What is a Commercial Bank? Functions & Examples (2024)

What is a commercial bank?

A commercial bank is a financial institution that primarily serves individuals and businesses by accepting deposits, providing checking and savings accounts, and offering loans for various purposes. It plays a vital role in managing the money flow in an economy, helping to meet financial needs and support economic growth.

A commercial bank is a type of financial institution that provides a range of financial services, including accepting deposits, offering various types of loans, and managing payment systems, catering to individuals and businesses, with the aim of facilitating economic development and ensuring the efficient functioning of the financial system.

Fig. 1 - HSBC and Citibank are one of the biggest commercial banks in the world

Commercial banks accept customer deposits and use those deposits to make loans. Banks get their money from customer deposits, which allows them to offer these as loans then. They make a profit on the interest they charge for mortgages, vehicle loans, company loans, and personal loans. Customers with checking or savings accounts will also receive interest on their deposits.

Functions of commercial banks

Commercial banks perform several vital functions supporting individuals and businesses in managing their financial activities. Here are some of the primary functions of a commercial bank:

Accepting Deposits

Commercial banks operate as a secure storage service for individuals and businesses who wish to deposit their money. This ensures the safety of the money and can earn the depositors interest over time. For example, if you're a store owner who has earned a significant amount from your sales, you can deposit this money in the bank for safekeeping.

Providing Loans

One of the main functions of commercial banks is to provide loans to individuals and businesses. This is often done using the money that other customers have deposited in the bank. For example, if a family wishes to buy a new home but doesn't have enough money, they can apply for a mortgage loan from the bank.

Overdraft Facilities

Commercial banks offer overdraft facilities to their customers, which can be a lifeline in times of financial need. This allows account holders to withdraw more money than they have in their account up to a certain limit set by the bank. For example, if you have an unexpected medical bill and your account is low on funds, the bank can cover the expense and you repay the bank later, with interest.

Electronic Banking Services

In today's digital age, commercial banks provide a variety of electronic banking services, such as online banking, mobile banking, and electronic fund transfers. For instance, if you want to pay your bills but can't make it to the bank, you can use your bank's online portal or mobile app to make the payment from wherever you are.

Foreign Exchange Services

Commercial banks also offer foreign exchange services, which are crucial for businesses involved in international trade, as well as individuals travelling abroad. For instance, if you're a business importing goods from another country, your bank can convert your local currency to the foreign currency you need to pay your supplier.

Advisory Services

Finally, commercial banks provide advisory services, offering financial advice to individuals and businesses. This might involve guidance on investment options, retirement planning, or managing business finances. For example, if you're unsure about the best way to invest your savings, a commercial bank can advise based on your financial situation and goals.

Other financial services

There are other financial services that a commercial bank offers, such as enabling clients to access cash in a matter of seconds by just going to an ATM. They also allow and facilitate international payments to pay for goods and services you might want to receive from other countries. They can also offer financial advice for your retirement fund or any other financial matter you might need advice on.

The balance sheet of commercial banks

The balance sheet of a commercial bank provides an overall overview of how well the bank is operating. At the end of the year, a balance sheet reveals the company’s assets and liabilities as of a certain date.

In a balance sheet, assets and liabilities are displayed on the left-hand side and right-hand side, respectively. Same as a company’s balance sheet, the total asset and liabilities of a commercial bank must balance. All commercial banks are required to disclose their balance sheets once a year.

The assets of commercial banks

A commercial bank generates revenue and profit through its assets. One of the first things you'll find on a commercial bank's balance sheet is cash in liquid form. This cash is a portion of deposits banks are required to keep in case a customer wants to withdraw their funds from the bank. They do not generate profit for the bank.

Other items that can be found on the asset's side of a commercial bank's balance sheet include receivables, which are deposits that the commercial bank makes at a central bank through which it generates profit.

Commercial banks also have loans made to other clients in their balance sheet as well as inventory, land, and building that the bank owns. These are the main items that can be found under the asset's side of a commercial bank's balance sheet.

However, there are many other types of assets that you can find on a commercial bank's balance sheet, including investments made in government securities, company shares, or corporate bonds.

Liabilities of a commercial bank

Liabilities are those items that the bank owes to other parties.

Deposits and borrowings from other institutions are examples of liabilities for a bank. You can think of liabilities of a commercial bank as things that provide funding for the bank.

One of the main and first items that can be found on the liabilities side is the bank's share capital. These is money owed to the bank's shareholders. Another very important item that you will always find on a bank's balance sheet is checkable deposits. These include the deposits of the bank's customers. The checkable deposits provide the bank with liability as the bank has to pay interest on those deposits.

There are other items that are included in a bank's liabilities such as borrowings from other banks, salaries paid to employees, rent, etc. Basically, you can think of liabilities as anything that the bank owes to someone.

Benefits of commercial banks

Commercial banks provide many benefits for their customers. Commercial banks offer loans and other financial products for people who need money for a large purchase or to start their own business.

Banks also offer checking and savings accounts, which may come with added bonuses and utilities that help people save and spend their money more wisely. For example, some commercial banks offer introductory CDs that pay higher rates of interest than regular CDs. They also offer safe deposit boxes at their branches, which can be used to store important documents and valuables in a secure location.

Commercial banks also offer basic investment services such as certificates of deposits (CDs) and mutual funds, which can allow people to invest without having to do so on their own. With the help of a financial advisor at the bank, this service can give you peace of mind knowing your investments are managed by professionals.

Examples of commercial banks

Here are three real-world examples of commercial banks, each illustrating various functions typically associated with such institutions.

• JP Morgan Chase & Co.: This is a leading global financial services firm headquartered in the United States. JP Morgan Chase & Co. provides various banking functions. It accepts deposits, provides loans, and offers other services like credit cards and mortgage lending. Its digital banking services are advanced, providing online and mobile banking options to its customers. They also have wealth management services for advisory functions.

• HSBC Holdings plc.: HSBC is one of the largest banking and financial services institutions in the world, headquartered in London. Along with standard banking functions such as accepting deposits and providing loans, HSBC also has a strong presence in international banking, offering robust foreign exchange services. They also provide advisory services for investments and wealth management.

• Deutsche Bank AG. Deutsche Bank is a leading German bank that provides a wide array of banking services. They excel in providing corporate finance and investment solutions, thereby playing a crucial role in advisory functions. The bank also offers online and mobile banking facilities, illustrating its role in electronic banking services.

What is commercial banking?

Banks get their money from customer deposits, which allows them to then offer these as loans. They make a profit on the interest they charge for mortgages, vehicle loans, company loans, and personal loans.

What are the main functions of commercial banks?

What role do commercial banks play in the economy?

Providing financing to businesses and individuals which enables them to perform activities such as opening up a startup or buying a house.

What Role Do Commercial Banks Play in the Economy?

Commercial banks play an important role in an economy as they are the main source of funding for individuals looking to buy a house or entrepreneurs looking to establish a startup. They also help individuals save for their retirement while protecting their wealth against inflation.

What is the difference between commercial banking and retail banking?

The difference between commercial banking and retail banking is that retail banking is a division that is concerned with retail customers.

How many jobs are available in commercial banks?