FORM THREE HOLIDAY ASSIGNMENT

INSTRUCTIONS

1. Read and write the following notes in your note book

2. Answer the questions at the end of the notes

MONEY AND BANKING

CONTENTS

 Introduction
 barter trade
 money system
 banking

INTRODUCTION
Money: Money refers to anything that is generally accepted as a medium of exchange for
goods and services. Money is in the form of notes and coins.

Banking: Banking refers to all activities carried out by financial institutions involving money.
Financial institutions include the central bank, commercial banks and non-banking financial
institutions.
BARTER TRADE

Barter trade is a system of trade where goods and services are exchanged with other goods
and services. This is a system of trade that was used in African traditional societies though
barter trade is still used in modern societies e.g. where a person works in exchange for food
stuffs.
Merits of Barter trade

 Buyers and sellers are able to get immediately those goods and services they require
 Enables a country or person dispose off its surplus
 Promotes harmony, peace and understanding among trading partners
 Promotes specialization in production
 Promotes the standard of living of those involved in trade

Limitations of Barter trade

Despite the advantages mentioned above, barter trade has a number of drawbacks as
discussed below

a) Requires double coincidence of wants

For barter trade to take place there must be double coincidence of wants. This means, that
there must be somebody who has what you have and is in need of what you have for barter
trade to take place. E.g. if someone has a goat and wants beans, then he has to look for
someone who has beans and is in need of a goat. This situation is very difficult to come by.

b) Lack of standard measure of value

In barter trade, it is difficult to determine how much of a commodity should be exchanged

for another. For example if someone has fish and is need of a cow, it will be difficult for him
to determine the number of fish to exchange for one cow.

c) Indivisibility of some commodities

Some commodities cannot be subdivided into small quantities without loss of value. For
example if you have a cow and you want one tin of maize, it will be difficult to subdivide a
cow into smaller parts equivalent to one tin of maize.

d) Perishability of commodities

Some commodities will go bad before they reach the market resulting in losses to the seller.

e) Inconvenience in transporting some commodities

Some goods are too bulky to be carried from one place to another. This will greatly hinder
trade.

f) Lack of standard of deferred payment

It is difficult to make payment in future using goods since their value could have reduced or
needs of the person to be paid could have changed

g) Lack of unit of account

It is difficult to calculate the value of goods and keep a record for future reference

h) Hinders specialization

Lack of double coincidence of wants makes people produce as many products as possible in
order to satisfy market demand
MONEY SYSTEM
Because of the many drawbacks, barter trade is no longer used; instead it has been replaced
by money system of trade
Development of money
a) The earliest form of money was commodity money which consisted of various
commodities such as ivory, salt, beads, hides and skins. Commodity money had
several limitations which include the following:
 Some commodities were perishable
 Some commodities were not portable
 Some commodities could be obtained easily without effort
  Some commodities were indivisible
b) Because of the above limitations, commodity money was replaced with metallic
money which was in the form of copper, silver and gold. Metallic however had the
following limitations:
 They were insecure to keep and carry around due to their high value
 They were heavy to carry around
 There were not easy to divide
c) The above limitations led to the metallic money being replaced with paper money
(paper notes) which was issued by goldsmiths and silversmiths who provided safe
custody of precious metals. Paper money had the following limitations:
 Fake notes came into existence
 Paper money lacking a legal force (backing by the law)
 Lack of credibility of the issuing authority
d) Paper money was followed by the development of legal tender currency notes and
coins which had the backing of the law. Legal tender currency were issued in the
form of bank notes and coins
e) The need for convenience has given rise to representative and plastic money.
Representative money are in form of cheques, money orders, bills of exchange etc.
whereas plastic money is in the form of credit cards

Forms of money

 Commodity money
 Metallic money
 Paper notes
 Bank notes
 Coin money
 Bank deposits (money held in current accounts)
 Quasi money e.g. cheques, bill of exchange, credit cards, money orders, postal
orders etc.

