Form 4

Business Studies
Revision Questions & Answers

Money & Banking

1. Explain the meaning of the following terms: (4marks)

a) 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.
b) Banking: Banking refers to all the activities carried out by banks and other financial institutions involving
money.
c) Banking: This is the process by which banks accept deposit from the public for safe keeping and lending
out the deposits in form of loans.
d) Bank: This is a financial institution that accepts money deposits from the public for safe keeping and
lending out in terms of loans.
e) Commercial banks: These are financial institutions that offer banking services with a profit motive and
their activities are regulated by the Central bank.
f) Barter trade: is a system of trade where goods and services are exchanged with other goods and services.
g) Barter trade: This is a form of trade where goods and services are exchanged for other goods and services
h) Demand for money (liquidity preference): This is the tendency or desire by an individual or people or
general public to hold onto money instead of spending it. It also refers to as liquidity preference.
i) Supply of money: Refers to the stock of monetary items that are in circulation in an economy at a
particular point in time.
j) Supply of money: This is the amount of money or monetary items that are in circulation in the economy at
a particular period of time. They include the following;
i. Total currency i.e. the coins and notes issued by the central bank.
ii. Total demand deposits: money held in current accounts in banks and are therefore withdrawable on
demand.
k) The central bank: This is a bank established by the government through the act of the parliament to
manage and control the monetary matters in the country.
l) 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.
m) Non-banking financial institutions: These are institutions, which address financial needs of specific
sectors of the economy, which commercial banks cannot address.
n) Monetary policy: This 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.
o) Agency banking: This is whereby a retail stores, supermarket, or any other commercial businesses are
authorized by the financial institutions to carry out financial transactions on their behalf.
p) Standing order: Instruction gives to the bank by account holder to pay at regular interval some money to
the named person/institution until further instruction is given by the account holder.
q) Credit transfer: This is a methods of paying many people using one cheque where the money is deposited
in the respective accounts of the payee.
r) Lender of the last resort: Situation where commercial banks having exchanged other services of money
turn to central bank to borrow money.

1|Page
 2. List four forms of money (4marks)
 Coins & notes
 Cheque
 Bill of exchange
 Credit cards
 Money orders
 Postal orders
3. Outline four merits of barter trade (Give four advantages of barter trade) (4marks)
 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
4. State four benefits of barter trade (4marks)
 Satisfaction of wants: And individual is able to get what he or she needs.
 Surplus disposal: an individual or country is able to dispose off its surpluses.
 Social relations: it promotes social links since the communities’ trade together.
 Specialization: some communities shall specialize in a particular commodity.
 Improved living standards: this is enhanced by receiving what one is unable to produce.
5. State four disadvantages of barter trade (4marks)
 Lack of double coincidence of wants.
 Indivisibility of some goods.
 Perishability of some goods.
 Difficult to measure value.
 Problems of portability of some goods.
 Lack of a standard for making deferred payments.
 Lack of unit of accounts.
6. State four limitations of barter trade (4marks)
 Involve double coincidence of wants which is difficult to find in real life
 Some items cannot be conveniently divided into smaller units
 Some goods are too heavy hence difficult to transport
 Lacks standards measure of value.
 Some commodities cannot be stored for a long period/perishable.
 Difficult to determine fair rate of exchange
7. Outline any four challenges experience when using barter trade system. (4marks)
 Requires double coincidence of wants
 Some commodities are highly perishable
 Problem of divisibility
 Transportation problem
 Lack of store value
 Lacks standard measure of value
 Lacks unit of account
 Hinders specialization
 Lack of differed payment

2|Page
 8. Outline four factors that may have led to the downfall of barter trade (10marks)
 Lack of double coincidence of wants: - it is difficult to find two people with the need for each other’s
product at the same time.
 Lack of store of value/ perishability of some commodities: Some goods are perishable thus their
value cannot be stored for a long time for future purposes e.g. one cannot store vegetables for exchange
purposes in future.
 Indivisibility of some commodities: It is difficult to divide some products like livestock into smaller
units to be exchanged with other commodities.
 Lack of standard measure of value: - It is not easy to determine how much one commodity can be
exchanged for a given quantity of another commodity.
 Transportation problem: It is difficult to transport bulky goods especially when there is no faster
means of transport.
 Lack of a standard deferred payment: The exchange of goods cannot be postponed since by the time
the payment is made, there could be fluctuation in value, demand for a commodity may not exist and
the nature and quality of a good may not be guaranteed.
 Lack of specialization: Everyone strives to produce all the goods he or she needs due to the problem
of double coincidence of wants.
 Lacks unit of account: It is difficult to assess the value of commodities and keep their record.
9. Explain five demerits of Barter trade/ Explain five limitations of Barter trade (10marks)
 Requires 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.
 Lack of standard measure of value: 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.
 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.
 Perishability of commodities: Some commodities will go bad before they reach the market resulting
in losses to the seller.
 Inconvenience in transporting some commodities: Some goods are too bulky to be carried from one
place to another. This will greatly hinder trade.
 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
 Lack of unit of account: It is difficult to calculate the value of goods and keep a record for future
reference
 Hinders specialization: Lack of double coincidence of wants makes people produce as many products
as possible in order to satisfy market demand
10. State four characteristics of a commodity to act as money (4marks)
 Should be divisible without losing value
 Should be light to carry around
 Should be universally accepted as a medium of exchange
 Should be capable of being used to measure the value of other commodities
 Should be capable of being used to store value etc.

3|Page
 11. Highlight four ways in which the introduction of money helped eliminate problems faced in barter
trade. (4marks)
 Money eliminates the need for double coincidence of wants since it is a medium of exchange.
 Stores the value of perishable goods by selling them and keeping the money for future use.
 Ensures that commodities exchanged are of comparable value, by offering a standard measure of value.
 Help in the exchange of indivisible commodities since it can be divided into smaller denominations
without losing value.
 Money provides a unit of account by which goods and services are valued unlike in barter trade.
 Money is a standard for deferred payment whereas it was not possible to make payments in the future
under the barter system.
 Money enables the exchange of fixed property like land.
12. List four characteristics of money/ Give four characteristics of money (4marks)
 Divisibility Portability Malleability
 Acceptability Homogeneity Durability
 Scarcity Cognisability Stability in value
 Not easy to forge
13. Outline four features of money that enables it to facilitate the exchange of goods and services.
 Cognizability. Portability/easy to carry.
 Made of homogeneous/uniform material. Stability in value.
 Malleability. Durability.
 Scarcity. Not easy to forge (authenticity).
 General acceptability as a medium of exchange
 Divisibility/ can easily be converted to smaller denominations without losing value
14. Outline five features/ characteristics of Money (10marks)
 Acceptability: Money must be generally accepted by everyone as a medium of exchange for goods and
services
 Durability: The material used to make money must be able to last long without getting torn, defaced or
losing its shape or texture. The material used to make money should therefore be able to withstand tear
and wear.
 Divisibility: Money should be easily divisible into smaller units (denominations) but still maintains it
value.
 Cognizability: Money should be ease to recognize such that it is easy to differentiate between fake and
genuine money. This helps reduce chances of forgery. It also helps people to differentiate between
various denominations.
 Homogeneity: Money should be made using a similar material so as to appear identical. This
eliminates any risk of confusion and forgeries. Money of the same denomination should be uniform in
quality and therefore identical.
 Portability: Money should be light and not bulky in order to be carried around without difficulties.
 Stability in value: The value of money should remain fairly stable over a given time period. Money
should be able to last for a long time without fluctuating in value
 Liquidity: - it should be easily convertible to other forms of wealth (assets).
 Scarcity: Money should be relatively scarce in supply in order to retain its value. This is because if
money is abundant in supply, it will lose its value greatly
 Malleability: The material used to make money should be easy to cast into various shapes.
 Not easy to forge: The material used to make money should not be easily available. The technique
used in making money should also be highly secretive in order to avoid forging

4|Page
 15. Outline four features of money that enables it to facilitate the exchange of goods and services.
 General acceptability as a medium of exchange.
 Cognizability.
 Portability/easy to carry.
 Divisibility/can easily be converted to smaller denominations without losing value.
 Made of homogeneous/uniform material.
 Stability in value.
 Malleability.
 Durability.
 Scarcity.
 Not easy to forge (authenticity).
16. Explain five Properties of money
 Acceptability: - Must be acceptable to everyone
 Scarcity- Should be limited in supply
 Divisibility- It must be divisible into small units so that people can pay all types of debt.
 Portability- Should be convenient to carry around. It should be light.
 Homogeneity: Should be uniform in quality i.e monies of the same denomination must be similar
 Durability — should last for long time without getting torn or defaced
 Stability — Must be stable for long time without fluctuating in value
 Cognisability — Should be easily recognized easily or tell genuine and false money
17. Discuss five functions of Money (10marks)
 Medium of exchange: It is generally acceptable by everyone in exchange of goods and services. It thus
eliminates the need for double coincidence of wants.
 Store of value: It is used to keep value of assets e.g. surplus goods can be sold and then money kept for
future transactions.
 Measure of value: Value of goods and services are expressed in money form. Performance of
businesses is measured in terms of money.
 Unit of account: It is a unit by which the value of goods and services are calculated and records kept.
 Standard of deferred payment: it is used to settle credit transactions.
 Transfer of immovable items (assets): Money is used to transfer assets such as land from one person
to another.
18. Explain four functions of money. (8marks)
 Used / serves as a medium of exchange: Money can be exchanged for goods/services removing the
problem of barter/ it is generally accepted as a medium of exchange.
 Measure of value: Value of goods or services can be compared or estimated or determined or
calculated or assigned.
 Store of value: value of goods / services can be stored in form of goods / services are recorded in terms
of money. 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
 Standard of deferred payments: Money assist of conduct business on credit / where payments are
made later. Money can be used to settle debts at any time
 Unit of account: Values of goods /services are recorded on term of money. 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.
 Transfer of immovable assets: Immovable assets can be sold and the money realized used to buy
similar assets elsewhere.

