Question

Central Banking and Financial Stability at a time of Global Crisis (the Role of Reserve Management)

General Remarks

Central banks impact our daily lives in many ways with their role to promote economic and financial welfare of citizens, but their operations are even more critical during a crisis. The global challenges presented by the COVID-19 pandemic make the role of central banks crucial to maintaining economic and financial stability. Central bank reserves provide an essential buffer against uncertain economic outcomes and help protect against economic shocks to promote trade, maintain price stability, and attract foreign investment. Effective reserve management supports the broader mission of central banks to set targets for unemployment, inflation, and interest rates to ensure a healthy economy with full employment and favorable conditions to promote investments and the conducting of business.

The central bank has the responsibility to maintain economic stability during the uncertain times of a global crisis, but an effective response is impossible without proper reserve management. Strengthening governance in decision making, along with improved risk measures, and proper accounting frameworks within central banks are crucial to promote financial stability. But proper reserve management is not only important during times of crisis. As the world economy moves to recover from the consequences of COVID-19, central banks need to continue on the path they’re on to implement sound reserve management practices and develop their capabilities to ensure long-term stability, in good times and in bad.

a. Define reserve management and explain how reserve management influences central banks decisions to restore stability in the financial stability in the economy.

b.In what way(s) the central bank is powerful? Identify some of the factors that make the central bank influential over decisions concerning the society’s socio-economic development.

c.How does the Central Bank of Bahrain conduct monetary policy? Can you provide some examples about the instruments used by the central bank of Bahrain to influence the macroeconomic variables in the economy?

d.What are the major challenges and opportunities facing banks in the digital age? What does deep-tech such as artificial intelligence and machine learning offer?

e.Where and how can Fintic play a meaningful role in key Islamic financial services such as Takaful, Zakat and Waqf?

Answer 1

a. Reserve Management entity is responsible for management of reserve and associated risks.It is a process which ensure that adequate official public sector foreign assets are readily available to and controlled by authority for meeting a defined range of objectives for country or union.

Reserve assets can support external stability at the individual country level.RM support and maintain confidence policies for monetory and exchange rate management including capacity to intervene in support of national and union currency, provide a level of confidence to market that a country can meet it's foreign exchange needs and external debt obligations and maintain a reserve for national disaster or emergency. Because of such Vital role influence central bank decision to restore stability in financial stability in economy.

b . Central Bank is an institution that manages the currency and monetary policy of a country. To ensure a nation's economy remain healthy central bank regulates amount of money in circulation. Interest rate, printing money and setting bank reserve requirements are some of the field via which central bank control money supply..

Central bank is banker bank, connected to government of a country, countries financial system depends upon central bank. All country's banks have accounts at Central bank to keep their money and for borrowing to offset any temporary shrtagshof cash. Both commercial and Central bank lends money. But commercial bank lend out the money they take in deposit. They make personal loans,autoloans,mortgage . Commercial bank borrow from central bank to cover the cash shortfall. Whereas Central bank lend only to another bank. It chanrgea higher interest rate than other source of bank lending and demand collateral such as securities from borrowing bank,central bank , manage monetary policy of country through their operations, set interest rate and regulate commercial bank activities.

C.Central bank of Bahrain is mainly responsible for setting and implementing monetory policy in kingdoK of Bahrain.In maintain a fixed exchange rate between Bahrain Dinar and US Dollar.

Bahrain is that kingdom where there is no any restriction on capital movement, foreign trade,foreign exchange,forign investment,a free trade economy.

Bahrain' s Central bank regulates and supervise FEB,IBL,and OBUs substantially. Regulating covering bank liquidity to modernize and working to update the liquidity regulation.

d. Digital banking challenges-

Some customers are not willing to take any chance because of hacking.

Several non financial institutions offer services similar to digital banking is expected today eg Facebook made possible for users to send money directly to someone's account.

Most banking system use COBOL programming language 60 years old and not meant to suit kind of technology that is available today.

Those who are embracing digital marketing not convinced unless they have proof that a bank exists in brick and mortar form.Make hard for digital banking.

AI is branch of computer science that emphasizes the development of intelligence machine, thinking and working like humans. It is the ability of digital computer controlled Robot to perform tasks commonly associated with intelligence.

e .This help people to merge finance with technology .Merging of both may lead to social welfare and also promote the country's economy.

When finance and technology merged together it save a lot of time alongwith a numbe of formalities. The transfer of money become more transparent .