Characteristics of money
For any commodity to be accepted as money, it must have the following characteristics

a) Acceptability

Money must be generally accepted by everyone as a medium of exchange for goods and
services

b) Divisibility

Money should be easy to subdivide into smaller units (Denominations) without losing its
value. This will enable people carry out transactions with ease.
 c) Portability

Money should be light and not bulky in order to be carried around without difficulties.

d) Durability

Money should be able to stay for long without getting torn, defaced or losing its shape and
texture. The material used to make money should therefore be able to withstand tear and
wear.

e) Stability

Money should be able to last for a long time without fluctuating in value.

f) Homogeneity

Money of the same denomination should be uniform in quality and therefore identical. This
makes it more recognizable and hence acceptable

g) Cognisability

Money should be ease to recognize such that it is easy to differentiate between fake and
genuine money.

h) Scarcity

Money should be relatively scarce in supply inoder to retain its value. This is because if
money is abundant in supply, it will lose its value greatly.

i) Malleability

The material used to make money especially coins should be ease to cast into different
shapes

j) Not easy to forge

The material used to make money shouldn’t be easily available. The technique used in
making money should also be highly secretive in order to avoid forging
Functions of money
The following are the roles played by money in the economy

a) Medium of exchange

Money enables trade to take place as it is exchanged for various goods and services

b) Measure of value

Money provides a common denominator in which the value of various goods and services
are expressed. For example 1kg of sugar is valued at Ksh 140.

c) Unit of account
Money provides a method through which the value of various commodities is calculated and
a record kept. For example, land can be measured and its value recorded in terms of money.

d) Store of value

Money can be used as a means of storing wealth. This is done by saving money which can be
used in the future to buy different commodities.

e) Standard of deferred payment

Money can be used to settle debts at any time because it is generally accepted as a medium
of exchange for goods and services.

f) Transfer of immovable assets

Immovable assets can be sold and the money realized used to buy similar assets elsewhere.
Demand for money (liquidity preference)
Demand for money refers to the desire of people to hold on money without intending to
spend it. This desire is influenced by three motives (reasons):

 The transaction motive

 Precautionary motive
 Speculative motive
a) The transaction motive

Refers to holding money in order to meet daily expenses such as buying food, paying for
transport etc. one therefore has to ensure that he has money at all times to meet these
daily expenses. Such moneys are held for transaction motives.
The amount of money held for transaction motive will depend on the following factors:

 Individual level of income: A person who earns more will have more money at his
disposal hence he will hold more money to meet daily transactions as compared to
someone with a low income
 Interval between pay days: When the interval between paydays is far apart, more
money will be held unlike when the interval is short. For example, a person who is
paid after a month need to hold more money to meet daily expenses for the whole
month unlike a person who is paid daily.
 Spending habits: High spenders will hold more money as compared to low spenders.
This is because they need more money to satisfy their spending habits
 Prices of commodities: When prices are high, people will require more money in
order to meet their daily expenses unlike when prices are low
 Availability of credit: When people are not allowed to buy on credit, they will need
more money to meet their daily expenses unlike when credit facilities are allowed
The transaction motive can further be subdivided into income motive and business motive.
Income motive refers to holding money to spend on personal or family needs. Business
motive refers to where money is held to meet business recurring needs such as paying
wages.

b) The precautionary motive

This is where people tend to hold money to meet expenses that may occur unexpectedly.
Such expenses may relate to sickness, accidents etc.
The amount of money held for precautionary purposes may depend on factors such as:

 Level of income: people with high levels of income tend to keep more money to
cater against emergencies than people with low income levels
 Family status: high class individuals with high incomes tend to hold more money as a
precautionary measure against emergencies as compared to low class individuals
 Age: older people are prone to health complications as compared to younger, they
therefore need to keep more money to guard against emergencies
 Number of dependants: with more dependants, emergencies will be more hence
more money has to be held to guard against these emergencies
 Individual temperaments: this has to do with how a person perceives life. An
optimistic person will assume that nothing will go wrong in the future, such person
will therefore keep little money to guard against emergencies as compared to a
pessimistic person who assumes that many things will happen in the future
 Interval between incomes: when the interval between incomes is long, more money
will be held to cater against as compared to when the interval between incomes is
short
c) The speculative motive

This refers to holding money to spend in the future when economic conditions become
favorable. For example an individual will keep his money inorder to spend it in the future
when prices are low
Amount of money held for speculative motive will depend on the following factors:

 Levels of income: the higher the income level, the higher the amount of money held
 Individual temperaments: an optimistic person who doesn’t care the future happens
will keep less money for speculative purposes as compared to a pessimistic person
who is very conscious about the future.

