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COMMERCIAL BANKS
Commercial banks are financial institutions that accept deposits from the public
and provide loans and other financial services. They operate with the primary
objective of earning profits while facilitating economic activities. Commercial
banks serve as intermediaries between savers and borrowers, making them vital
players in the functioning and development of the economy (Rose & Hudgins,
2013).

Commercial banks are regulated by the central bank and offer a variety of services
such as savings accounts, checking accounts, loans, and investment opportunities.
Their operations contribute significantly to financial inclusion, economic
development, and monetary stability in any nation (Mishkin, 2018).

Functions of Commercial Banks

1. Accepting Deposits: Commercial banks accept deposits from individuals,
businesses, and government agencies in the form of savings, current, or fixed
deposits (Rose & Hudgins, 2013).

2. Providing Loans and Advances: Banks lend money for business expansion,
asset purchases, and personal needs, thereby boosting investment (Levine, 2005).

3. Facilitating Payments: They provide services such as cheques, electronic

transfers, and mobile banking (Mishkin, 2018).

4. Credit Creation: Banks increase money supply by creating credit through

lending (Onoh, 2007).
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5. Investment in Securities/shares: Banks invest in securities to earn returns and

support national development (Levine, 2005).

6. Foreign Exchange Operations: They help in currency exchange and facilitate

international trade (Mishkin, 2018).

7. Agency Services: Services include bill collection, payment processing, and

acting as trustees (Rose & Hudgins, 2013).

Contributions of Commercial Banks to the Economy

1. Promoting Economic Growth: Banks mobilize savings into investments,

increasing GDP (Levine, 2005).

2. Enhancing Capital Formation: Lending encourages infrastructure and industry

growth (Onoh, 2007).

3. Supporting Government Policies: Collaborate with central banks to stabilize

the economy (Mishkin, 2018).

4. Creating Employment: Jobs are generated both directly and indirectly (Rose &
Hudgins, 2013).

5. Encouraging Entrepreneurship: Credit access supports SMEs and innovation

(Levine, 2005).

THE CENTRAL BANK AND IT ROLES

1. Definition of Central Bank:

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A Central Bank is the apex monetary institution in a country, established by the

government to manage the nation’s monetary and financial system. It serves as
the authority responsible for issuing currency, formulating and implementing
monetary policy, and also regulating the banking sector to ensure economic
stability. Unlike commercial banks, the central bank does not provide services to
the general public such as deposits or personal loans. Instead it acts as a bank to the
government and to other banks. (Federal Reserve System, n.d.).

3. Examples include:

a. The Federal Reserve in the USA: Established in the year 1913. The
bank is responsible for the U.S. monetary Policy and financial regulation.

b. The European Central Bank (ECB): Established in the year 1998. The
bank manage euro and implements monetary policies for Eurozone.
countries

c. The Central Bank of Nigeria (CBN): Established in the year 1958.

The bank manages Naira, regulate Banks and implements monetary policy.

d. Bank of England (United Kingdom): Established in the year 1694.

The Bank sets interest rates and manages inflation in the United Kingdom.

e. People’s Bank of China (POBC): Established in the year 1948. The

Bank controls the Yuan and oversees China’s vast financial system

4. Five Main Functions of a Central Bank

i. Issuer of Currency
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The central bank is the sole authority authorized to issue the nation’s legal
tender. This helps ensure a uniform and secure supply of currency, thereby
promoting trust in the financial system (Central Bank of Nigeria).

ii. Regulator and Supervisor of Banks

It regulates and monitors the operations of commercial banks and other

financial institutions. Through licensing, setting capital requirements, and
monitoring compliance, it ensures the safety and soundness of the banking
system (European Central Bank).

iii. Lender of Last Resort

In times of financial crisis or liquidity shortages, the central bank provides

emergency funding to commercial banks to prevent collapse. This is called
acting as the lender of last resort (Mishkin, 2019).

Iv. Controller of Monetary Policy

The central bank manages the economy by controlling money supply,

interest rates, and inflation. It uses tools such as the policy rate, open market
operations, and reserve requirements to maintain price stability and support
economic growth (Federal Reserve System).

v. Manager of Foreign Exchange Reserves

It holds and manages the country’s foreign currency reserves and intervenes
in the foreign exchange market when necessary. This helps stabilize the
national currency and supports international trade (Investopedia).

HOW CENTRAL BANK USE MONETERY POLICIES TO CONTROL

INFLATION
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Inflation a general rise in prices erodes purchasing power and can destabilize an
economy. Central banks are mandated to maintain price stability by controlling
inflation through monetary policy. This involves adjusting the money supply and
credit conditions using tools like interest rates, reserve requirements, and open
market operations.