5|Page
 19. Explain three motives of holding money instead of spending (6marks)
 The transaction motive: Refers to holding money in order to meet daily expenses such as buying
food, paying for transport.
 Transaction Motive: Money is held with a motive of meeting daily expenses for both the firms and
individuals.
The transaction motive can further be divided to;
1. Income motive refers to holding money to spend on personal or family needs.
2. Business motive refers to where money is held to meet business recurring needs such as paying
wages.
 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.
 Precautionary Motive: Money is held in order to be used during emergencies such as sicknesses.
 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 in order to spend it in the future
when prices are low
 Speculative Motive: Money is held to be used in acquiring those assets whose values are prone to
fluctuations such as shares/ money is held anticipating fall in prices of goods and services.
20. Highlight four factors that may influence an individual’s demand for money in order to fulfil the
transaction motive (4marks)
 The individual’s level of income/earning.
 The frequency of payments by the individual.
 The individual’s spending habits.
 The rate of inflation.
 The number of dependants supported by the individual.
 Availability of credit.
 The frequency of income/individual’s earning.
21. Highlight two factors that may influence: (4marks)
(a) Transaction motive.
 Size/level of individual’s income: The higher the income of and individual, the more the number of
transactions thus high demand for transactions.
 Interval between pay days/ receipt of money: if the interval is long, then high amount of money will
be held for transaction reasons.
 Price of commodities: if the prices are high, the value of transactions will also increase thus more
money balances required.
 Individuals spending habits: people who spend a lot of money on luxuries will hold more money than
those who only spend money on basics.
 Availability of credit: people who have easy access to credit facilities hold little amount of money for
daily transactions than those who do not have easy access to credit.
(b) Speculative motive.
 The wealth of an individual/ Levels of income: the higher the income level, the higher the amount of
money held
 The rate of interest on government debt instruments
 Interest on money balances held in the bank.
 How optimistic or pessimistic a person is/ 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.

6|Page
 22. Money is held by people in various forms:
 Notes and coins
 Securities and bonds
 Demand deposits such bank current account balances.
 Time deposits such as fixed account balances
23. Mention four factors that influence the amount of money held by an individual for transaction
motives. (4marks)
 Spending habits of an individual
 Level of income
 Price level
 Effects of inflation
 Interval of salary / income payments
 Income motive (pay rent, food, school fees, transport etc).
24. Discuss five factors that may determine the amount of money held for transaction motive (10marks)
 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
25. Discuss five factors that may determine 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 dependents: With more dependents, 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
 Duration between incomes: Those who earn money after a short time are likely to keep less money
than those who earn money after a long time.
26. Name four factors influencing the amount of money held for precaution motive. (4marks)
 Level of income Family status
 Age of individual Number of dependants
 Individual temperaments Duration between incomes

7|Page
 27. State four factors that influence the amount of money held by individuals for precautionary motive
(4marks)
 Level of income
 Family status
 Age of the individual
 Number of dependants
 Individuals’ temperament
 Duration between incomes
 Prevailing economic conditions
 Emotional nature of the person nervous people hold more money
 Firms operating in risky industries tend to hold more money in cash.
28. For each of the following cases, name the motive for holding money. (4marks)
Case Motive
a. To meet daily transport expenses Transaction
b. To meet any unforeseen circumstances Precautionary
c. To take advantages of anticipated future fall in price Speculative
d. To pay for daily food requirements Transaction
29. Outline three factors that influence the supply of money.
 Government policies: If there is more money in the economy, the government will put in place
measures to reduce the supply such as increasing interest rates. (Central bank’s monetary policy)
 Policies of commercial banks: The more the loans offered by commercial banks, the more the amount
of money in circulation. (Ability of commercial banks to lend money to the public)
 Increase in national income: increase in national income means that more people will be liquid due to
increase in economic activities.]
 Increase in foreign exchange: The foreign exchange reserves will increase thus supply increases.
 Ability of central bank to control the lending ability of commercial banks
 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
 The national budget i.e. the higher the national budget, the higher the supply of money and vice versa
30. Given below is the first stage in the historical development of money list the next four stages in their
order of occurrence (4marks)
 Barter to commodity
 Commodity to metallic coinage
 Metallic to paper money (notes)
 Paper to representative money e.g. cheques
 Representative to plastic money e.g. credit cards.
31. Banking system in Kenya consists of;
 The central bank
 Commercial banks
 Non-banking financial institutions
32. Commercial banks make their profits 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

8|Page
 33. Explain how modern banking system has evolved in course of time from the experiences of
goldsmiths of 16Th and 17Th Century in England
 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.
34. Examples of commercial banks in Kenya may include:
 Equity Bank Absa Kenya commercial bank
 Family bank National bank of Kenya Standard chartered bank
 Co-operative bank of Kenya etc.
35. Highlight four functions of the commercial banks in an economy. (4marks)
 Accept deposits.
 Provide loan facilities/lending money.
 Provision of foreign exchange.
 Provide safekeeping for valuables.
 Provide financial information/advice.
 Provide money transfer facilities./Provide safer means of payment
 Discounts bills of exchange.
 Acts as guarantors or referees.
 Acts as intermediaries between savers and borrowers of money.
 Provide trustee services.
 Credit creation.
36. Highlight four ways through which commercial banks have enhanced development of business
activities in the country. (4marks)
 They give advice to business people on investments and expansion.
 Facilitate payment among business e.g. through cheques, cash etc.
 The safe keep money on behalf of business people.
 They rent money to business people necessary for business operations.
 They assist business people to buy share on the stock exchange.
 They act as custodians for valuable items e.g. certificates and land title deeds for business people.
 Avail foreign exchange to importers this assisting in international trade.
37. State four ways in which banks contribute to the development of Kenya (4marks)
 Providing capital to existing new business
 They carry feasibility studies for potential investors
 They provide advisory services on how to set up and ran invest projects
 They support investments in areas which would otherwise not be financed by other financial
institutions due to risks involved
 They generate revenue to the government to pay taxes or dividends to the government
 Create employment opportunities
 Mobilization of savings investments

9|Page
 38. Outline any four roles played by commercial banks in home trade. (4marks)
 Providing safe custody for business money.
 Lending money/giving loans for trade.
 Provision of means of settling debts/making payments.
 Provision of right safe facilities.
 Providing business advice.
 Purchase/sale of foreign currencies.
 Offering trustee services
 Acting as a guarantor
 Offering management and consultancy services
 Advisory services on financial matters.
39. Explain five functions of commercial banks in an economy (10marks)
 Accepting deposits: They accept deposit from members of the public inform of current accounts,
savings account and fixed deposit accounts. Such accounts help individuals to keep money safely.
 Provision of safe means of payments: They provide safe and reliable means of payment such as
cheques, bank drafts, credit transfers, electronic funds transfers etc.
 Provision of loan facilities/Lending money: Lending money refers to giving out money in form of
loans. They provide loans to members in form of short term and long term. These loans are repayable
with interests thus income to the banks. These loans encourage investments in the economy leading to
economic growth.
 Facilitates foreign exchange payments: They provide foreign exchange that is used in international
trade. They also make payments on behalf of their customers.
 Provision of safe keeping of valuables: They provide security for valuables to their customers at a
fee. Such valuable items may include title deeds, jewelry, wills etc.
 Discounting bills of exchange: This is process by which a bank accepts bills of exchange and
promissory notes from its customers in exchange of cash less than the face value of the bill or note.
 Provision of financial information: They advise their clients on financial matters affecting their
businesses such as investment option and wise use of loans.
 Money transfer services: Commercial banks provide methods through which money can be
transferred from one person to another. Such means include cheques, standing orders, credit transfers,
bank drafts, letters of credit, credit cards, travelers’ cheques etc.
 Act as guarantors and referees: Commercial banks may act guarantors to their customers who want
to acquire goods on credit or borrow money from other financial institutions.
 Act as intermediaries: They act as a link between the savers and borrowers.
 Credit creation: - This is the process of creating money from the customer deposits through lending.
 Provision of trusteeship: They can manage a business on behalf of the client especially if the client
does not have managerial skills. 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.
 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.
 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.

10 | P a g e
 40. Highlight four services that commercial banks offer to their customers (4marks)
 Providing foreign exchange services
 Guarantor to their customers when taking loans with other official institutions
 Safe keeping of valuables items. Commercial bank acts as custodian of valuable item for the clients
such as wills, title deeds, jewellery etc.
 They lend money to their clients in form of loans, overdrafts or discounting bills of exchange and
promissory notes.
 They receive money deposits from their clients’ commercial banks operate 3 types of accounts for this
purpose namely savings, current and fixed deposit account.
 They facilitate transfer of money through cheques, credit transfers standing orders etc.
 They advice their clients on financial and investment matters.
 They facilitate international payments through letters of credit.
 They act as management trustees of properties of business of deceased clients.
 They act as referees for their clients during a credit status inquiring.
41. State four roles played by commercial banks to enhance business activities in a country. (4marks)
 The banks accept deposits of money for safe-keeping
 They are sources of finance to business people inform of loans
 Assist to enable business people access goods from other countries
 Provide convenient means of payment such as credit transfer and standing orders which facilitate
business advice on financial and investment matters for sound decision making for business people
 Safeguards valuables of the business e.g. share certificates, title deeds, nominees particulars etc
 Act as agent of stock market hence enable investors to trade in securities
 Acts as trustees for the beneficiaries
42. In the spaces provide below indicate with a tick whether each of the following statements is true or
false about commercial banks (5marks)
Statement True False
Accept deposits from the members of the public x
Provides safe custody for the valuables x
Issues currency for the use in the country x
Controls money supply in the country x
Lends more to the public x
43. State four Ways in which commercial banks advance money to their customers (4marks)
 Use of credit facilities/ Formal loans- an individual can apply to commercial bank for a personal loan.
 Treasury bills: Banks advance to the government on exchange of the bill/bond
 Standing order
 Bankers’ cheque
 Credit cards/ Plastic money:
 Travellers cheque
 Telegraphic transfer
 Mobile banking
 Giving out personal loans
 Bank overdraft facilities /Overdraft facilities: A customer who operates a current account with a
commercial bank may require the bank to allow him overdraft his account
 Discounting of bills of exchange and promissory note may request a commercial bank to discount to
pay the bill note before maturity