Supply of money
Supply of money refers to the stock of monetary items in circulation at a given time. These
monetary items may consist of

 Total currency in form of notes and account

  Total monetary deposits in commercial banks

Factors influencing the supply of money in the economy

a) Central bank’s monetary policy
b) Ability of commercial banks to lend money to the public
c) Ability of central bank to control the lending ability of commercial banks
d) The rate of interest in the economy i.e. higher interest rates limits lending by
commercial banks resulting in lower supply of money and vice versa
e) The national budget i.e. the higher the national budget, the higher the supply of
money and vice versa

BANKING

Banking refers to all the activities carried out by banks and other financial institutions
involving money.
Development of banking
Banking developed from the services offered by goldsmiths and silversmiths. These services
included:

 Accepting deposits of precious metals from the public

 Providing safe custody of the precious metals received
 Providing loans to traders from the deposits of precious metals held and charging
interest on those loans
 Issued paper notes to the depositors which facilitated change of ownership of the
precious metals deposited without having to withdraw the deposits

Many goldsmiths and silversmiths emerged to provide these services prompting

governments to start controlling their activities. This led to the rise of banks and the need to
control these banks led to the emergence of the central bank.
Banking system in Kenya consists of;

 The central bank

 Commercial banks
 Non-banking financial institutions
a) Commercial banks

These are banks which are formed with the main aim of making profit through financial
intermediation. Their profits are made through:

 Interests earned on loans and overdrafts extended to customers

 Investments in the economy
 Income from daily operations e.g. ledger fees charged on customers’ deposits

Examples of commercial banks in Kenya may include:

  Kenya commercial bank
 Family bank
 National bank of Kenya
 Standard chartered bank
 Co-operative bank of Kenya etc.

Services offered by commercial banks

a) Accepting deposits

Deposits constitute money kept in commercial banks by customers. By accepting deposits

help people save their money. These deposits are accepted in three main accounts
depending on the customers' desire namely

 Current account
 Savings account
 Time(fixed) deposit accounts
b) Lending money

Lending money refers to giving out money in form of loans. Commercial bank gives loans to
individuals, businesses and government agencies. Such loans attract interest at given rates.
These loans encourage investments in the economy leading to economic growth.

c) Safekeeping of valuable items

Commercial banks do accept some valuable items from their customers for safekeeping.
Such valuable items may include title deeds, jewelry, wills etc. a fee is charged for
safekeeping of these items.

d) Facilitating transfer of money

Commercial banks provide methods through which money can be transferred from one
person to another. This is made effective using methods such as; cheques, standing orders,
credit transfers etc.

e) Provision of foreign exchange

Commercial bank facilitates the exchange of different currencies. This is done to facilitate
foreign trade. To offer foreign exchange services, commercial banks charge a fee.

f) Offering advisory services

Through their customer care services, commercial banks advise their customers on the
available investment opportunities and on the best ways to manage their funds.

g) Provision of trustee services

Commercial banks can undertake to manage a deceased customer’s property on behalf of

the inheritors if requested by the customer. This is mostly done if by the time of death of
the customer, inheritors were minors. The property is passed over to the inheritors when
they attain maturity. To do this, the bank charges a fee.

h) Acting as guarantor or referee

Commercial banks may act guarantors to their customers who want to acquire goods on
credit or borrow money from other financial institutions

i) Linking savers and borrowers

By accepting deposits and lending money in for of loans, commercial banks provide a forum
through which savers and borrowers can interact
Money transfer services

a) Standing order

This is an instruction to the bank from the account holder to be paying a given amount of
money to a named person at given intervals for as specific period of time.
b) Credit transfer

This is method where one cheque is used to pay a given number of people whose account
numbers and names are written on the cheques

c) Telegraphic transfer

This is a method of transferring money from one account holder to another. The sender fills
an application form containing the details of the payee

d) Electronic funds transfer

This is a method of transferring money from one account holder to another via computers
within the same bank or between different banks

e) Cheque

This is a written order by the account holder (drawer) to his bank to pay on demand a
specified amount of money to the person named on its face (payee) or to the bearer.

