Money, Banking and Financial Institutions
Domain 6 tests the functions and characteristics of money, the structure of the banking system and the role of the Bank of Namibia.
Money
Money serves as a medium of exchange, unit of account, store of value and standard of deferred payment. It must be durable, portable, divisible, homogeneous, scarce and difficult to counterfeit. M1 covers currency in circulation plus demand deposits; M2 adds savings and time deposits.
Commercial banks
Banks accept deposits, lend, create credit and provide payments services. Credit creation depends on the reserve ratio: the simple multiplier is 1 divided by the reserve ratio.
The central bank
The Bank of Namibia issues the Namibian dollar, acts as banker to government and to commercial banks, manages reserves, supervises the financial system and conducts monetary policy through the repo rate. NAMFISA regulates non-bank financial institutions. Namibia is a member of the Common Monetary Area, and the Namibian dollar is pegged one-to-one to the South African rand, which limits independent interest-rate setting.
Worked example
A customer deposits N$500 and the reserve ratio is 10%. The credit multiplier is 1 / 0.1 = 10, so the banking system can create total deposits of N$5,000, of which N$4,500 is new credit. In practice the expansion is smaller because the public holds cash and banks hold excess reserves.
Traps that cost marks
- Listing central bank functions as if they were commercial bank functions, or vice versa.
- Treating the simple multiplier as an exact prediction.
- Forgetting that the peg to the rand constrains Namibian monetary policy.