In Nigeria, the Central Bank of Nigeria (CBN) has focused on reining in recent
high inflation. For example, headline inflation in Nigeria reached about 33.9% in
October 2024, driven by factors like subsidy removal and currency changes. Such
elevated inflation threatens growth and welfare, making effective monetary policy
crucial for Nigeria’s economic stability.

Monetary Policy Tools and Mechanisms

Central banks have several key instruments to influence inflation and the economy.
Open Market Operations (OMO) involve buying or selling government securities.
When the CBN sells bonds, it withdraws money from circulation, reducing
liquidity and slowing inflation. Interest Rate Policy is the benchmark tool: the
CBN’s policy rate (MPR) influences all lending rates. Raising the MPR makes
borrowing more expensive, which dampens spending and curbs inflation. Reserve
Requirements (Cash Reserve Ratio) dictate what share of deposits banks must hold
as reserves. By increasing the CRR, the CBN reduces banks’ lending capacity,
tightening credit and slowing money growth. Other tools include liquidity ratios,
discount window lending, and forward guidance. In extreme cases, central banks
may use quantitative tightening. By applying these tools, a central bank can
manage the money supply and demand to influence inflationary pressures.

Central Banks and Inflation Control

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The primary goal of using these tools is price stability. Central banks often set
explicit or implicit inflation targets and adjust policy to achieve them. For
example, lowering interest rates encourages borrowing and spending (stimulating
growth), whereas raising rates “makes borrowing more expensive, dampening
economic activity and curbing inflationary pressures”. In practice, a tight monetary
stance (higher rates, restricted credit) slows aggregate demand, which over time
reduces the rate of price increases. Central banks continuously monitor indicators
(CPI, core inflation, expectations) and adjust tools to keep inflation low and stable.
This requires staying ahead of inflation expectations; credible, independent policy
can “anchor inflation expectations” so that wage and price-setting behavior does
not push inflation higher.

Conclusion

Controlling inflation is central to a central bank’s mandate, and Nigeria’s recent

experience underscores the challenges involved. By hiking its policy rate and
tightening liquidity (raising CRR, using OMO), the CBN has sought to slow the
money supply and anchor inflation expectations. These measures have helped
stabilize the naira and slow price growth from its mid-2024 peaks. However,
persistent supply-side pressures (food, fuel) mean the battle is not over. In
conclusion, Nigeria’s case illustrates that monetary policy tools—when actively
employed—are vital for price stability and broader economic stabilization.

DEVELOPMENT BANK
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Development banks are specialized financial institutions established to provide

medium and long-term financing for sectors critical to national development,
including infrastructure, agriculture, and industrial growth. Unlike commercial
banks that operate primarily for profit through short-term lending and deposit-
taking, development banks aim to stimulate economic growth, reduce poverty, and
promote balanced regional development (Musa, 2020).

These banks often operate with government backing or international support and
are mandated to fill financing gaps left by commercial banks. Their focus is on
projects with significant social and economic benefits, which may not be
immediately profitable but have long-term developmental value (World Bank,
2022).

Meaning of Development Banks

Development banks are non-depository institutions that provide capital for

investment in sectors that are vital to economic growth and often overlooked by
private lenders. They mobilize funds through international markets, government
allocations, and donor agencies, and reinvest these into large-scale, high-impact
projects.

Examples of Development Banks includes:

 World Bank: A global institution that finances development projects in low-

and middle-income countries (World Bank, 2022).
 African Development Bank (AfDB) Promotes sustainable economic growth
and social progress in African countries (AfDB, 2021).
 National Bank for Agriculture and Rural Development (NABARD) India
Supports credit flow for rural development (NABARD, 2021).
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 Development Bank of Nigeria (DBN) Facilitates financing for micro, small,

and medium enterprises (MSMEs) (DBN, 2023)

Roles of Development Banks in Promoting Economic Development

Development banks play a crucial role in fostering economic development through

several strategic functions includes:

1. Infrastructure Financing: They invest in critical infrastructure like roads,

power, and water, creating the foundation for economic activities (UNCTAD,
2020).

2 . Industrial Development: Development banks support manufacturing and

industrial projects that create jobs and enhance local production capacity (Musa,
2020).

3. Support for SMEs: They provide long-term, low-interest loans to SMEs, which
are often excluded from traditional credit access (DBN, 2023).

4. Rural and Agricultural Development: Many development banks fund

agricultural activities, promoting food security and rural livelihoods (NABARD,
2021).

5. Innovation and Technology Promotion: They back research and innovation to

increase productivity and economic diversification (OECD, 2021).