f) Credit cards

These are cards which allows the customer to obtain goods and services from specified
sellers without paying for them in cash. The value of the goods is deducted directly from the
buyer’s bank account and the money remitted to the seller

g) Travelers cheques

These are cheques which are issued to travelers in and out of the country to settle their
debts in the country’s they are visiting
Commercial bank accounts
Commercial banks accept deposits from their customers into three accounts;

 Current accounts
 Savings accounts
 Fixed(time) deposit accounts
a) Current accounts

This is an account where money can be deposited and be withdrawn at any time provided
there is sufficient funds in the account
This account is suitable for business people who need money regularly
Its features

 Money is withdrawn at any time

 No minimum balance is required to be maintained in the account
 Account holders are allowed to use cheques to facilitate payments
 Money deposited in the account do not earn interest
 Customers can withdraw in excess of what is in their account. This excess withdrawal
is known as an overdraft
 Deposits can be made at any time
 The bank charges ledger fees for maintaining the account
 The account holder is given periodical bank statements to show a summary of the
transactions between him/her and the bank for a given period of time

Advantages of a current account

 They allow overdrafts

 Cheques can be used to effect withdrawals and make payments
 No minimum balance is to be maintained
 Regular bank statements are issued to the account holder
 Money can be deposited at any time
 Money can be withdrawn at any time

Disadvantages of current accounts

 No interest earned on deposits

 Ledger fees is charged to operate the account
 Withdrawals at any time discourages savings
b) Savings account

This is an account where money deposited is only withdrawn after a given period of time.
Suitable for those who are interested in saving.
Its features

 Money deposited beyond a certain minimum earns interest

  Cheques are not used by the account holder to facilitate payment
 Overdrafts are not allowed
 A minimum balance has to be maintained in the account
 A notice must be served when withdrawing large amount of money exceeding a
given limit
 Money is only withdrawn by the account holder himself
 Money can be deposited in the account at any time
 An initial deposit is required when opening the account

Advantages of a savings account

 Earns interest
 Low initial deposit
 Deposits can be made at any time
 Restrictions on withdrawals encourages savings
 Deposits can be made at anytime

Disadvantages of savings accounts

 A minimum balance is required to be maintained at all time

 A fee is charged when withdrawing
 Ledger fee is charged to operate the account
 Overdrafts are not allowed
c) Fixed(time) deposit account

This is an account where money deposited cannot be withdrawn until after the expiry of an
agreed upon period. The period can be 3 months, 6 months, 1 year or 5 years. During this
period no further deposits can be made.
This account suitable for people who have money that is not intended for immediate use.
Its features

 Earns interest at an agreed rate depending on the amount of money deposited and
the duration
 There is a minimum amount of money that can be deposited in this account
 A deposit certificate is issued to the account holder to act as evidence of the
contract
 If money is withdrawn before the expiry of the agreed period, no interest is earned
 At the expiry of the agreed upon period, all the money can be withdrawn together
with the interest earned
 Involves large amounts of deposits
 Money is deposited in the account once
 The rate of interest is usually higher than in savings accounts
  There is a minimum amount of money that can be deposited in the account

Advantages of fixed deposit accounts

 Allow the account holder time to plan on how to spend the money deposited
 Deposited money can be used as a collateral security for a loan
 High interest is earned
 No ledger fees
 Encourages savings

Disadvantages of fixed deposit account

 A notice is given when terminating the account

 No interest if money is withdrawn before the expiry of the contract period
 Money deposited cannot be accessed before maturity of the period
 No regular deposits
 Minimum balance is high

Differences between fixed deposit accounts and savings accounts

Fixed deposit accounts Savings accounts

Money is not withdrawn until the contract Money is withdrawn after an agreed
is over interval
Can be used as a security for a bank loan Can be used as a security for a bank
overdraft
The account remains in force for a specific The account is in force as long as the
period of time minimum balance is maintained
A large amount of money is required to A small amount of money is required to
open the account open the account
A separate account is required for each All deposits can be made in the same
deposit account
A certificate of deposit is issued once A passbook or a bank card is issued when
money is deposited in the account deposits are made into the account
Interest earned is high Interest earned is low

