Management Notes

Reference Notes for Management

The fundamental function of a commercial bank is

The fundamental function of a commercial bank is

    1. Acceptance of deposits
    2. Advancing loans
    3. Issuing bank draft
    4. Creating credit

Correct Answer: Advancing Loans

 Answer Explanation

As a fundamental function of a commercial bank, it advances loans to individuals, businesses, and other entities. Advancing loans is a core activity that distinguishes the commercial bank from other financial institutions. Through loans, banks help individuals in need, stimulate economic growth, and earn interest income, all of which contribute to their profitability.

When customers approach a commercial bank for loans, the bank evaluates their creditworthiness and assesses the risk associated with lending. The bank grants the loan to a borrower who meets the bank’s criteria and is deemed creditworthy. Interest earned on these loans represents a significant portion of the bank’s revenue, making it crucial to its operations.

Why the other options are not correct

a. Acceptance of deposits:

Although accepting deposits is one of the primary functions of a commercial bank, it is not the most important one. In addition to providing a source of funds for lending and investment, deposits are vital to banks.

Nevertheless, accepting deposits alone does not define the core purpose of a bank. Bank operations are based on advancing loans and generating interest income from these deposits.

c. Issuing bank draft:

It is one of the services offered by commercial banks to issue bank drafts, but it is not their fundamental function to do so. Although drafts are a convenient and secure way to transfer funds and make payments, they are not the primary activity that distinguishes a bank as a commercial entity.

d. Creating credit:

Banks are fundamentally responsible for advancing loans, so creating credit is one of their essential functions. The act of creating credit is a consequence of the loan process rather than the core function of a commercial bank. When a bank grants a loan to a borrower, it creates credit for that borrower.


Banks play an important role in driving economic growth and development by providing financial assistance to individuals and businesses. Therefore, the primary function of a commercial bank is (b) advancing loans. Bank revenues and profitability are heavily influenced by interest income generated from these loans.

A commercial bank’s primary function is to advance loans, so accepting deposits, issuing bank drafts, and creating credit are secondary functions. Commercial banks play a vital role in supporting the economy and meeting community financial needs by fulfilling their core purpose responsibly and efficiently.

What is known as the most profitable asset of a commercial bank?

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