Definition, Function and Role of Commercial Banks in the Economy

Banking experts in developed countries defines a commercial bank as a profit-oriented financial institution. To obtain the profit of commercial banks perform the inter mediation function. Because permitted  raise funds in the form of deposits, commercial banks also called depository financial institutions. Based on its ability to create money (demand deposits), commercial banks may also be known as the creator of a commercial bank demand deposits. 

The definition of commercial banks according to Law No. 10 of 1998:"Commercial Bank is a bank conducting business based on conventional or Islamic principles in its activities to provide services in payment traffic."

The functions of commercial banks which are described below shows how important the presence of commercial banks in modern economies, namely:

 1. Creation of money. Money is created by commercial banks demand deposits, namely the means of payment via transfer mechanism (clearing). The ability to create demand deposits of commercial banks led possisi and function in the implementation of monetary policy.The central bank can reduce or increase the money supply by affecting the ability of commercial banks to create demand deposits.