Differences between savings accounts and current accounts

Savings accounts Current accounts

Withdrawals are made after a specific Withdrawals are made at any time
period of time
A minimum balance must always be No minimum balance is required to be
maintained in the account maintained in the account
Cheques cannot be used to make payment Cheques are used to make payment
Overdrafts are not allowed Overdrafts are allowed
Interest is earned on the money deposited No interest is earned on the money
deposited
 Large withdrawals require a notice to be Any amount of money can be withdrawn
given to the bank from the bank without a notice to the bank
Money remittance services are not Money remittance services are permitted
permitted

Reasons why majority of Kenyans do not operate bank accounts

 Most Kenyans earn low incomes which is entirely consumed hence no savings to
keep in bank accounts
 Requirements to open bank accounts are not favourable to most Kenyans
 Instability in the banking sector discourages most Kenyans from operating bank
accounts
 Ignorance of the existence of banking facilities by most Kenyans
 Banking facilities are located far away from some people

Ways in which commercial banks advance money to their customers

 Bank overdraft facilities

 Discounting bills of exchange and promissory notes
 Giving out personal loans

Disadvantages of a bank overdraft

 It may be expense as interest charged is high

 Frequent use of overdraft by the business may be seen as a sign of mismanagement
by financiers
 Banks may recall the overdraft at any time
 Overdrafts are not easily available unless one is well known or has a good reputation
 Overdrafts are only given to current account holders
 Overdrafts offer a limited amount of financing hence not suitable for long term
financing
 Overdrafts require short repayment period which may affect the cash flow of the
business

Reasons why commercial bank loans are not popular in Kenya

 High rate of interest is charged on the loans

 Individuals and firms may have cheaper sources of loans
 Not so many people have accounts with commercial banks
 Acquiring commercial bank loans involves a lengthy procedure
 Many people fear the consequences of failing to repay the loans
 Many people do not have recognized property to attach as collateral security
b) The central bank
This is a financial institution which is established by the government of the country to
manage and control the supply of and demand for money
Functions of the central bank

a) Issue of currency

The responsibility of issuing new currency lies with the central bank. The central bank will
ensure adequate amount of money is in circulation. This is because excess money leads to
inflation while too little money may suppress economic activities

b) Acts as a banker to commercial banks

The central bank offers banking services to the commercial banks. These banking services
include:

 Maintains current accounts for commercial banks

 Receiving money deposits from commercial banks and providing safe custody of such
deposits
 Facilitates the settlement of inter-bank debts
 Lends money to commercial banks
 Advices commercial banks on financial matters
c) Acts as a banker to the government

The central bank provides banking services to the government. These banking services
include:

 Maintains current accounts for all government ministries and departments

 Receiving money deposits from the government and providing safe custody of such
deposits
 Making payments on cheques drawn by the government
 Advising the government on financial matters
 Providing safe custody of funds received from abroad on behalf of the government
d) Controlling commercial banks

The central bank regulates the operations of commercial banks by giving them instructions
on lending procedures and proper banking practices. This is done to prevent these
commercial from exploiting their clients. Some of the methods used by central bank to
regulate commercial banks include the following:

 Licensing commercial banks

 Inspecting commercial banks
 Approving the establishment of branches of commercial banks
 Ensuring the protection of depositors funds
 Punishing and closing down errant commercial banks
  Interpreting and implementing government monetary policies to all commercial
banks
e) Links the country to external financial institutions

The central bank links the country with external financial institutions such as World Bank
and the IMF. This facilitates healthy financial relationships enabling the country access
financial assistance from such institutions

f) Maintaining stability in exchange rates

The central bank monitors the rates of exchange between the local currency and other
currencies. It therefore comes up with methods of ensuring that stability in exchange rates
is maintained at all time. This is done through the following methods:

 Devaluation of the local currency

 Ensuring that no commercial bank is allowed to effect payments abroad without
seeking permission from the central bank
 Ensuring that no commercial bank is allowed to buy or sell foreign currency without
seeking permission from the central bank
 Requiring commercial banks to submit periodic reports to the central bank showing
their foreign exchange deals
g) Lender of last resort