Differences Between Development Banks and Commercial Banks

Aspect Development Bank Commercial bank

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Purpose Promote socioeconomic development Maximize shareholder

profit

Funding source Government international donors, Customer deposits and

capital markets interbank markets

Target Sector Infrastructure SMEs, agriculture Broad sector including

customer finance

Loan Tenure Long-term financing Short to medium-term

loans

Risk Appetite Higher tolerance for risk to fund Lower focus on

development creditworthiness and
profit

Development banks often fill gaps left by commercial banks by funding projects
that have developmental value but lack immediate profitability or are considered
too risky.

Conclusion

Development banks are key players in driving inclusive and sustainable economic
growth, particularly in developing economies. By focusing on long-term projects
in critical sectors and supporting underserved regions and populations, they serve
as instruments of national policy and development strategy. Their role is
indispensable in achieving broader social and economic goals.
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NATIONAL INCOME AND HOW ITS MEASURE

National income is a fundamental concept in economics that represents the

total monetary value of all goods and services produced within a country during a
specific period, usually a year. It encompasses all incomes earned by individuals,
businesses, and government institutions through wages, rents, interests, and profits.
The study of national income is vital as it provides a clear picture of the economic
performance of a nation.

Economists such as Alfred Marshall and A.C. Pigou have emphasized the
importance of national income as a measure of a country's economic well-being.
According to Pigou, national income is "that part of the objective income of the
community, including income derived from abroad, which can be measured in
monetary terms." Understanding national income has several benefits, including its
use in evaluating a country's economic growth, formulating policies, and
comparing economic performance between nations.

What is National Income?

National income refers to the total value of all goods and services produced by a
country in a specific period, typically a year. It includes income generated from
domestic production and net income from abroad. Components of national income
include wages, rents, interests, and profits.

Importance of National Income

The study of national income is crucial for the following reasons:

 Economic Growth: It helps assess the growth rate of a country's economy over
time.
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 Income Distribution: It highlights disparities in income distribution, aiding in

policy decisions.
 International Comparisons: It allows for the comparison of economic
performance between countries.
 Policy Formulation: Governments use national income data to plan and
implement economic policies.
 Resource Allocation: It guides the efficient allocation of resources for
economic development.

Methods of Measuring National Income

a. Product Method (Output Method)

The Product Method, also known as the Output Method, calculates national income
by adding up the value of all goods and services produced in the economy during a
given year. This method focuses on the production side and categorizes the
economy into sectors such as agriculture, manufacturing, mining, and services.

b. Income Method

The Income Method estimates national income by summing up all the incomes
earned by individuals and businesses in the production of goods and services. It
includes wages, rents, interests, and profits.

c. Expenditure Method

This method measures national income by adding up all expenditures made in the
economy on final goods and services.
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CHALLENGES IN MEASURING NATIONAL INCOME

Several challenges complicate the accurate measurement of national income:

 Informal Sector: Many transactions go unreported, especially in developing

countries.
 Non-monetized Economy: Barter and subsistence farming are difficult to
value.
 Data Collection: Lack of reliable statistical data and infrastructure.
 Double Counting: Risk of counting intermediate goods as final output.
 Illegal Activities: Black market and illegal transactions are not captured.

Importance of Measuring National Income

Understanding national income has several benefits:

 Policy Making: Helps governments formulate economic policies.

 Comparison: Enables international economic comparisons.
 Economic Planning: Assists in identifying strong and weak sectors.
 Standard of Living: Helps estimate per capita income and quality of life.
 Investment Decisions: Guides investors on where to allocate capital.

HOW NATIONAL INCOME ACCOUNTING HELP THE PERFORMANCE

AND GROWTH OF THE ECONOMY
NATIONAL INCOME ACCOUNTING - (NIA) - Is the financial diary of a
country, it tracks all the money made and spent through production, income, and
consumption over time. It provides critical indicators like Gross Domestic Product
(GDP) and Gross National Income (GNI) that help governments, researchers, and
policymakers evaluate how well the economy is performing.
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NATIONAL INCOME ACCOUNTING

National Income Accounting (NIA) is the system economists use to track the total
income and output of a country over a given period. It tells us whether the
economy is growing, shrinking, or just standing still. which helps economists and
policymakers understand the broader economic picture and help in providing key
measures like Gross Domestic Product (GDP) and Gross National Income (GNI).