11 | P a g e
 44. Explain five ways in which commercial banks facilitates payment on behalf of their customers.
 Standing orders: A customer making regular payments could instruct the bank to make the payments
for an agree period of time until he makes changes to the instruction in writing.
 Credit transfers: Customer with several payments to make at a certain time may write only one
cheque and then fill a credit transfer form which instructs the bank who is to be paid and how much
 Electronic transfer: This is where the bank would remit the payment electronically through computer
from one account to another on behalf of the customer
 Credit card: This allows a customer to obtain goods /services without paying for them in cash.
 Cheque: The bank issues the customers with a cheque book which they use for payments
 Bank drafts: Are used for payment of goods /services
 International money order: Are issued by banks to customers to enable them make foreign payments.
 Use of debit cards (smart cards): Are used to pay for goods and services by money transfer being
made from one’s account to the account of sellers.
 Telegraphic transfer: This is whereby bank remits money by use of a telegram on behalf of their
customers.
 Banker‘s cheque/bank draft: This is a cheque drawn by one bank to another the people making the
payment buys the cheque and makes the payment to creditors who don‘t accept personal cheques.
 Letter of credit: This is where banks guarantee payment to exporters on behalf of their clients who
have imported goods.
 Traveler‘s cheques: This is used to assist travelers in/out of the country to settle their debts in the
country they are visiting.
45. Describe methods which may be used by commercial banks to advance money to Customers.
 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.
 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
 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
 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
 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.
 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
 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.
 Mobile banking: This is where customers can carry out transactions by use of mobile phones.
 Bankers’ cheque: This is a cheque issued by the bank to make payment on behalf of a customer
46. State four methods used by commercial banks to lend money (4marks)
 Overdraft facilities
 Personal loans
 Use of credit facilities
 Treasury bills
 Discounting bills of exchange/promisory note

12 | P a g e
 47. State four means of payment that may be provided by commercial banks to their customers.
 Cheques
 Bank drafts/Banker’s cheques.
 Standing orders.
 Traveler’s cheques.
 Credit transfers.
 Telegraphic transfers.
 Use of credit/debit cards.
 Electronic Funds Transfer.
48. State four disadvantages of a bank overdraft as a source of finances (4marks)
 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
 It is an expensive source of finance as the interest charges are very high
 Interest repayment cannot be planned for with certainty
 Limited access- overdrafts is only given to current account holders only
 Security: The lenders may require security or property pledge
 Repayment patterns are unplanned hence any deposits made in the account are assumed to be repaying
the overdraft
 Short repayment period which affects the cash flow of firm adversely.
49. A businessman wishes to obtain a loan from a commercial bank. Highlight the conditions that he
should satisfy before the bank can grant him the loan (4marks)
 Collateral security valued by appointed valuers
 Account from leading bank at least six months old
 Bank statements for the last six months busy account to determine credit worthiness
 Quarantine to the followed in case of default
 Intended purpose of the loan
 Agreement on the repayment
 Appraisal fee/ charge to determine credit worthiness by a bank
50. State how a credit transfer is used as a means of transferring money through the commercial banks
(3marks)
 One cheque is drawn by customer showing total amount payable to number of people
 A list of individual names, their account numbers and total amount Payable
 The bank then makes payments to individual account.
51. Highlight four advantages of using a telegraphic money order as a means of remitting money though
the post office. (4marks)
 It is faster means of sending money
 The sender can be compensated in case the money is lost
 It is faster way of sending money
 It is a convenient way of sending money
 It can be easily traced when it gets lost

13 | P a g e
 52. Name the four types of cheques used in home trade (4marks)
 Open cheques
 Crossed cheques
 Bearer cheques
 Dishonored cheques
 Bankers cheques
 Travelers cheques
 Personal cheques
53. Explain five reasons for the continued use of ordinary cheques in settling debts despite
advancements in modern form of money transfer (10marks)
 Evidence of payment: The counterfoil provides proof that payments have been made
 Convenience of payment: The drawer does not need to travel to make payment
 Secure: If it is stolen it can be traced to the person who cashed it
 It can be negotiable: It can be transferred to the third party to settle transactions
 Can be discounted: Can be cashed before maturity under special circumstances
 Easy / light to carry: It can be easily used to carry large sum of money
54. Outline four advantages of using cheques as a means of payment. (4marks)
 Cheques are more secure (security) as a means of payment
 It can be used to pay huge amounts of money
 It is convenient to carry
 It is not easy to forge
55. Highlight four circumstances in which a cheque may be used as a means of payment. (4marks)
 When the amounts involved in the transaction are high.
 When the seller insists on payment by cheque.
 When evidence of payment is required.
 When payment is to be directed into the payee’s account.
 When the terms of sale is cash with order.
 When there is need to ensure safety of the money being transferred.
56. Outline four measures that a cheque drawer may take in order to ensure that the cheque is not
dishonoured. (4marks)
 Have enough funds in the account
 Instruct the bank for honour
 Not postdating the cheque
 Sign against any alterations
 Append signature similar to the specimen in the bank
 Remain financially stable/avoid bankruptcy
 Ensure amount in words corresponds with amount in figures
 Urge the payee to respect the cheque
57. Give four reasons for dishonoring a cheque (4marks)
 In case of insufficient funds in the account.
 Differing signature of the holder and the specimen.
 Post-dated cheque
 Stale cheque:If the cheque is presented after 6 months
 Where the amount in words differ from amount in figures.
 In cases the drawer may stop payment
 When cheque has been altered without drawn.

14 | P a g e
 58. State four factors that determine the rate of interest charged on borrowed capital. (4marks)
 Amount borrowed
 Risk factor
 The borrowing period
 Reputation of the borrower
 Government policy
59. Highlight four reasons why loans advanced by commercial bank in Kenya may not appeal to many
people (4marks)
 High rate of interest charged on these loans
 Poor profits as a result of poor economy
 Individuals and firms may have cheaper source of loans
 Many people fear the consequences of failing to pay the loans
 Many people do not have recognized property that they can offer as collateral or security for loans
 Not so many people have accounts with commercial banks
 Acquiring commercial bank loans involves a lengthy procedure
60. Explain three types of accounts offered by commercial banks (6marks)
 Current account or demand deposits: This is an account where money deposited can be withdrawn
on demand by the customer by means of a cheque.
 Current account or demand deposits: This is an account where money can be deposited and be
withdrawn at any time provided there is sufficient funds in the account
 Savings account or deposit account: This is an account operated by individuals and firms who have
intentions of saving money. It is suitable for business people who need money regularly.
 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.
 Fixed deposit account or time Deposit account: This account is maintained by those who have
money not meant for immediate use. Once money is deposited, there are no withdrawals until the time
expires.
 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.
61. The following are some of the accounts available to customers in the Kenyan banking industry:
Current account, savings account and Fixed deposit account. Give the account that corresponds to
each of the descriptions given below (4marks)
Description Type of Account
Account holders require to deposit a specific initial amount as well Savings account
as maintain a minimum balance

Account holder may deposit and withdraw money whenever they Current account
want without maintaining a minimum balance

Banks pay interest on the deposit at comparatively higher rates Fixed deposit account
Money may be deposited at any time and interest is earned if a Savings account
specified balance is maintained

15 | P a g e
 62. State four features of current accounts (4marks)
 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.
 Withdrawals can be at any time without giving and advance notice as long as the customer has
sufficient funds.
 Cheque books are issued to the account holder to be used as a means of payment/ cheques are usually
used to withdraw money from the account.
 Overdraft facilities are offered to the account holders’ i.e the bank can allow customers to withdraw
more money than they have in their accounts.
63. Highlight four advantages of current account (4marks)
 No minimum balance is maintained hence the account holder can access all his/her money.
 Withdrawals can be made at any time.
 Transactions are made easier by use of cheques for example; one does not have to go to the bank in
order to make payment.
 Overdraft facilities are available.
 Payments can be done even if there are insufficient funds in the account using postdated cheques.
 The account holder can withdraw any amount at any time without notice as long as there are sufficient
funds in the account.
 Cheques can be used to effect withdrawals and make payments serves as evidence of payments made
 Regular bank statements are issued to the account holder
 Money can be deposited at any time
64. Highlight four reasons that make a current account popular among the business people. (4marks)
 They offer bank overdraft facilities.
 Enables the holder to pay creditors using a cheque without necessarily travelling to the bank.
 One can withdraw large sums of money without any notice.
 The holder can give postdated cheques if need arises thus enabling clearing of debts at future date.
 Do not have to maintain a minimal balance unlike in other accounts.
 The bank can pay on behalf of the trades such as standing orders
 Purchases can be made postdated cheques.
 Gives statement of account status when required
65. Outline five reasons why banks current account is popular with traders (4marks)
 The traders can withdraw money at any time without notice
 Cheques are used for payments instead of cash
 Traders can arrange for overdrafts facilities with the management of the Bank
 The bank can pay on behalf of the trades such as standing orders
 There is no minimum balance required in the account
 Purchases can be made postdated cheques