The central bank can give loans to commercial banks. Commercial banks can therefore
obtain loans from the central bank to meet their daily financial obligations when need arises

h) Facilitates clearing of cheques

Through the clearing house, the central bank facilitates the clearing of cheques between
different commercial banks
i) Administering public debt

Public debt refers to all outstanding government borrowings both internal and external. The
central bank is responsible for ensuring that such a debt is paid. The central bank therefore
does the following:

 Sales government securities such as treasury bills and bonds to the public
 Discounts government securities
 Redeeming government securities on maturity
 Maintains a register of all government securities
 Paying accrued interest on government securities
j) Controlling monetary system

The central bank controls the supply of money in the economy. It does by using certain
methods known as the instruments of monetary policy which will be discussed later.
The monetary policy
Monetary policy refers to the deliberate move by the government through the central bank
to manipulate the supply, availability and cost of money in order to achieve the desired
economic levels
Reasons for monetary policies

 To facilitate rapid and steady economic growth

 Create employment
 Stabilize prices of goods
 Ensure balanced economic development
 Ensure equilibrium in the balance of payments

Tools of monetary policy

These are methods the central bank uses to control the supply of money in the economy.
These tools are discussed below

a) Bank rate policy

The central bank as lender of last resort gives loans to commercial banks at an interest rate.
This interest rate determines the lending rates of commercial banks to individual borrowers.
To reduce the supply of money in the economy therefore, the central bank will increase its
lending rate forcing commercial banks to increase rate of interest on their loans. This makes
loans expensive therefore discouraging borrowers. On the other hand to increase the supply
of money in the economy, the central bank will lower its lending rate making loans cheaper
hence encouraging borrowing
Factors limiting the effectiveness of bank rate policy

 Availability of excess reserves in commercial banks enabling them to lend money to

the public without having to approach the central bank for more money.
 Few monetary transactions especially in under-developed countries
 Existence of other lending institutions such as SACCOs from where loans can be
accessed by the public
 Reduction in the number of potential borrowers to the extent that changes in bank
rates have no effect on borrowing
 Savings and investments are done purely for safety reasons but not to earn interest
b) Open market operations(OMO)

The central bank can regulate the supply of money in the economy by selling or buying
government securities in the open market. Government securities include treasury bills and
government bonds.
To reduce the supply of money in the economy, the central bank sells these government
securities to the public, this will help in withdrawing money from the economy as people
pay for these securities through commercial banks

On the hand the central bank can increase the supply of money by buying bank the
government securities earlier sold. This will have an effect of releasing more money to the
economy thereby increasing the supply of money

c) Cash/liquidity ratio requirement

The central bank requires commercial banks to hold a certain proportion of their total
deposits in form of cash in order to assist in meeting their day to day operations. This
proportion is known as the cash ratio.
Cash ratio = cash held / total deposit

At other times, the central bank may require commercial banks to hold part of their total
deposits in the form of liquid assets. This proportion is known as the liquidity ratio

To reduce the money supply in the economy, the government will reduce the amount of
money always available in the cash. This will reduce the amount of money available for
lending. On the other hand reducing the amount of money always available in commercial
banks reduces their ability to lend.

d) Compulsory deposit requirements

The central bank may require commercial banks to deposit a specific amount of money in
the accounts they hold with it. These deposits will affect the amount of money available for
lending by commercial banks. To reduce money supply therefore, the central bank will
increase the amount of the compulsory deposits. On the other hand, to increase the supply
of money, the central bank will reduce the amount of compulsory deposits.

e) Selective credit control

The central bank may give instructions to commercial banks to only lend money to specific
sectors of the economy. This will reduce the supply of money. On the other hand, to
increase the supply of money, the government will reduce all forms of restrictions

f) Directives and requests

The central bank may give directives to the commercial banks on the rate of interest to
charge on their loans. To increase the supply of money, directives to lower interest rates will
be issued. On the other directives to increase interest rates will be issued if the objective is
to reduce the supply of money.
The central bank may also request commercial banks to adjust their interest rates as
required. This is known as moral persuasion
Limitations of monetary policies
 a) Bank rates may not be effective where central banks lacks the power to enforce its
rules
b) Treasury bills lack a wider market hence hindering the effectiveness of open market
operations
c) Central bank may have limited control over commercial banks especially in
developing countries
d) Limited use of cheques and other banking services renders monetary policies
ineffective
c) Non-banking financial institutions

