Explanation

Methods of control used by the Central Bank on commercial banks are:

(i) Open Market Operation: This is a method used to either increase or reduce the money in the hands of commercial banks for lending purpose. To increase the money in circulation, the Central Bank will buy instruments (Treasury certificate and Treasury bills) and pay with cash while it sells instruments to reduce money.

(ii) Reserve Requirement/Liquidity/Cash Ratio: This represents the amount a commercial bank must keep as reserve from her deposits. This will be kept low or high to encourage or discourage lending by commercial banks. There are two types of reserves; namely cash ratio and liquidity reserve.

(iii) Moral Suasion: This is more of an appeal to commercial banks to keep within the rules as stipulated by the Central Bank.

(iv) Bank Rate: This is referred to as the minimum rate for lending as stipulated by the Central Bank. The rate will be kept high to discourage people from borrowing and encourage savings, while the rate will be kept low to encourage borrowing.

(v) Special Deposit: This refers to compulsory deposits demanded by the Central Bank which is pegged as a percentage of total deposits to reduce the lending activities of commercial bank.

(vi) Special Directives: This is a control measure used by the Central Bank in the form of credit ceilings, allocation to sectors and supportive lending to particular sectors. 
 

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