16 | P a g e
 66. Discuss five reasons why business people prefer to operate bank current accounts (10marks)
 They can pay creditors cheques, hence safety and does not have to go to the bank
 They can get bank overdraft facility when they do not have enough cash
 They do not have to maintain minimum balance unlike in other accounts hence can use all the funds in
the account
 They can withdraw large sums of money without notice and as many times as they wish thus enabling
them to access money when needed.
 They can give postdated cheques if need arises, thus enabling them to be aware of their bank balances
 One can withdraw large sums of money without notice, which is convenient for the business
 One can get bank overdraft facility when one does not have enough cash
 One does not have to maintain minimum balance unlike in other accounts hence can use all the funds in
the accounts
 Regular bank statements
 Deposit can be done anytime any amount
67. Outline the benefits that bank customer gets from operating a current account (4marks)
 One can give postdated cheques if need arises, thus enabling clearing of debts at a future date.
 One can make withdrawals as many times as they wish thus enabling them to access money when
needed
 One can get issues of regular statements thus enabling them to be aware of their bank balances.
 One can get bank overdraft facility when one does not have enough cash.
 One does not have to maintain minimum balance unlike in other accounts hence can use all the funds in
the account.
 Cheques can be used to make payments and one does not have to go to the bank
 No restrictions on the amount of withdrawals
68. Outline four requirements for opening a current account with a commercial bank (4marks)
 Photocopies of identification documents such as National Identity Card or Passport
 A letter of introduction from an existing customer.
 Physical contact address.
 Be of majority age/above 18 years old.
 Passport size photographs. Some banks are nowadays taking the photographs instead of the customers
providing them
 Filling in the application form provided by the bank.
 Reference letter from employer or and existing customer.
 Submission of a specimen signature to be held by the bank.
 An initial deposit is paid and the account becomes operational.
69. State four disadvantages of current accounts (4marks)
 No interest earned on deposits
 Ledger fees is charged to operate the account
 Withdrawals at any time discourages savings
 Lengthy procedures of opening the account.
 The account holder does not earn any income since the balances in the current account does not earn
interest.
 Initial deposit when opening the account is usually high hence discourages prospective customers.
 Customers are not encouraged to save since they can access their money at any time.

17 | P a g e
 70. Highlight four features of Savings account (4marks)
 There is minimum initial deposit that varies from bank to bank.
 A minimum balance is maintained at all times.
 Account holders are issued with a pass book or a debit card (ATM card) for deposits and withdrawals.
 Overdraft facilities are not allowed.
 Ordinarily, withdrawals across the counter can only be done by the account holder.
 The balance on the account above a certain minimum earns some interest.
 Money deposited beyond a certain minimum earns interest
 Cheques are not used by the account holder to facilitate payment
 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
71. State four advantages of Savings account (4marks)
 There are relatively low banking charges.
 Initial deposit is usually low as compared to other accounts.
 The balances earn interest to account holder hence an incentive to save.
 ATM facilities have made account operations very convenient to customers.
 Low initial deposit
 Deposits can be made at any time
 Restrictions on withdrawals encourages savings.
72. Outline four disadvantages Savings account (4marks)
 For across the counter withdrawals, it is only the account holder who can withdraw cash.
 Withdrawals are restricted and sufficient notice is required before large amounts are withdrawn.
 The account holders do not enjoy services such as cheque books and overdraft facilities like the current
account holders.
 Easy access to the money through ATM cards encourages overdrawals.
 Anybody who knows the pin of the card (ATM card) can withdraw money from the account.
 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
73. State four benefits of a savings account to a customer. (4marks)
 Allows the customer to save by accumulating small amounts of money/for future use/since withdrawals
are controlled/limited
 Offers safe custody for the customer’s money/against theft/Loss
 Minimal charges are levied on the account making it more attractive/affordable/compared to current
account
 Customers earn interest on the account balance/as an income/which increases the bank balances.
 Requires little deposits to open. which makes inaccessible/as compared to other accounts.
 Customer may get bank loan on the basis of the savings accounts.
 Encourages the customer to invest from the savings.
 Deposits can be made into the account anytime to its convenience of the customers/compared to fixed
account.
 Account holding are issued with identification cards which may also act as a debit card.

18 | P a g e
 74. Highlight four reasons why loans advanced by commercial bank in Kenya may not appeal to many
people (4marks)
 High rate of interest charged on these loans
 Poor profits as a result of poor economy
 Individuals and firms may have cheaper source of loans
 Involve lengthy formalities
 Many people fear the consequences of failing to pay the loans
 Many people do not have recognized property that they can offer as security for loans
75. Highlight four characteristics of a time deposit account (4marks)
 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
76. State four advantages of fixed deposit accounts (4marks)
 Allow the account holder time to plan on how to spend the money deposited
 Encourages savings.
 High interest earned is relatively high as compared to savings account.
 There are no bank charges to the account holder.( No ledger fees)
 Money held in fixed deposit account can be used as security to acquire bank loans.
 Restricted withdrawals encourage savings.
77. Highlight four disadvantages of fixed deposit account (4marks)
 No interest if money is withdrawn before the expiry of the contract period
 No regular deposits
 Access to money is not allowed until the end of the agreed period/ maturity of the period.
 Interest is forfeited if there is pre-mature withdrawal.
 The minimum amount of money for this account is high.
 The customer is not allowed to deposit more money in this account.
 A notice is required if the customer wants to terminate the contract before expiry date.
78. Explain five differences between fixed deposit accounts and savings accounts (10marks)
Fixed deposit accounts Savings accounts
Money is not withdrawn until the contract is over Money is withdrawn after an agreed 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 period The account is in force as long as the minimum
of time balance is maintained
A large amount of money is required to open the A small amount of money is required to open the
account account
A separate account is required for each deposit All deposits can be made in the same account

A certificate of deposit is issued once money is A passbook or a bank card is issued when deposits are
deposited in the account made into the account
Interest earned is high Interest earned is low

19 | P a g e
 79. Explain five Differences between savings accounts and current accounts (10marks)
Savings accounts Current accounts
Withdrawals are made after a specific period of Withdrawals are made at any time as there is no
time restriction on the maximum to be withdrawn
A minimum balance must always be maintained in No minimum balance is required to be maintained in
the account for it to remain operational. 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 given to Any amount of money can be withdrawn from the bank
the bank without a notice to the bank
Money remittance services are not permitted Money remittance services are permitted
Funds are not withdrawn by use of a cheque A cheque is usually used to withdraw money from the
Account
A certain minimum deposit maintained on the Money on this Account does not earn interest
Account may qualify to earn interest
80. State four reasons why majority of Kenyans do not operate bank accounts (4marks)
 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
81. State four reasons for the popularity of public relations among banks (4marks)
 It is effective in informing the public about the products/activities offered by the banks.
 Reliable way of correcting a bad image created about the firm/bank
 Useful in maintaining the good image of the bank
 It is effective in creating and improving the relationship between the bank and its customers/Personal
touch.
 There is the benefit of immediate feedback from clients
82. List four examples of the non-bank financial institutions in Kenya (4marks)
 Development Finance Institution (DFI)
 Insurance Companies
 Building Societies
 Housing Finance Companies
 Savings And Credit Co-Operative Societies
 Micro Finance Companies
 Agricultural Finance Corporation (AFC)
83. Identify the type of financial institution described in each of the statements below. (4marks)
Statement Type
Operates fixed deposits, savings and current accounts Commercial Banks
Advances loans in proportion to one`s savings Savings and Credit Co-operatives
Societies/SACCO
Sells house through mortgages Housing Finance Companies
Offers finance to start or expand industrial enterprise Development Finance Institution/Development
Banks

20 | P a g e
 84. Discuss five examples of the non-bank financial institutions in Kenya (10marks)
 Development financial institutions: These are institutions which offer financial services to the
manufacturing sector. Example: Kenya industrial estate, Industrial development bank etc.
 Development Finance Institutions: These are development banks which are formed mainly to provide
medium term and long-term finances, especially to the manufacturing sector.
 Housing Finance Companies: They are mainly formed to finance housing activities that is they either
put up houses and sell to the individuals or offer mortgage finance to those who wish to put up their
own houses. Example Housing Finance Corporation of Kenya (HFCK), National Housing Corporation
(NHC), East African building society.
 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.
 Savings and Credit Co-operative societies: These are co-operative societies that are formed to enable
members save and obtain loans at most conveniently and favorable conditions.
 Savings and credit co-operative societies (SACCOs): These are financial institutions which are
formed to enable members save and access loans more conveniently. Examples include: Kakuma lima
Sacco, Stima Sacco, Mwalimu Savings and Credit Co-operative Societies, Afya Savings and Credit
societies, Harambee Savings and Credit Societies.
 Insurance companies: These are companies that assist in creating confidence and sense of security to
their clients as well as offering financial assistance to their clients.
 Insurance companies: These are financial institutions which guard against risks. They also encourage
savings. Examples: Madison insurance company, Blue shield insurance company, British American
insurance company etc.
 Micro Finance Companies: These are financial companies formed to provide small scale and medium
size enterprises with finance.
 Micro finance companies: These are institutions which offer financial services to small scale and
medium sized enterprises. Examples: Faulu Kenya, Kenya women finance trust etc.
 Agricultural Finance Houses: These are institutions formed to promote the agricultural sector
 Agricultural finance houses: These are institutions which offer financial services specifically to the
agricultural sector e.g. the agricultural finance corporation.
85. Outline four functions of a microfinance institution in Kenya. (4marks)
 Educate and train entrepreneurs on how to run their enterprises through seminars, workshop
 Mobilize savings by accepting deposits
 Channeling government funding through small and medium enterprises programme (SMEP)
 Partner with insurance to provide security on investment
 Invest inequities, real estate etc.
 Provide personal financing for development.
 Offer advisory services to their clients in matters such as business opportunities available and how to
operate them.
 Encourage the clients to carry out business activities by offering loans to them
 They encourage the savings by advancing loans to the individual member of a certain group
 They supervise, monitor and advise those whom they have given loans