These are institutions which address financial needs of specific sectors of the economy
which commercial banks cannot address. These institutions include;

a) Development financial institutions

These are institutions which offer financial services to the manufacturing sector. Examples
may include:

 Kenya industrial estate

 Industrial development bank etc.
b) Housing finance companies

These are institutions whose major responsibilities to finance housing activities. They do this
by either putting up houses which they sell to interested people or by giving mortgages to
people to buy houses. Examples may include:

 Housing finance company of Kenya

 East African building society
c) Savings and credit co-operative societies(SACCOs)

These are financial institutions which are formed to enable members save and access loans
more conveniently. They are formed by people engaged in similar activities or are under a
similar employer. Examples include:

 Mwalimu Sacco
 Kakuma lima Sacco
 Stima Sacco etc.
d) Insurance companies

These are financial institutions which guard against risks. They also encourage savings.
Examples may include:

 Madison insurance company

 Blue shield insurance company
 British American insurance company etc.
e) Micro finance companies
These are institutions which offer financial services to small scale and medium sized
enterprises. Examples may include:

 Faulu Kenya
 Kenya women finance trust etc.
f) Agricultural finance houses

These are institutions which offer financial services specifically to the agricultural sector e.g.
the agricultural finance corporation.
Functions of Non-banking financial institutions

 Giving loans
 They offer training services
 Advisory services that equip people with knowledge on how to set up and run
businesses
 They may extend guarantee/trustee services to members
 They offer savings services to their clients
 They generate revenue to the government through tax and dividends
 They supplement the government’s effort of developing the economy
 They create employment opportunities

Advantages of borrowing money from non-banking financial institutions

a) They give long-term loans

b) They provide finances for specific projects
c) They give loans at relatively lower interest rates compared to commercial banks
d) They accept lower collateral value
e) They give longer grace period for loan repayment

Differences between commercial banks and Non-banking financial institutions

Commercial banks Non-banking financial institutions

They provide current accounts They don’t provide current accounts
They provide short term and medium term They only provide long term loans
loans
They are under the direct control of the They are not directly controlled by the
central bank central bank
They offer finances to all sectors of the They only offer finances to specific sectors
economy of the economy
They provide foreign exchange services They do not provide foreign exchange
services
They participate in the central bank They do not participate in the central bank
clearing house clearing house
They safe keep valuable items They do not safe keep valuable items
They finance working capital They finance capital for development
 Offers bank overdrafts for current account They do not offer bank overdraft facilities
holders

Similarities between commercial banks and non-banking financial institutions

a) Both accept deposits from the public
b) Both lend money to the public
c) Both are registered under the banking act except building societies
d) Both pay interest on money deposited with them
e) They both provide investment advice to their clients
f) They both charge interest on loans advanced to their clients

NOTE: Due to the current changes in the banking industry, some non-banking financial
institutions are now carrying out banking activities
Trends in banking

a) Introduction of automated teller machines(A.T.Ms)

Advantages of ATMs

 They are conveniently located

 They offer 24hr services
 Transactions are secured through pin
 They provide additional information about the account
 They save time
 ATM cards can be used as credit cards to buy goods
 They are cheaper
 ATM cards are highly portable
 Withdrawals can be done on behalf of somebody

Disadvantages of ATMs

 They may not be used by the illiterate

 They contribute to unemployment
 They encourage cases of theft
 ATM machines are not always available

b) Introduction of computer usage which have facilitated networking of branches

c) Restructuring of accounts
d) Soft conditions on loan access
e) Improved customer care services
f) Introduction of mobile banking through M-pesa and airtel money which enables
users
  Send money
 Withdraw money
 Buy airtime
 Access account balance
 Buy goods and services from registered sellers
 Withdraw money from A.T.Ms
g) Introduction of pesa point money services where money can be withdrawn at any
time
h) Introduction of mobile banks.