IMPORTANCE OF NATIONAL INCOME ACCOUNTING,

National Income Accounting helps a country measure, understand, and
manage its economic performance effectively.
1. Measuring Economic Performance: National income accounting provides
vital indicators like GDP and GNI that help track how well an economy is doing
over time (Mankiw, 2021).
2. Guiding Policy and Planning: Governments use national income data to
make informed decisions on budgeting, taxation, and development priorities
(Todaro & Smith, 2020).
3. Comparing Economies: It allows for meaningful comparisons between
different countries and across time, using standardized data (IMF, 2023).
4. Monitoring Sectoral Contributions: NIA shows which sectors (like
agriculture, oil, or ICT in Nigeria) are driving growth, aiding targeted investment
(National Bureau of Statistics, 2023).

CHALLENGES OF NATIONAL INCOME ACCOUNTING

Despite its usefulness, national income accounting faces several limitations that
affect the accuracy and completeness of economic data.
1. Informal sector exclusion: Many economic activities in Nigeria occur
informally and are not captured in official statistics (Todaro & Smith, 2020).
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2. Inaccurate or outdated data: Weak data infrastructure often leads to delays

and unreliable figures (NBS, 2023).
3. Inflation and price instability: Frequent changes in prices distort the real
value of income and output (IMF, 2023).

HOW NATIONAL INCOME ACCOUNTING HELPS PERFORMANCE

AND GROWTH OF AN ECONOMY
National Income Accounting is like a vital compass for any country’s
economy.
1. By measuring things like total income and output, it gives leaders a clear
sense of how well the economy is doing. For example, GDP that show whether the
economy is growing or slowing down, helping governments decide when to boost
spending or tighten policies (Mankiw, 2021).
2. By pointing out which parts of the economy are pulling their weight.
3. National Income Accounting allows us to see how income is spread across
the population, which is crucial for tackling inequality and ensuring that growth
benefits everyone,
4. National income accounting help the governments to make smart decisions
or track it economy progress. It also helps to make policies, allocate resources
wisely, and keep the economy moving forward.

KEY CONCEPTS IN NATIONAL INCOME ACCOUNTING

National Income Accounting relies on a few core concepts to measure a country’s
economic activity. One of the most important is
Gross Domestic Product (GDP) –: which represents the total value of all goods
and services produced within a country over a specific period (Mankiw, 2021).
Gross National Income (GNI) -: which adds income earned by residents from
abroad, giving a broader picture of national income (Todaro & Smith, 2020).
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Income Approach -: which calculates national income by adding up all wages,

rents, interests, and profits earned by individuals and businesses. Alternatively, the
Expenditure Approach sums up total spending on goods and services (Mankiw,
2021). These approaches help ensure accuracy by measuring the economy from
different angles.
Finally, the concept of Net National Product (NNP) accounts for depreciation,
reflecting the economy’s sustainable production level after subtracting wear and
tear on capital goods (IMF, 2023).

10 TERMS USED IN NATIONAL INCOME

Below are ten common terms used in the study and discussion of national income in
economics.

1. Gross Domestic Product (GDP):The total market value of all final goods/services
produced within the country usually for a period of one year.

2. Gross National Product (GNP): Gross National Product (GNP) is the total
monetary value of all final goods and services produced by the citizens (nationals) of a
country in a given period, regardless of whether the production takes place within the
country or abroad.
3. Net National Product (NNP): Net National Product (NNP) is the total value of all
final goods and services produced by the nationals of a country, after subtracting
depreciation (i.e., the wear and tear or reduction in value of capital goods over time).
4. National Income (NI): National Income (NI) is the total income earned by the
residents of a country for their contribution to the production of goods and services in one
year, measured at factor cost.
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5. Personal Income (PI): Personal Income (PI) is the total income actually
received by individuals or households in a country before direct taxes (like personal
income tax) are deducted.
6. Disposable Personal Income (DPI): Disposable Personal Income (DPI) is the
amount of money individuals or households have left to spend or save after paying
personal taxes (such as income tax and other compulsory deductions).
7. Per Capita Income (PCI):Per Capita Income (PCI) is the average income earned
per person in a country during a specific period, usually one year. It is calculated by
dividing the national income by the total population.
8. Real National Income: Real National Income is the total value of all final
goods and services produced by a country in a year, adjusted for inflation or changes in the
general price level.
In other words, it reflects the actual volume of production rather than just the monetary
value. It allows us to compare national income over time without the distortion caused by
rising prices.
9. Nominal National Income: Nominal National Income is the total value of all
final goods and services produced by a country in a given year, measured at current market
prices, without adjusting for inflation.
It reflects the monetary value of production using the prices that are actually prevailing in
the market during the year of measurement.
10. Transfer Payments: Transfer Payments are payments made by the
government or other institutions to individuals or households without any exchange of
goods or services in return.
These are non-compensatory payments—meaning the recipients do not work or provide
any productive service in exchange for them.