21 | P a g e
 86. Outline four functions of a development financial institution (4marks)
 Financing people who wish to start either commercial of industrial enterprises, as well as the existing
enterprises in the above sectors for expansion
 Offering training services through seminars and workshops to equip the entrepreneurs with the relevant
skill in industrial and commercial sectors
 Offer advisory services to those people wanting to start or expand their businesses
 Acting as guarantors to people wishing to take loan from other lending institutions to help them expand
their business
87. Outline four functions of insurance companies (4marks)
 Enable the policy holders to save through their schemes
 Provide finances to their policy holders in form of loans
 Offer guarantee services to the policy holders wishing to obtain loans from other non-bank financial
institutions
 Provide advisory services to the policy holders on security matters
 Provide finances to meet the expenses in cases of loans.
88. Outline four functions of non-banking financial institutions (4marks)
 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
89. State four advantages of borrowing money from non-banking financial institutions (4marks)
 They give long-term loans
 They provide finances for specific projects
 They give loans at relatively lower interest rates compared to commercial banks
 They accept lower collateral value
 They give longer grace period for loan repayment
90. Explain five ways in which the Agriculture Finance Corporation (AFC) assist farmers (10marks)
 Loans or credit or give loans/ credit to farmers for crop/ livestock production/ farm development/ on
easy terms/ specific purposes.
 Training/education/organize training courses/ seminars/ workshops for farmers on farm management
 Advisory services- on farm management/agricultural improvement
 Create employment: Facilitate employment by stimulating growth in agricultural improvement.
 Improving production - more / variety of products are produced / of improved quality/ by financing/
carrying out research in agriculture.
 Improved income by facilities growth in agricultural industry.
 Earning foreign exchange through increased exports of agricultural goods
 Generates government revenue through interests and on loans.
 Channel for donor funds to finance agricultural projects
 Offering technical and professional advice to loaned farmer
 Carry research and come up with better ways and means of agricultural sector
 Coming up with projects that would open up new areas for agriculture.

22 | P a g e
 91. Outline five benefits that a Savings and Credit Co-operative society (SACCO) provides to its members
 Encourage members/help to save (big making regular contribution)
 Provide loan facilities to members based on member’s contribution.
 Members receive dividends based on their shares/they give dividends to their members.
 Members are educated/advised on cooperative activities/their rights/their obligations.
 Some SACCOS have front office banking facilities/front office services for their members.
 They give interest to their members.
 They charge low interest on loans.
 They ensure member’s contributions/members loans are written off on death.
 They give loans on easy terms/conditions.
 Members savings/new contribution is doubled upon death of a member.
92. Outline four reasons why post bank services are not suitable for promotion of small-scale business
units in Kenya (4marks)
 They do not offer current account services.
 They do not provide overdraft facilities.
 They do not provide cheque books to facilitate payments.
 Frequency of withdrawal is limited to once a week.
 Their operations are limited to large cities/urban centers.
93. A trader has decided to take a loan to expand a manufacturing business. Give four reasons why it is
beneficial to borrow from a non-bank financial institution (4marks)
 Gives long term loans
 Provides finance for capital development / specific projects
 Low interest rates.
 Assist in management of the project.
 Accept lower collateral values.
 Give a longer grace period.
94. Explain five differences between commercial banks and Non-banking financial institutions
Commercial banks Non-banking financial institutions
Provide all types of accounts, i.e. current, savings Mainly offer savings and fixed deposit accounts
and fixed deposit accounts only.
They provide short term and medium-term loans They only provide long term loans
They are under the direct control of the central They are not directly controlled by the central bank
bank
They offer finances to all sectors of the economy They only offer finances to specific sectors of the
economy
They provide foreign exchange services They do not provide foreign exchange services
They participate in the central bank clearing house Do not participate in clearing houses since they do
not have cheque facilities.
Offer facilities for safe keeping of valuable items Do not offer facilities for safe keeping of valuable
such as title deeds items
They finance working capital They finance capital for development
Offers bank overdrafts for current account holders They do not offer bank overdraft facilities
Their finance is not restricted to any sector Their finance is restricted to a particular sector
They are closely supervised by the central bank They not closely supervised by the central bank
May offer cheque books Do not offer cheque books

23 | P a g e
 95. State four similarities between commercial banks and non-banking financial institutions (4marks)
 Both accept deposits from the public
 Both lend money to the public
 Both are registered under the banking act except building societies
 Both pay interest on money deposited with them
 They both provide investment advice to their clients
 They both charge interest on loans advanced to their clients
96. Highlight four functions of the Central Bank of Kenya (4marks)
 Issuing of currency
 Banker to the government
 Controlling credit
 Management of foreign exchange reserves
 Implementing government monetary policy
 Management of public debts
 Controlling commercial Bank
 Acts as link bank to external financial institution
 Maintaining stability in exchange rates
 Leader of the last resort
 Facilities clearing of cheques
 Administering public debt
 Control of monetary
97. Explain five functions of the Central Bank of Kenya (10marks)
 Banker to the commercial banks: As commercial banks are required by law to deposit a certain
percentage of their customers deposits in the central bank
 Acts as a banker to the government: The central bank provides banking services to the government
which enables the government to operate an account with them.
 Advisor to the government on financial issues in the economy
 Provide links with other central banks in other countries: It links the commercial banks to
international financial institution and other central banks. It also provides a link between the country
and other financial institutions such as IMF
 Maintaining stability in exchange rates: The central bank monitors the rates of exchange between the
local currency and other currencies.
 Act as the lender of the last resort: Central bank is the last institution where commercial banks obtain
loans if they are unable to get finances elsewhere
 Administering public debt: Public debt refers to all outstanding government borrowings both internal
and external. By facilitating the receipt and providing a means through which the government pays
back the borrowed money.
 Control of the monetary system in the country in order to regulate the economy: By controlling
the lending capacity of commercial banks thus regulating the amount of money in circulation
 Clearing of cheques: Central bank facilitates the clearing of cheques between different commercial
banks through its clearing house.
 Controlling commercial banks: By giving them instructions on the lending procedures and proper
banking practices.
 Issue of currency: It is the only institution authorized to issue currency in the country.

24 | P a g e
 98. Highlight four services offered by the central bank of Kenya to the commercial banks (4marks)
 Advising /information/Education/establishing journal for Commercial Banks on Financial matters.
 Being in custody/Bank to commercial banks/account deposit of commercial banks
 Supervising smooth operation of commercial Bank/banking act.
 Providing a central clearing house where commercial banks settle debt due to each other
 Being a lender/providing loans/ being a lender of last resort to the commercial banks
 Foreign exchange: Buying or sale of foreign currency to or for commercial banks
 Issue of currency: For commercial banks operations/ replace old currency/issue new notes/coins
 Mediation or arbitration incase of dispute between commercial banks
 Licensing the operation of commercial Bank
 Statutory management during financial crisis.
99. Explain four services that the central Bank of Kenya may offer as a Banker to commercial banks
 Advising/information/education/publishing journals for commercial banks or financial matters.
 Banker to commercial banks/accepts deposits by being in custody of the reserves received from
commercial basis.
 Supervising/ monitoring the operations of commercial banks /banking act
 Providing a central cleaning horse where commercial banks settle debts due to each other /for cheques
 Being a tender of the last resort to the commercial bans
 Foreign exchange /buy /sell foreign currency to/ for a commercial bank
 Issue of currency for commercial banks operations/replaces old currency/issue new notes/coins
 Mediation/arbitration in case of disputes (between commercial banks)
 Licensing- the operations of commercial banks
 Repatriation of excess foreign currency/profit (broad) on behalf of commercial banks
 Statutory management during financial crisis /receiverships
1. State four ways in which central bank acts as a banker to commercial bank. (4marks)
 It accepts deposits from commercial banks for safe-keeping
 It has the authority and power to direct, control and supervise financial activities of commercial banks
 It acts as the lender of the last resort to commercial banks
 It acts as a clearing house to facilitate clearing of cheques to commercial banks.
 It controls the lending activities of commercial banks
2. Outline four services that the central bank of Kenya offers to commercial banks (4marks)
 Licensing the operations of commercial banks
 Supervision of banking operations
 Giving commercial banks, loans as the tender of the last resort
 Provides advisory services, banking economic matters
 Central bank is a source of currency for commercial bank operations
 Buying and selling foreign currency from commercial banks
 Acts as a mediator for commercial banks in case of dispute between them
 It repatriates excess foreign currency on behalf of commercial banks
 Statutory management during financial crisis.
 Facilitates the clearing of cheques
3. State four banking services that the central bank of Kenya provides to the government (4marks)
 Accept government deposits for safe keeping
 Issues currency on behalf of government
 Arranges and pays public debt on behalf of the government
 Advises government

25 | P a g e
 4. Explain five ways in which the central bank acts as a banker to the government (10marks)
 It undertakes all government transactions e.g. different government ministries draw their cheques on it
as payment for different goods / services that ministers purchase
 It receives various financial / revenue on behalf of the government in form of taxes, foreign loans,
grants and foreign aids
 It safeguards the finances / revenue of the government
 The central bank repays foreign loans on behalf of the government
 It advances loans to the government both short aid long terms basis to finance different projects
5. State four ways in which the Central Bank acts as a banker to the government. (4marks)
 Keeps government accounts.
 Receives finances/revenues on behalf of government.
 Safeguards finances for government.
 Repays foreign loans on behalf of government.
 Financial advisor to government
 Purchasing, selling, government securities on behalf of government.
6. Outline four services the central bank provides to the government (4marks)
 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
7. The central bank is a banker to the government. Outline four banking services it provides to the
Kenyan Government. (4marks)
 Giving financial advice
 Receiving payment on behalf of government
 Giving credit/loan to the Government
 Making various payments on behalf of the Government
 Getting credit / loans from other sources on behalf of the Government.
8. State four methods used by central bank to regulate commercial banks (4marks)
 Licensing commercial banks
 Inspecting commercial banks
 Approving the establishment of branches of commercial banks
 Ensuring the protection of depositor’s funds
 Punishing and closing down errant commercial banks
 Interpreting and implementing government monetary policies to all commercial banks
9. State four methods used by the central Bank of Kenya to ensuring that stability in exchange rates is
maintained (4marks)
 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.

