Lending Ability Of Commercial Financial Institutions

923 WordsApr 5, 20154 Pages
together both the borrowers and the savers in an economy. This is because the banking and non-banking financial institutions accepts deposits or savings from individuals and business and thus creates a pool of funds in the process called credit creation. These funds will be given to borrowers in form of loans at some interest over a give period of time. Rødseth, A. (2000) stated that the lending ability of commercial financial institutions is controlled by the central bank which is in charge of regulating the amount of money that is circulation in the economy. To increase money circulating in the economy so as to achieve some macroeconomic goals, the central bank may reduce their leading rate (bank rate) and thus encourage the commercial banks to borrow more loans from the central bank and thus expand their lending capacity to the borrowers in the money market. According to Gwartney, J. D. (2009), the concept of loanable funds is defined as the amount of money that is available in the economy in form of savings and can be lent out to borrowers as investment rather than utilize for personal consumption. The loanable funds market is market that brings together both the borrowers and savers and also avail the money available in commercial banks and other leading institutions. The savers work in the loanable funds market by supplying the loanable funds through buying bonds and other securities and giving money to the issues of these securities. On the other hand, the borrowers
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