This question was quite popular among the candidates and majority of them were able to define central bank and list the instruments of central bank in regulating the supply of money but only few of them could define building society and expatiate on their points in the (c) part of the question . Candidates were expected to answer thus to score maximum marks in this question.

(a)

(i) Building society is a financial institution which specializes in the provision of long term mortgage loans for building purposes.

(ii) The central bank is defined as the apex bank established by an Act of Parliament and charged with management and control of the national monetary affairs and the supervision and coordination of banking and financial activities of a country.

(b)

(i) Open Market Operation (OMO): This is the sale and purchase of government securities like treasury bills to influence the supply of money. When there is excess liquidity in the economy, the central bank will sell her treasury bills and vice versa.

(ii) Liquidity ratio/cash ratio: banks are mandated by law to keep a percentage of their total deposit in the form of liquid asset. This percentage can be increased if the central bank wants to reduce money supply and vice versa.

(iii) Bank rate: This is the rate at which the central bank lends to commercial banks and also discount bills of exchange. To increase money supply the central bank will reduce the bank rate and vice versa.

(iv) Special deposit: the central bank can mandate banks to make special deposits with it so as to mop up excess liquidity when the need arises.

(v) Special directives: The central bank can order or instruct other banks to increase their lending to a particular sector so as to stimulate the sector for the overall growth of the economy.

(vi) Moral suasion: unlike other instruments, this is more of an appeal to other banks to restrict or expand their loans to a particular sector(s) of the economy.

(vii) Funding: this refers to the process where short-term debts of government are converted to long-term debts to reduce excess liquidity.