted to the a Seven Member Board of Directors under the chairmanship of the Governor. HISTORY OF THE CENTRAL BANK OF GHANA

 The BOG right from its inception was assigned oversight responsibility over the banking system comprising:  The British Bank of West Africa (now Standard Chartered Bank)  Barclays Bank Limited  Ghana Commercial Bank  Post of Office Savings Banks (POSB) HISTORY OF THE CENTRAL BANK OF GHANA

 Th e Bank of Ghana was assigned the following responsibilities  Acting as banker to other banks  Liaise with the commercial banks to maintain adequate and reasonable banking service for the public  Ensuring that proportions of their assets in a specified form and to submit monthly returns on their operations to the CB  banking supervision or bank examination. This was not originally highlighted in the ordinance. HISTORY OF THE CENTRAL BANK OF GHANA

 Legislative reforms of the CB  Bank of Ghana Ordinance (No 34) of 1957  Bank of Ghana Act (1963), Act 182.  `Broadened the functions of the CB to include policy measures capabilities  Bank of Ghana (Amendment Act) 1965 (Act 28)  Banking Law 1989 (PNDCL 225) was introduced to deal with new emerging issues such as:  Establish tighter capital structure  Broaden the scope the banks  Impose stringent reporting requirements  Improved on sight and off-sight supervision HISTORY OF THE CENTRAL BANK OF GHANA

 Legislative reforms of the CB (Cont’d)  PNDCL 291 was also enacted in 1992 to repeal the earlier ones  Bank of Ghana Act, 2002 (Act 612) spell out the mandate of the BOG.  This act clearly spells out price stability as the banks primary function.  Also enhances the independence of the BOG  Sets up the Monetary Policy Committee  Banking Act, 2004 (Act 673)  Sought to provide the appropriate and legal framework for the establishment and regulation of an international services center.  Financial Institutions Non-Bank Law 1993 (PNDCL 328)  Regulates the activities of non-bank financial institution HISTORY OF THE CENTRAL BANK OF GHANA

 Main Objective: To maintain financial system or economic stability. To achieve these objectives, the CB formulates policies that:  Promote price stability  Contribute to the stability of the financial system  Promote, regulate and oversee sound and efficient payment systems  Provide and promote efficient currency services  Optimize the returns on financial assets through prudent investment practices  Collect, compile and disseminate statistical data for economic analysis by the MC THE OBJECTIVE OF THE CB

 The main functions of the central bank include  Implementing monetary policy  Controlling money supply  Being the government’s banker and the bankers’ banker  Managing the country’s foreign reserve  Managing the country’s foreign exchange and the gold reserves  Regulating and supervising the banking industry  Setting the official interest rate used in the management of inflation and exchange rate.  Credit control  See the Banking act for more specific objectives and functions THE OBJECTIVE OF THE CB

 Monetary policy  Exchange Rate Policy  Pricing Policy  National Debt Management  “Fiscal Policy” POLICIES OF THE CENTRAL BANK

 Monetary Policy  Concerns the actions of the CB to influence the availability of money and credit in the system  Exchange Rate Policy  Involves the management of a country’s exchange rate by influencing the flows within the balance of payments  Price Control  The is manipulations by the central bank intended to influence the level of inflation in the economy.  National Debt Management  Concerned with the manipulation of the outstanding debt stock of government debt instrument held by the domestic private sector with the objective of influencing the level and structure of interest rate and or the availability of reserve assets to the banking system POLICIES OF THE CENTRAL BANK

 Monetary Policies in Ghana  Conducted under the guidance of the monetary policy committee (MPC).  MPC is a statutory requirement under the BOG act 2002 (612)  Set up in September 2002 after the similitude of the Bank of England  Its major responsibility was to refocus the central bank on inflation control.  Consists of seven members, comprising:  The Governor, first and second deputy governors, head of monetary policy analysis of the bank, head of banking operations and two external knowledgeable and experienced advisors appointed by the minister of financ e POLICIES OF THE CENTRAL BANK

 Monetary Policies in Ghana (Cont’d)  Responsibilities of the MPC  Initiating proposals for the formulation of monetary policies  Providing statistical data and advise necessary for the formulation of monetary policy  Examining and approving the monetary conditions and policy stance report, and overseeing the quarterly inflation report. The MPC is now aided by two departments: Monetary Policy Analysis and Financial Stability Department POLICIES OF THE CENTRAL BANK

 Monetary policy objectives are achieved through monetary policy instruments:  Open Market Operations  Bank Reserves Requirements  Discount Rate and  Directives HOW THE CENTRAL BANK MONETARY POLICIES WORK

 Open Market Operations (OMO)  This is the buying and selling of government bonds on the open market by a central bank. It is the primary means of implementing monetary policy.  Reserve Requirement (Cash Reserve Ratio)  This is central bank regulation that sets the minimum reserves each commercial bank must hold of customers’ deposits. This is stored in the bank vaults or deposit made with the central bank. HOW THE CENTRAL BANK MONETARY POLICIES WORK

 The Discount Rate  This refers to the interest rate at which the central bank rediscounts liquid assets (eg. Government securities – bonds) of commercial banks for additional lending for an onward lending to customers.  Directives  The central bank or government can issue directive in the form of instruction to commercial banks to control the direction and volume of credit they grant to customers HOW THE CENTRAL BANK MONETARY POLICIES WORK

 Promote growth and employment  Price stability  Interest rate stability  Price stability  Stable financial markets and institutions  Exchange rate stability GOALS OF MONETARY POLICY

 Central banks do undertake monetary control and administer the amount of money in the economy.  The functions of the CB has been identified in this lesson.  The role of the MPC has also been examined CONCLUSIONS

3 END OF LECTURE THREE THANK YOU