MONEY AND BANKING

Barter trade

- This is a form of trade where goods and services are exchanged for other goods and services.

Benefits of Barter Trade

 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.

 Promotes Social relations: it promotes social links since the communities trade together.

 Promotes Specialization: some communities shall specialize in a particular commodity.

 Improved living standards: this is enhanced by receiving what one is unable to produce.

Limitations of Barter trade

 There is no double coincidence of wants: - it is difficult to find two people with the need for
each other's product at the same time.

 There is no 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.

 There is no 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.

 There is no specialization: - Everyone strives to produce all the goods he or she needs due to
the problem of double coincidence of wants.

 There is no unit of account; it is difficult to assess the value of commodities and keep their
record.

Money System

- Money is anything that is generally accepted and used as a medium of exchange for goods and
services.

Features/ characteristics of Money

- For anything to serve as money, it must have the following characteristics:

 Acceptability: The item must be acceptable to everyone.

 Durability: The material used to make money must be able to last long without getting torn,
defaced or losing its shape or texture.
  Divisibility: Money should be easily divisible into smaller units (denominations) but still
maintains it value

 Cognizability: The material used to make money should be easily recognized. 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

 Portability: Money should be easy to carry regardless of its value

 Stability in value: The value of money should remain fairly stable over a given time period

 Liquidity: it should be easily convertible to other forms of wealth (assets).

 Scarcity: It should be limited in supply. If it is abundantly available its value will reduce

 Malleability; the material used to make money should be easy to cast into various shapes

 Not easy to forge; money should not be easy to imitate.

Functions of Money

1. 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.
2. 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.
3. Measure of value: Value of goods and services are expressed in money form. Performance of
businesses is measured in terms of money.
4. Unit of account: It is a unit by which the value of goods and services are calculated and records
kept.
5. Standard of deferred payment: it is used to settle credit transactions.
6. Transfer of immovable items (assets): Money is used to transfer assets such as land from one
person to another.

Demand For Money

- This is the tendency or desire by an individual or general public to hold onto money instead of
spending it. It also refers to as liquidity preference.

Reasons (Motives) For Holding Money

A) Transaction Motive

Money is held with a motive of meeting daily expenses for both the firms and individuals. The
demand for money for transaction purpose by individuals depends on the following factors:
1. Size/level of individual’s income: The higher the income of and individual, the more the number
of transactions thus high demand for transactions.
2. Interval between pay days/ receipt of money: if the interval is long, then high amount of money
will be held for transaction reasons.
3. Price of commodities: if the prices are high, the value of transactions will also increase thus more
money balances required.
4. Individuals spending habits- people who spend a lot of money on luxuries will hold more money
than those who only spend money on basics.
5. 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.
- The transaction motive can further be divided to;

 Income motive i.e. holding money to spend on personal/ family needs

 Business motive i.e. holding money to meet business recurring needs such as paying wages,
postage, raw materials. Etc

B. Precautionary Motive:

Money is held in order to be used during emergencies such as sicknesses

- The amount of money held for this motive will depend on the factors such as:

 Level of income- the higher the income the higher the amount of money held for
precautionary motive.

 Family status- high class families tend to hold more money for precautionary motive than
low class families.

 Age of the individual- the aged tend to hold more money for precautionary motive than the
young since they have more uncertainties than the young.

 Number of dependant- the more the dependants one has, the more the money they are
likely to hold for precautionary motive.

 Individual’s temperament- pessimists tend to hold more money for precautionary motives
than the optimists because they normally think things will go wrong.

 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.

C. 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. This depends on the following:

i. The wealth of an individual

ii. The rate of interest on government debt instruments
iii. Interest on money balances held in the bank.
iv. How optimistic or pessimistic a person is.

Supply Of Money

- This is the amount of money/ monetary items that are in circulation in the economy at a particular
period of time.
 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.
- A bank is a financial institution that accepts money deposits from the public for safe keeping and
lending out in terms of loans.

Commercial Banks

- These are financial institutions that offer banking services with a profit motive. Their activities are
regulated by the Central bank.

