A bank is a financial institution whose aim is to provide financial services. They largely contribute to economic development through financial intermediation, money creation, and asset transformation. They also represent the largest source of financing for businesses by providing financing directly, extending loans and buying bonds and providing financing for consumers.
Banks are classified according to;
On this basis, banks are either classified into private and public banks. While a private bank is owned by one or more individuals, a public bank, which is also referred to as an incorporated bank is incorporated under an act and are owned by shareholders.
Since banks carry out different functions, they are classified based on their roles. These include; commercial banks, development banks, industrial banks, agricultural banks, exchange banks, savings banks, and central banks.
What is a Commercial banks?
Commercial banks are financial institutions which accept deposits from the public which are repayable on demand. These banks also lend the public for short periods. They make a profit by borrowing money in the form of deposits at a lower interest rate and lend at a higher rate. Commercial banks are classified into:
- Public sector banks- These are banks where the majority of shares are owned by the government.
- Private sector banks- These are banks where the majority of shares are held by individuals and other private entities.
- Foreign banks- These are banks that are registered outside the host country but still operate in the host country.
What is a Development banks?
Development banks are financial institutions that provide long-term capital to productive sectors, often for infrastructure, managerial and technical assistance. These banks are the most widely used instruments of funding and assistance for projects that require long-term maturity. Infrastructure in developing countries is a focus not only because they involve higher capital costs but also are essential for providing ideal conditions for innovation.
Similarities between commercial banks and development banks
- Both offer financial help to the respective customers
- Both are financial institutions which contribute to economic growth
- Both are regulated by the government
Differences between Commercial banks and Development banks
Purpose of Commercial and Development banks
The main purpose of commercial banks is making a profit through interest earned by lending at a high-interest rate. Development banks, on the other hand, aim at achieving social profit, through effecting developmental projects.
Process of formation
While commercial banks are set up as companies under the companies act, development banks are set up under the special Act passed by the government.
Target clients
Commercial banks lend to individuals and business entities while development banks lend to the government.
Nature
Commercial banks are financial institutions while development banks are multi-purpose institutions.
Raising funds
Commercial banks raise funds through public deposits, which are payable on demand. Development banks on the other hand source funds by selling of securities, borrowing, and grants.
Sector targets
Commercial banks target the masses as they have many products to offer. Development banks, on the contrary targets only the development sector.
Provision of loans
While commercial banks provide short term and medium term-loans, development banks provide medium and long term loans.
Cheque amenities
Commercial banks provide cheque amenities whereby deposits can be made and withdrawn with cheques. Development banks, on the contrary, do not offer cheque amenities.
Commercial vs. Development banks: Comparison Table
Commercial banks vs. development banks: Summary
With the constant evolution of banking and banking services, we have seen many developments in the industry. Without a doubt, there is no economy that would survive without these services. Banks play an important role in the day to day activities of human beings and are the backbone of all industries. Banks can hence be called the basis of economic progress. Both commercial banks and development banks play this role, though differently, hence are both essential for any economy.
Tabitha graduated from Jomo Kenyatta University of Agriculture and Technology with a Bachelor’s Degree in Commerce, whereby she specialized in Finance. She has had the pleasure of working with various organizations and garnered expertise in business management, business administration, accounting, finance operations, and digital marketing.
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APA 7
Njogu, T. (2019, July 5). Difference Between Commercial Bank and Development Bank. Difference Between Similar Terms and Objects. http://www.differencebetween.net/business/difference-between-commercial-bank-and-development-bank/.
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Njogu, Tabitha. "Difference Between Commercial Bank and Development Bank." Difference Between Similar Terms and Objects, 5 July, 2019, http://www.differencebetween.net/business/difference-between-commercial-bank-and-development-bank/.
FAQs
Functions: Commercial banks offer comprehensive banking services to individuals, businesses, and governments, including deposit accounts, loans, payment services, and investment products. Development banks specialize in providing long-term financing for infrastructure projects, small and medium-sized enterprises (SMEs) ...
What is the difference between commercial bank and development bank? ›
Commercial Bank is the bank organized to perform public utility banking services, such as accepting deposits, lending money, etc. On the other hand, development bank refers to a multi-purpose financial undertaking set up to provide financial aid to the industrial and agricultural sector, to encourage development.