26 | P a g e
 10. Highlight ways in which Central Bank of Kenya control the public debt (4marks)
 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
11. Explain five ways in which Central Bank of Kenya exercises control over financial activities of
Commercial Banks (10marks)
 Setting the base lending rate through treasury, bill rates to increase/decrease lending by commercial
Bank
 Credit control: By use of monetary policy investments give examples
 Through clearing the house; To determine the financial/liquidities position of commercial Bank
 Foreign exchange: Regulating the outflow of foreign exchange in commercial Bank
 Financial advice: On investment opportunity lending etc
 Appointment of receiver manager
12. State four ways in which central Bank of Kenya regulate the operations of commercial banks in
Kenya. (4marks)
 Determining the cash ratio! liquidity ratio
 Special compulsory deposits
 Selective credit control
 Direct supervision
 Open market operations
13. State four ways through which central bank can control commercial bank. (4marks)
 Licensing of all commercial banks and other non-bank financial institutions.
 Inspecting activities of banks and NBFIs.
 Approval/ Allow opening of new branches/ mergers of banks/ closing down of banks/ stopping
operations of banks.
 Protection of depositor’s funds.
 Requesting commercial banks/ NBFIs to submit periodic reports on their activities.
 Provide guidance/ interpret monetary policies of the country and other relevant laws.
14. State four reasons for monetary policies (4marks)
 To facilitate rapid and steady economic growth
 Create employment
 Stabilize prices of goods
 Ensure balanced economic development
 Ensure equilibrium in the balance of payments
15. State four monetary policy used by the central bank to control money supply (4marks)
 Bank rates
 Open market Operation (OMO)
 Cash Liquidity ratio requirement
 Compulsory deposit requirement
 Selective credit control
 Directives
 Request.

27 | P a g e
 16. Explain four tools of monetary policy used by the central bank to control money supply.
 Bank rates: They may increase or decrease the interest rate at which they lend to the commercial
banks to enable them increase or decrease the rate at which they lend money to their customers in the
economy. When they increase their lending interest rate, the commercial banks also raise their lending
rates to the consumers to reduce the number of people obtaining loans, leading to a reduction of money
supplied in the economy. When they decrease their lending interest rate, the commercial banks also
decreases their lending rates to the consumers, increase the amount of money supplied in the economy
 Open Market Operations (OMO): This is where they regulate the supply of money in the economy
by either selling or buying the government securities (treasury bills or bonds) in the open market. When
they want to increase the supply in the economy, they buying the securities from the members of the
public who had bought them to increase more supply of money in the economy. When they want to
reduce the amount of money in circulation they will sell the government security to the public in the
open market, to mop up/reduce the excess supply in the economy. The payment of the securities takes
money from the individuals accounts in the commercial banks, reducing the amount that the individual
can use in the economy, while when buying the central bank pays the security holders in their
respective accounts in the commercial banks, increasing the amount that they can use in the economy
 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.
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.
Cash ratio = cash held / total deposit
 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.
 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
 Directives: The central bank may issue a directive to the commercial banks on the interest rate they
should charge on their lending. 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.
 Request (Moral suasion): The central bank may appeal to other financial institutions to exercise
restrain in their lending activities to the public to help in controlling the money supply. The central
bank may also request commercial banks to adjust their interest rates as required. This is known as
moral persuasion.

28 | P a g e
 17. Outline four factors limiting the effectiveness of bank rate policy (4marks)
 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
18. Give four limitations of monetary policies
 Bank rates may not be effective where central banks lacks the power to enforce its rules
 Treasury bills lack a wider market hence hindering the effectiveness of open market operations
 Central bank may have limited control over commercial banks especially in developing countries
 Limited use of cheques and other banking services renders monetary policies ineffective
19. Explain five ways in which central bank of Kenya may control the supply of money in the country
 Bank rates: This is the rate at which the central bank lends to commercial banks. It can be varied to
encourage or discourage credit/ raising/ lowering bank rate
 Open market operation: The central; bank may sell or buy securities in the market. Selling securities
reduces the money supply ( for lending)
 Special deposits/ compulsory deposits/ minimum reserve requirements: The central bank require
other financial institutions to have a certain percentage of deposits deposited in the central bank which
can be varied to encourage / discourage credits
 Cash ratio/ liquidity ratio: The ratio of cash/ deposits may be carried to control money supply credit
which can be increased to reduce money supply/ can be decreased to increase money supply.
 Moral persuasion/ Liquid assets persuasion: The central bank may appeal/ request/ persuade/
restrain leading/ credit rationing. The commercial banks may be required by the central bank to
approve loans only for special types of projects e.g. agriculture, manufacturing e.t.c
 Direct action/ directive/ instructions: Central banks can use its authority to direct/instruct the
financial Institutions to lend more/ less/ apply credits squeeze/ credit expansions margins requirements.
20. Outline four tools that the central bank of Kenya may use to lower money supply in the country
 Raising the cash ratio
 Raise the bank rate
 Increasing the liquidity ratio
 Sale of securities through OMO
 Order compulsory deposits for commercial banks
 Moral persuasion to reduce lending
21. Highlight four monetary policy measures used by the central bank to decrease money supply in the
economy. (4marks)
 Increase in bank rates that would increase the cost of borrowing hence reduce money supply
 Increase in compulsory deposit requirement will leave less that the banks can lend out.
 Making commercial papers attractive increasing their sales hence withdrawing money from the
economy
 Selective credit central where the Central Bank selects the sectors to be given credit.

29 | P a g e
 22. Describe four measures that the Government may put in place to reduce the amount of money in
circulation (8marks)
 Compulsory deposits/special deposits/increase minimum reserve requirements. The Central bank may
require that commercial banks deposit a certain amount of their cash with the central bank.
 Selective credit control/credit rationing: The government through the central bank may require that
certain sectors of the economy be assisted financially.
 Open market operations: The government may instruct the central bank to sell government
securities/stocks/bonds in the open marker/stock exchange.
 Raise interest rates: High interest rates may be offered for savings to encourage more deposits.
 Raise cash/liquidity ratio thereby leaving commercial banks with less money to lend.
 Raising the bank rate leading to credit/loans becoming more expensive.
 Raising margin requirement to discourage borrowing.
 Moral suasion by government appealing to commercial banks to reduce lending to the public.
 Reducing government expenditure by suspending some projects.
 Raising taxes to reduce disposable income hence lower purchasing power.
 Surplus budgeting by spending less than the income raised.
23. State four methods that central bank may use to control credit (4marks)
 Reserve ration
 Credit rationing
 Moral persuasion
 Selective control
 Compulsory deposit
 Special instruction
 Margin requirement
24. Outline four tools of monetary policy that a government may use to reduce excess money in
circulation. (4marks)
 Open market operations - to sell government securities through the Central Bank
 Bank rate - raising interest rate on loans to banks.
 Cash/Liquidity ratio can be raised for commercial banks.
 Directives - can be given to commercial banks to charge higher interest rates on credit.
 Raising margin requirement - raise the value of assets required as security
 Selective credit control - freeze lending to some sectors of the economy.
 Increase compulsory deposits made by banks to the central bank.
 Use moral persuasion to reduce the supply of money
25. Explain five ways through which the Central Bank can reduce excess supply of money in the
economy. (10marks)
 Bank rates-Increasing the Central bank interest lending rates to commercial banks
 Liquidity/cash ratio – increasing the cash/liquidity ratio
 Compulsory deposit- increasing the compulsory deposit requirements
 Open market operations- selling the government securities to the general public and institutions
 Selective credit control-instruction to commercial banks and other lending institutions to advance loans
to few specific sectors
 Directives – instructions to commercial banks and other lending institutions to increase the interest that
they should charge
 Requests/moral suasion appealing the commercial banks to contract credit activities to specific sectors.

30 | P a g e
 26. Explain five ways in which the central bank controls the money supply in the country. (10marks)
 Determining banking rates: The central bank can reduce the money supply by
 Increasing the bank rate. Commercial banks will in turn increase their lending rates to customers which
reduces the demand for loans. To increase money supply, the central Bank reduces bank rate
 Open market operations (o.m.o): To increase money supply, the CB buys government countries from
the public and sells the same to reduce money supply.
 Cash/liquidity ration requirement: To increase many supply, cash/liquidity ratio is reduced and to
reduce money supply, c/l ratio is increased.
 (Increasing/ reserves) Compulsory deposit requirements: To increase many ss, compulsory deports are
reduced and they are increased to reduce many supply.
 Selective credit control: To reduce money ss. The CB can instruct commercial banks to give credit to
some sectors and restrict for others. For an expansionary policy, such restrictions on lending can be
removed.
 Directives: The CB may instruct commercial banks on the lending rates to charge and the margin
required depending on the prevailing economic conditions.
 Requests: - The Central Bank can persuade or appeal to the commercial banks to increase or decrease
credit facilities without giving specific instructions on what to do. (Moral suasion/persuasion)
 Reduce / stop printing of currency
27. Mention four measures that the central bank can use to lower the level of money supply in country.
 Engaging in moral persuasion of the commercial banks
 Raising bank interest rates
 Raising cash / liquidity ratio requirement
 Selling / floating treasury bills / treasury bonds
 Raising reserve requirement
 Advising commercial banks to restrict lending to a few / selected sectors of the economy.
28. State four ways that may be used to control the amount of money in circulation by the central Bank
of Kenya (4marks)
 Instructing commercial banks to only lend in priority areas/ selective credit control
 Practicing domestic borrowing/ open market operations
 Increasing interest rates on loans advanced by commercial banks/ bank rate increases
 Requirement that commercial banks maintain a cash ration
 Liquidity ratio
 Special/ compulsory deposits
 Margin requirements ( higher/ lower collateral requirements)
29. The management of national debt, credit control and lender of last resort are some of the functions of the
Central Bank. Match these functions with the statements given below. (3marks)
Statement Function
Repayment of Government securities as they mature. Management of national debt