Functions of commercial banks

1. 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.
2. 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.
3. Provision of loan facilities: They provide loans to members in form of short term
and long term. These loans are repayable with interests thus income to the banks.
4. Facilitates foreign exchange payments: They provide foreign exchange that is
used in international trade. They also make payments on behalf of their customers.
5. Provision of safe keeping of valuables: They provide security for valuables to their
customers at a fee.
6. 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.
7. Provision of financial information: They advice their clients on financial matters
affecting their businesses such as investment option and wise use of loans.
8. Money transfer: They provide varied, safe and reliable means of money transfer.
Such means include cheques, standing orders, credit transfers, bank drafts, letters of
credit, credit cards, travellers cheques etc.
9. Act as guarantors and referees: They act as guarantors to their customers who
want to acquire credit facilities from other financial institutions.
10. Act as intermediaries: They act as a link between the savers and borrowers.
11. Credit creation: This is the process of creating money from the customer
deposits through lending.
12. Provision of trusteeship: They can manage a business on behalf of the client
especially if the client does not have managerial skills. They can also manage the
assets of the deceased client if there was no will.

Types of accounts offered by commercial banks

1. Current account
- This is an account where money deposited can be withdrawn on demand by the customer by
means of a cheque. This means that money can be withdrawn at any time during the official working
hours so long as the account has sufficient funds.
- This account is also referred to as demand deposits.
Features characteristics of current accounts

 Deposits of any amount can be made at any time.

 Balances in this account do not earn any interest.

 The account holder is not required to maintain a minimum cash balance in this account.

 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.

 Monthly bank statements are issued to the account holder.

 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.

Advantages of current account

1. No minimum balance is maintained hence the account holder can access all his/her
money.
2. Withdrawals can be made at any time.
3. Transactions are made easier by use of cheques for example; one does not have to go
to the bank in order to make payment.
4. Overdraft facilities are available.
5. It is possible to deposit any amount at any time during the office hours.
6. Use of cheques as means of payment serves as evidence of payments made.
7. Payments can be done even if there are insufficient funds in the account using post
dated cheques.
8. The account holder can withdraw any amount at any time without notice as long as
there are sufficient funds in the account.

Disadvantages of current account

1. Lengthy procedures of opening the account.
2. The account holder does not earn any income since the balances in the current
account does not earn interest.
3. Initial deposit when opening the account is usually high hence discourages prospective
customers.
4. Customers are not encouraged to save since they can access their money at any time.
5. Ledger fees are charged on the account making the operations of the account
expensive.

2. Savings account (deposit account)

- This is an account operated by individuals and firms that have money to save.
Features of Savings account

 There is minimum initial deposit that varies from bank to bank.

 A minimum balance is maintained at all times.

 The withdrawals are up to a certain maximum within a given period. Withdrawal above this
maximum will require notice.

 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.

Advantages of Savings account

1. Customers are encouraged to save because of the restricted withdrawals.
2. There are relatively low banking charges.
3. Initial deposit is usually low as compared to other accounts.
4. The balances earn interest to account holder hence an incentive to save.
5. ATM facilities have made account operations very convenient to customers.

Disadvantages Savings account

1. A minimum balance must be maintained at all times and the customer is denied
access to that money.
2. For across the counter withdrawals, it is only the account holder who can withdraw
cash.
3. Withdrawals are restricted and sufficient notice is required before large amounts are
withdrawn.
4. The account holders do not enjoy services such as cheque books and overdraft
facilities like the current account holders.
5. Easy access to the money through ATM cards encourages overdrawals.
6. Anybody who knows the pin of the card (ATM card) can withdraw money from the
account.

3. Fixed deposit account

- This account is also known as time Deposit account. It is maintained by those who have
money not meant for immediate use.
- Once money is deposited, there are no withdrawals until the time expires.

Advantages of Fixed deposit account

1. Interest earned is relatively high as compared to savings account.
2. There are no bank charges to the account holder.
3. Money held in fixed deposit account can be used as security to acquire bank loans.
4. Restricted withdrawals encourage savings.
5. The account holder has time to plan for the deposited money.

Disadvantages of Fixed deposit account

1. The account holder may lose the interest if the amount is withdrawn before the
maturity time.
2. The initial minimum deposit is relatively high.
3. No further deposit after the first deposit in to the account.
4. A notice is required if you want to terminate the contract before the expiry period.
 5. Access to money before the maturity time is not allowed.
6. No partial withdrawal can be made on this account before the expiry of the period.