What is the main difference between commercial bank and other bank? ›
The key difference between retail and commercial banking is who the products are designed for. While retail banks service individuals, communities, small businesses, and families, commercial banks focus on larger companies, government entities, and institutions.
What is commercial bank answers? ›
A commercial bank is a financial institution that provides services like loans, certificates of deposits, savings bank accounts bank overdrafts, etc. to its customers. These institutions make money by lending loans to individuals and earning interest on loans.
What are the two main differences between commercial bank and investment bank? ›
The difference between commercial banking vs. investment banking is that investment banks typically raise money by selling securities (like stocks and bonds). On the other hand, commercial banks use consumer deposits to fund loans and mortgages, and the interest on those loans becomes profit for the bank.
What are the three differences between a commercial bank and a central bank? ›
The central bank is usually owned and governed by the government. A commercial bank is just a unit of a country's banking structure that operates under the control of the Central Bank. The central bank is an apex institution in the money market. A commercial bank does not have the power to issue currency.
What is the primary function of a development bank? ›
Development banks are specialized institutions that provide medium and long-term credit lending facilities. Their main objective is to serve the public interest instead of earning profits. They provide financial assistance to both public as well as private sector institutions.
What are the 5 functions of a commercial bank? ›
Commercial banks perform various functions that are as follows:
- Accepting deposits. The basic function of commercial banks is to accept deposits of the customers. ...
- Granting loans and advances. ...
- Agency functions. ...
- Discounting bills of exchange. ...
- Credit creation. ...
- Other functions.
Banks are typically for-profit entities owned by shareholders who expect to earn dividends. Credit unions, on the other hand, are not-for-profit, member-owned cooperatives that are committed to the financial success of the individuals, families, and communities they serve.
What is the difference between commercial bank and non commercial bank? ›
A commercial bank is the one that lends money to potential borrowers, accepts deposits, offers other banking services , opening savings account and other small business. Non commercial bank is also referred to as investment bank offers money on long term basis and doesn't contribute to credit creation.
Commercial banks ensure liquidity by taking the funds that their customers deposit in their accounts and lending them out to others. Commercial banks play a role in the creation of credit, which leads to an increase in production, employment, and consumer spending, thereby boosting the economy.
What are the main points of commercial bank? ›
The two primary characteristics of a commercial bank are lending and borrowing. The bank receives the deposits and gives money to various projects to earn interest (profit).
What is a commercial bank's main goal? ›
The general role of commercial banks is to provide financial services to the general public and business, ensuring economic and social stability and sustainable growth of the economy. In this respect, credit creation is the most significant function of commercial banks.
What are the two difference between commercial bank and development bank? ›
Commercial banks primarily focus on providing comprehensive financial services to a broad range of customers while aiming for profitability. Development banks, on the other hand, concentrate on fostering economic development by providing long-term financing for projects and sectors that contribute to societal progress.
What is the difference between a bank and a commercial bank? ›
Central bank can be called the apex bank, which is responsible for formulating the monetary policy of an economy. Commercial banks, on the other hand, are those banks that help in the flow of money in an economy by providing deposit and credit facilities.
What are the primary differences between commercial banks and savings banks? ›
Commercial banks are classified as: retail banks and wholesale banks. Commercial banks are intermediaries between the central bank (FED) and the ultimate money borrowers. However, savings banks are financial institution whose primary purpose consists of accepting savings deposits and paying interest on those deposits.
What is the meaning of development banks? ›
Meaning of development bank in English
a bank that provides financial help to increase industry and other business in a country or area: A government-backed development bank could provide small businesses with the cheap capital they now lack.
What is a commercial development bank? ›
Commercial Development Bank operates as a bank. The Bank provides personal banking, lending, credit and debit cards, mortgage loans, and investment banking services. Commercial Development Bank serves customers worldwide.
What makes a commercial bank? ›
Definition. Commercial banking is a type of banking that provides services for businesses, government agencies, and institutions like colleges and universities to help them grow and profit. Commercial banks make money mainly by loaning money to businesses and earning back interest and fees from these loans.