Receipt of treasury bills to secure loans. Lender of last resort

Directing commercial banks on the preferred sectors to lend money. Credit control

31 | P a g e
 30. Discuss five circumstances under which the government may be forced to borrow money. (10marks)
 When there is budget deficit – if the planned exceeds the planned revenue.
 When there is need for reconstruction – this usually happens after the economy is devastated by natural
calamities or war.
 When there is need to provide relief services to those affected by disasters.
 When there is need to improve infrastructure – so as to enhance the pace of economic development.
 When there is need to maintain price stability: the government could borrow through the sale of
treasury bills and bonds in order to reduce the amount of money in circulation thereby reducing
aggregate demand.
 If external sources of funds are not available
 If the government wants to stand on its own/sovereignty
 If the government wants to control inflation
 When the government wants to reduce on external debts.
31. Explain five current trends in Kenya‘s banking sector (10marks)
 Increased / widespread use of (ATMs) Automated teller machines: Which enables banks to offer
services around the clock. ATM cards has enabled banks to offer services to clients /purchase from
designated retail outlets (using ATM cards/ Debit cards)
 Networking all their branches: Which has enable the customers to carry out their transactions in any
of the branch countrywide /faster processing of transactions e.g. clearing of cheques take less time.
 Relaxation of some of the conditions on opening and operating some of the accounts to make them
be more attractive to their customers.(but keep on changing in line with competitive market)
 Offering varieties of products: Which includes easier credit facilities to their customers to attract
more customers/ variety of loan products / loans with minimal requirements are now available (to
attract more customers)
 Improving the customers care services: With some bank setting up a departments known as the
customer care department to offer detailed assistance to their customers and those who may require
personalised / specialised advice / assistance
 Allowing non-bank financial institutions to offer banking services to the members of the public
through provision of basic banking services. e.g. Faulu Kenya, Front Office Service Activities (FOSA,
KWFT) accept examples of micro- finance.
 Emergence of Agency banking: Whereby some financial institutions allow some businesses to
provide financial services on their behalf.
 Liberalization of foreign exchange dealings by licensing forex bureaus: Liberisation of foreign
exchange dealings or licensing of forex bureau has enabled clients to access foreign exchange services
more conveniently / readily
 E-Banking: E-banking has enabled clients to carry out some banking transactions by use of computers
online
 Mobile Banking services (M-Banking), which allows the customers to carry out their financial
transactions over their mobile phones. e.g. balance inquiries / salary deposit alerts / airtime top up /
payment of bills / cheque book ordering etc.
 Restructuring / rationalizing of operations by merging / closing some branches / introducing new
outlets / retrenching (to improve service delivery).

32 | P a g e
 32. State four current developments that have taken place in the banking sector. (4marks)
 Introduction of Automated Teller Machine (A.T.Ms)
 Introduction of computer usage which have facilitated networking of branches (Use of computers)
 Restructuring of accounts (Types of deposits)
 Soft conditions on loan access
 Improved customer care services/ Customer Care Services
 Introduction of mobile banking through M-pesa.
 Introduction of Pesa point money services where money can be withdrawn at any time
 Introduction of mobile banks
 Credit Facilities
33. Discuss five current trends in Kenya banking sector. (10marks)
 E- Banking use of mobile phones by customers or computers to carry out some transactions eg airtime
top up.
 Introduction of a variety of products to attract the public e.g. easier credit facilities including unsecured
loans.
 Customer care department that offer personalized services/ advice to the banks clients.
 Relaxation of some of the condition in relation to operation of accounting e.g. restriction of minimum
opening accounts.
 Liberalization of foreign exchange dealings –forex bureaus have been authorized to give foreign
exchange services.
 Provision of some banking services by micro finance institutions. Eg (FOSA)
 Adoption of new marketing strategies - where staff members go out to persuade people to go for the
various banking services on offer.
 Reduction on the number of workers in banks - due to movement from the manual system to use of
computers.
 Fast clearing of cheques - Today it takes about three days to clear while in the past it used to take as
long as three weeks.
34. Give four reasons for the increased use of mobile phones in banking. (4marks)
 Easy to transact / easy ownership
 It saves on time since there is no traveling and queuing for the services.
 The speed of transaction is fast / quick feedback.
 It reduces paper- work by eliminating the need for physical files and other documentations.
 The use of PIN enhances security
 Increased ownership of mobile phones
 Transactions can be conducted any time
 Reduce transaction costs (travel and bank charges)
 Easy access to transaction records
 It is a requirement by service providers (utility bills)
 Easy to obtain credit facilities e.g. M-Shwari loan
35. State four benefits of M-pesa as a means of remitting money. (4marks)
 Cheap to operate/ less charge
 Readily available in most parts of the country
 Money can be deposited easily
 Money can be withdrawn easily/ less procedures

33 | P a g e
 36. Outline four benefits of using mobile phone money transfer services. (4marks)
 Ease to use as the agent assists in carrying out the transaction / can be used even by illiterate people /
easy to understand.
 Fast transfer of money to the receiver without delay
 Affordability/ It’s cheap: The charges of sending / receiving money are low / affordable.
 Security / safety: Sending money is quite safe / reliable (so long as the correct pin / receivers phone
number is used) its more safe than carrying cash / one needs a pin to send / receive money.
 Acceptability: many people accept it as a way of transferring money / means of payment.
 Convenience: The agents are located close to users / easily accessible to the users / agents /phones are
found throughout the country /even in remote places / one can send / receive money at any place.
 Facilitates M-banking – money can be withdrawn / transferred the mobile phone through bank ATM
machines / transferred to / from bank accounts.
 No account maintenance fee for keeping money in the mobile phone
 Short / simple procedure to register for the service
 Buy goods in large scale retail / shops e.g supermarkets
 Used to pay bills e.g water electricity bills.
 Keeps record/ reference
37. State four advantages of using M-pesa account to an individual. (4marks)
 It is cheap to operate/less charges
 Readily available to customers/Easy access/ Mpesa shops are available everywhere
 Money can be withdrawn easily and anytime – as long as the shops are opened
 Money can be deposited easily/ can deposit any time – as long as the shops are opened.
 Utility bills can be paid e.g. electricity
 It is safer to use/ Safer to use – has private pin / password.
 One can buy airtime easily.
 Saves time
 Conveniently placed – in all towns.
 Access to account balances / extra information – through phone.
 M-pesa can be used to buy goods and services – in a shop / petrol station.
 Can deposit money in the bank account – through M-banking.
 Can withdraw money from the bank – through M-banking
38. Identify four benefits that accrue to a customer using E- Banking/Mobile banking services
 The customer can use it to buy airtime.
 Enable the customer to pay utility bills: Easy to pay bills by the customers - water, power
 Customer can be alerted on any deposits in the account/ Instant feedback for any transaction
 One may access account balance
 One can transfer money from the bank to the mobile phone.
 Ease of use - mobile phones are easy to operate and access the account
 Fast in transacting business /Speedy transfer of money - money is sent and received without delays
 Security - it is more secure and safe as a phone is used by the owner for monetary transactions
 Cheap to use - some banks charge very little fees for the use of banking services
 Facilitates loan facilities - owners can access loans through mobile phones
 Service is available for 24 hours convenient for the account holder
 Statement of account - account holders can access their statement from the phone
 Provide a record - transactions through mobile phone have evidence of records for any future reference.

34 | P a g e
 39. State four ways in which mobile phones service are important in promoting business activities.
 Facilitates phone calls and sending sms for communication
 Facilitates use of e-mail
 Product promotion through access to internet
 Money transfer services e.g. M-Pesa, Zap etc
 Can access mobile bank services e.g. accounts status
40. Outline four benefits of M-banking to a trader (4marks)
 Save him time he would have spend going to the bank.
 He can access his bank information any time.
 He can pay utility bills easily egs power, NSSF, NHIF, water e.t.c.
 Withdrawal any time through bank’s agents near his business.
 It is safe to use than going to the bank hall.
 Top up airtime
 Allows M-Pesa transactions.
 It is easy and convenient to operate
 Can obtain loans e.g. M-Shwari loans.
 Can be alerted of any changes in his/her bank account through sms.
41. State four Advantages of m-banking (4marks)
 Easy transfer of funds from one account to the other in the same bank (inter account transfer)
 Easy Transfer money from the bank to the mobile phone e.g M-Pesa and vice versa
 Ability to check ones account balance in the bank with ease/ Request for mini-statements
 Easy to monitor your financial transactions by checking your transaction details over the phone
 Easy payment of the bills without going to the bank such as electricity bill, etc and other wages
 Ability to transfer money from one mobile number to other in collaboration with the service providers
 Easy request for new cheque books and bank statements from the banks
 Able to top up air time to your mobile phones in collaboration with the service providers
 Reduced risk of carrying large sums of money in cash or cheques that may be stolen
 Automatically know when salary has been entered into the account
42. State four disadvantages of m-banking (4marks)
 Registration to enjoy all these services must physically be done in the banking hall, which subject the
customers to stress queues of the bank
 Only the registered mobile number can carry out these transactions which limits the customer to only
using one number
 Users requires a mobile phone with a screen that can display the transaction which at times some may
not afford
 Mobile phones can easily be lost or stolen from the owner.
 Bank transaction information may load slowly, which may makes it expensive for the user
 Possibility of transferring the funds to a wrong account, due to error in typing of the account number
43. Outline four services offered in agency banking as a trend in the banking sector. (4marks)
 Receiving customer deposits
 Offering withdrawal services from own account
 Transfer of funds for customers
 Pay bills for the customers
 Balance inquiry services
 Opening new accounts for the customers
 Fill loan application forms for them.