Requirements for opening an account

- The following are some of the requirements for opening either a current account or a savings
account:

 Photocopies of identification documents such as National Identity Card or Passport.

 Passport size photographs (number varies from bank to bank). Some banks are nowadays
taking the photographs instead of the customers providing them.

 For current account holders, an introductory letter from an existing customer from the
prospective customer’s employer.

 Filling in the application form provided by the bank.

 Signing of the specimen signature cards. Usually two.

NB: Once these requirements are fulfilled, the bank allocates the customer an account number.

Non-Banking financial institutions

- These are financial institutions that offer finances for development purposes to individuals and
organizations.
- These institutions address themselves to the needs of specific sectors in the economy.
- They includes: Agricultural finance houses, Housing finance companies, cooperative societies,
insurance companies, Development finance institutions, Micro Finance companies.
- They offer the finances inform of either short term or long term loans.
-The following are some of the non-bank financial institutions in Kenya

 Development banks

 Building societies

 Finance houses

 Savings and Credit Co-operative Societies

 Micro finance organizations

 Insurance companies

 Pension Funds Organizations

 Hire Purchase Firms

 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. They
includes Housing Finance Corporation of Kenya (HFCK), National Housing Corporation (NHC).
Development Finance Institutions

- These are development banks which are formed mainly to provide medium term and long term
finances, especially to the manufacturing sector. They perform the following functions

 Financing people who wishes 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

- They includes the following Kenya Industrial Estates (KIE), Development Finance Company of Kenya
(DFCK), Industrial Development Bank (IDB), Industrial and Commercial Development Corporation
(ICDC).

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. They are formed by those engaged in similar activities. They
includes: 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. Their functions include;

 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 case of loans

- They includes the following: Stallion Insurance Company; Madison insurance company; Blue shield
insurance company.

Micro Finance Companies

- These are financial companies formed to provide small scale and medium size enterprises with
finance. They also carry out the following functions:

 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

 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.

- Examples include: Kenya Women finance Trust (KWFT), Faulu Kenya (as of 2020).

Agricultural Finance Houses

- These are institutions formed to promote the agricultural sector. They carry out the following;

 Giving loans to farmers.

 Offering supervisory and training services to the loaned farmer.

 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.

Differences between commercial banks and non-bank financial institutions.

Commercial Banks Non-Bank Financial Institutions

- Offer only two types of accounts savings and

- Offer all types of accounts
deposit

- Provide both short term and medium term finances to their - Mainly provide medium term and long term
customers finances

- Their finance is not restricted to any sector - Their finance is restricted to a particular secto

- May offer foreign exchange services - Do not provide foreign exchange services

- Their finance is mainly for working capital - They provide capital for development
 - Do not participate in clearing house since the
- Participate in clearing house as they offer cheque
don't offer

- Offer facilities for safe keeping of valuable items such as title - Do not offer facilities for safe keeping of valua
deeds items

- Always in direct control of the central bank - Not usually in direct control of the central ban

- May offer overdraft facilities to their customers - Do not offer overdraft facilities to their custom

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. It was formed to perform the following functions;

 Issue currency in the country, which includes both new notes and coins to replace the worn-
out ones

 Banker to the commercial banks, by ensuring that all the commercial banks in the country
operate an account with them

 Being the government ‘s bank, by offering 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

 Controller of the commercial banks on how they carry out their functions in the economy to
ensure that their customers are served well

 Provide links with other central banks in other countries, facilitating financial relationships. It
also provide a link between the country and other financial institutions such as IMF

 Maintain stability in the exchange rates between the local currencies and the foreign ones

 Act as the lender of the last resort to the commercial banks to enable them meet their
financial obligations when need arise

 Facilitates the clearing of cheques between different commercial banks through its clearing
house (a department in the central bank)

 Administering of the public debt 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. In doing
this they put in place various monetary policies that can either expand the economic
activities in the country or depress them
- Monetary policy refers to the deliberate move by the government through the central bank to
manipulate the supply and cost of money in the economy in order to achieve a desirable economic
outcome.
- They do this through the use of various tools of monetary policies which includes the
following: Bank rates, Open market Operation (OMO), Cash Liquidity ratio
requirement, Compulsory deposit requirement, Selective credit control, Directives, Request.

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 to enable the government achieve the desirable economic development in the country.
- 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. That is 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

- Here the central bank expect the commercial bank to keep a certain proportion of their total
deposits in form of cash to enable them meet their daily needs, while the rest are held in liquid
assets. This proportion can be reduced by the central bank to reduces the amount of money held by
the commercial banks in order to reduce the amount of money spent by the commercial banks in
cash, reducing the amount of money in supply, or they may increase the proportion to be held by the
commercial banks to enable them increase the amount of money they spent in cash increasing the
amount of money in supply.

Compulsory deposit requirements

- The commercial banks are required to maintain a certain amount of deposits with the central bank
which will be held in a special account where the money stays frozen. This reduces the amount of
money that the commercial banks hold and are able to spend in their operation, influencing the
supply of money in the economy.
- The deposit may be increase to reduce the amount of money in the commercial banks, or reduced
to increase the amount of money in the commercial banks.

Selective credit control

- The central bank may issue a special instruction to the commercial bank and other financial
institution only to lend more in a particular sector to control the amount of money reaching the
economy. The instruction may be removed, if the bank feels that the supply in the economy has
reduced and needs to be increased.

Directives
- The central bank may issue a directive to the commercial banks on the interest rate they should
charge on their lending and to increase or reduce the margin requirement for borrowing to make it
harder or easier for the customers to obtain loan.
- Margin requirement is the proportion of money expected to be raised by the client to finance the
project he/she wants to obtain the loan for, before being given a loan to complete the project with.

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.

Trends in Banking

- These are the positive changes that have taken place in the banking sector to improve their service
deliveries to their customers. They include;

 The use of Automatic Teller Machines (ATMs), which has made it possible for the customers
to access their money any time of the day. The ATM cards that are used for withdrawals from
the ATM machines can also be used as a debit card to make purchases.

 Networking all their branches, which has enable the customers to carry out their
transactions in any of the branch.

 E-Banking, which is the banking through the internet. This has made it possible for the
customers to transact their financial businesses on-line.

 Relaxation of some of the conditions on opening and operating some of the accounts to
make them be more attractive to their customers.

 Offering varieties of products which includes easier credit facilities to their customers to
attract more customers.

 Liberalization of foreign exchange dealings by licensing Forex bureaus to offer services to the
customers, improving the accessibility to the service.

 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.

 Allowing non bank financial institutions to offer banking services to the members of the
public, for example; KWFT, SACCOs, FOSA, Faulu Kenya, etc
  Mobile Banking services (M-Banking), which allows the customers to carry out their financial
transactions over their mobile phones. It has brought about several benefits/ advantages to
their customers which includes;

Advantages of m-banking

1. Easy transfer of funds from one account to the other in the same bank (inter account transfer).
2. Easy transfer of money from ones account to his mobile phone for other transactions.
3. Ability to check ones account balance in the bank with ease.
4. Easy to monitor your financial transactions by checking your transaction details over the phone.
5. Easy payment of the bills such as electricity bill, Dstv bills, etc and other wages.
6. Ability to transfer money from one mobile number to other in collaboration with the service
providers.
7. Easy request for new cheque books and bank statements from the banks.
8. Able to top up air time to your mobile phones in collaboration with the service providers.
9. Reduced risk of carrying large sums of money in cash or cheques that may be stolen.

Disadvantages of m-banking

1. Registration to enjoy all these services must physically be done in the banking hall, which subject
the customers to stress queues of the bank.
2. Only the registered mobile number can carry out these transactions which limits the customer to
only using one number.
3. Users requires a mobile phone with a screen that can display the transaction which a times some
may not a ford.
4. Mobile phones can easily be lost or stolen from the owner, inconveniencing him from carrying out
the transactions.
5. Bank transaction information may load slowly, which may makes it expensive for the user.
6. Possibility of transferring the funds to a wrong account, due to error in typing of the account
number.
7. Introduction of agency banking, which has made them to make their services to be more
accessible to even areas where they may have not put up a banking hall.

- Agency banking 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. They may
offer the following services;

 Receiving customer deposits.

 Offering withdrawal services.

 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.

Advantages of agency banking

1. 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.
2. Time saving as the agents are located close to the customer and the customer may carry out other
transactions as he withdraw the money.
3. More convenient for the customer to bank with their local retailers other than the traditional
banking halls.
4. Enable the bank to reach far places within the country.