35 | P a g e
 44. State four advantages of agency banking as a trend in the banking sector (4marks)
 Reduction of set up and delivery cost to the banks, which in turn passes to the customers in form of
reduced cost of accessing services
 Time saving as the agents are located close to the customer and the customer may carry out other
transactions as he withdraw the money
 More convenient for the customer to bank with their local retailers other than the traditional banking
halls
 Enable the bank to reach far places within the country
45. Highlight four services offered in m-banking (4marks)
 Top up mobile phone airtime automatically
 Mini-statement and account balance
 Payment of utility bills without going to the bank
 Transfer of money from bank to the phone and vice versa
 Temporary overdraft facilities
 Withdraw money
 Buy goods and services from registered sellers
 Withdraw money from A.T.Ms
46. Give four Reasons to account for E-banking as a method of Banking through Electronic system.
 It’s easy to check the account balances
 It can be used to pay utility bills without going to the bank
 You can request for mini statements
 Automatically know when salary has been entered into the account
 You can top up mobile phone airtime automatically
 Transfer money from bank to the mobile phone,e.g. M-pesa and vice versa
 Withdraw cash from the account
47. Outline four benefits that accrue to a customer who uses automated teller machine (ATM) banking
services. (4marks)
 Withdrawing any time: Customer can withdraw money at any time/for 24hrs/for 7 days a week
 Means of payment: customer can pay utility bills/buy goods/services.
 Cheaper to operate: Fees charged are low compared to over-the-counter services/withdrawals/hence
saving on costs.
 Conveniently placed /Strategic locations: ATM`s may be found even where banks are non-existent.
 Safer to use / Security: The pin number which guarantees safety
 to carry a card than cash.
 Getting mini statement: customer can use it to monitor his transactions with the bank.
 Deposits any time: Customer can deposit money or cheques at any time for 24hrs & 7 days in a week.
 Saves time/faster services: Due to less paperwork/avoidance of long queues in the bank
 Use the visa cards: to make interbank withdrawals
 Portability: It is light to carry ATM cards around
 Access to credit: through the use of credit cards
 Simple/easy to operate/use: The machine guides the user.
 Access to account balances / extra information: Transaction receipts: to show current
balance/amount withdrawals/for record keeping/reveal errors
 Accessibility/unlimited use: Since it operates throughout the day/round the clock
 Facilities movement of cash/funds from one account to another.
 Since ATM cards can be used to buy goods/ services

36 | P a g e
  Withdrawals can be done for one else behalf
48. Outline four advantages of use of Automatic Teller Machines (ATMs) in banking (4marks)
 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
49. Outline four disadvantages of use of Automatic Teller Machines (ATMs) in banking. (4marks)
 May lead to overspending
 The machines may breakdown
 Customers may forget PIN and lose access to the account
 Subject to fraudulent activities by relatives and bank staff
 They may not be used by the illiterate
 They contribute to unemployment
 They encourage cases of theft
 ATM machines are not always available
50. Wambua intends to import a car from Dubai which costs 20, 0000 Dirams. If 4 Dirams = 1 Us Dollar
and Kshs 70 = 1 Dollar, calculate the amount in Kenya shillings that Wambua will pay for the car.
Car Costs 20,000 Dirams
4 Dirams = 1 US dollar
Amount of Kshs paid
20,000 = 5,000 US dollars
4
5000×70=350,000
Amount paid = Kshs 350,000
51. List four functions of development bank (4marks)
 Mobilize long term saving
 Provide long-term loans
 Provide investment opportunities
 Provide working capital to the public limited companies by investing in
 Shares
 Provide education on investment opportunities that they offer guaranteeing loan from external source
52. Outline four functions of the World Bank. (4marks)
 Providing finances to reduce budgetary deficits
 Provide loans for development projects.
 Provide finance to correct and adverse balance of payments.
 Provide technical expertise to support development.
53. Outline four ways that the World Bank may use to assist developing countries to improve their
economy. (4marks)
 Providing finances to reduce budgetary deficits
 Provide loans for development projects.
 Provide finance to correct and adverse balance of payment.

37 | P a g e
  Provide technical expertise to support development.
54. Highlight four functions of the International Bank of Reconstruction and Development (4marks)
 Provision of finance to member countries to foster economic development.
 Issuance of loans to developing countries at concessionary rates for project development.
 Provision of personnel/manpower to facilitate project appraisal.
 Provision of experts to implement and manage identified projects.
 Training of local personnel in project appraisal and implementation.
 Supervise member countries’ management of public finance.
 Approving development plans from member countries for funding.
 Advising and recommending economic policies to be adopted by member countries.
 Promotes long-term growth in international trade.

Monetary policies used by the central bank of Kenya to control money in circulation include
I. Use(influence)interest rates /bank rates/borrowing rates /lending rates lower interest rates
/Bank rates tend to increase borrowing/high interest rates /bank rates discourages borrowing
II. (Engage in) Open Market Operation ( OMO)by buying government securities which increases
money supply/selling government securities which reduces money supply
III. Decrease (set the ) reserve requirement / compulsory deposit/Special deposit decrease money
in supply
IV. Directives ( by central bank to commercial Bank) to reduce/create money in supply/
V. (Through) selective credit control by freezing/lending to some sectors of the economy/
liberalization Lending
VI. Cash /liquidity ratio can be raised/lowered ( for commercial banks) to decrease/increase the
amount of money in circulation
VII. Moral persuasion banks can be encouraged/convenience to increase/decrease lending
VIII. Marginal requirements increasing/decreasing margin required increase decrease. Encourage
/discourages borrowing
Ways in which insurance companies promote the development of the Kenyan economy include
i. Proving employment opportunities thus improving the people’s standards of living/enables people to
earn an income
ii. Insurance companies finance (economic/development) projects/invest in real estates / mortgage/stock
/corporate/government bonds using surplus fund/accept examples of investment as expansion
iii. Insurance companies help business mitigate risks /create confidence in investors enabling them to
invest in risk business/recover loses
iv. Insurance companies act as a source of funds/loans ( for individuals /business organization/government)
for financing various economic activities/business/development opportunities activities
v. Insurance companies act as a source of revenue to the government through taxation/for financing
provision of public goods/services
vi. It encourages saving (as the amount contributed as premium Amy be )used for investment/through
regular contribution/premium
vii. Allow for continuity of business/life after occurrence of risk through compensation
viii. Spread risks to various people through sharing the burden of loss /which reduces the burden of loss
ix. Contribute to social for the insured /beneficiaries/accept examples of social welfare as expansion

38 | P a g e
x. Life assurance policy can be used as securities to acquire loans
xi. Promote loss preventions by advising/educating their clients on how to reduce occurrence of
risks/rewarding those who don’t make claim(over a certain period)
(b) Reasons for the growth of SACCOs in Kenya
I. Cheap loans, SACCOS are cheaper source of funds/loans where interest rates are lower ( compered to
bank)/make it affordable
II. Investment opportunities – SACCOS have different development projects that their members can invest in /
accept examples of development projects as expansion
III. Limited liability where members (can rest easily knowing their liability is limited to their saving/ capital.if
SACCOS
get bankrupt/insolvent the members personal assets remain secure
IV. Emergency loans / SACCOS offer emergency loans within a short time
V. SACCOs give dividends/ interest to their members from profit/ surplus gained
VI. Educate their members on financial matters/ SACCOs matters / through AGM / workshop/seminars /Open day
/ visit
VII. In case of the death of the borrower,loan is written off since loans are insured / burden is not transferred to
beneficiaries/next of kin
VIII. Offer a variety of loans to improve members welfare/ accept types of loans as expansion
IX. Easy to acquire loans since it doesn’t require collateral/security/ require few formalities/ favorable terms
X. ( In case of deaths of a member) the beneficiaries are refunded double the amount saved since saving are
insured/ give beneficiaries more financial stability/ security
XI. Government support by creating favourable condition to enhance operation/ accept examples of favourable
condition as expansion
XII. To encourage saving for future use / through check off system
XIII. Offer FOSA that provide limited banking services/ accept examples of FOSA as expansion
XIV. Demographics administration where members have equal opportunities to SACCOs/accept examples of
equal opportunities as expansion
XV. Open/ voluntary membership and where one if free /join leave
(a) Factors that may make a business to make payments by use of a cheque
i. Need for evidence of payment for future reference
ii. Making entries into books of account/as a source document that facilitate preparation of accounts
iii. Enhance security/safety (in the office) that would result from the risks of theft of cash since cheque have
security features/ can not easily be cashed if stolen/where large amount are involved
iv. If it’s the business payment policy to enhance it’s operation/ that must be followed
v. Drawing/writing a cheque is faster than counting Large sums of money
vi. Postdated/discounted cheque may be used where the business lack cash ( in the meantime)
xv. The business operates a current account which is operated by use of a cheque
Accountability since it’s easy to monitor/ audit the flow of revenue/expenses
Portable they are convenient to carry
Cheaper to use in (making payments) since charges are low
Payment can be made without traveling which saves time /avoid inconvenience of traveling
Cheque are negotiable making it easy to transfer payments
A cheque is the only means (of payment) therefore there is no option
If the payee requires payments by a cheque and the business/ drawer complies
Many people to be paid which can be done through credit transfer cheque/ reduce cost / inconvenience
of payment

39 | P a g e
 6. Highlight four advantages of using Mbanking. (4 marks)
i) Paying through mobile phones is safer than carrying cash.
ii) It is easier to transact over mobile phones.
iii) It is convenient because transactions can be conducted anywhere.
iv) It saves on time since there is no travelling and queuing for the services.
v) The speed of transaction is fast.
vi) It reduces paper work by eliminating the need for physical files and other documentations.
vii) The use of PIN enhances security.
viii) Increased ownership of mobile phones/affordability of mobile phones. ix) Transactions can be
conducted at any time. x) Reduced transaction costs.
xi) Easy access to transaction records.

40 | P a g e