Money and Banking 3

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 incases 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 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

They includes the following: Kenya Women finance Trust (KWFT), Faulu Kenya

• 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

(i) Offer all types of accounts

(ii) Provide both short term and
medium term finances to their customers

(iii) Their finance is not restricted to
any sector

(iv) May offer foreign exchange
services

(v) Their finance is mainly for
working capital

(vi) Participate in clearing house as
they offer cheque

(vii) Offer facilities for safe keeping
of valuable items such as title deeds

(viii) Always in direct control of the
central bank

(ix) May offer overdraft facilities to
their customers

Non-Bank Financial Institutions

(i) Offer only two types of
accounts savings and fixed deposit

(ii) Mainly provide medium term
and long term finances

(iii) Their finance is restricted to a
particular sector

(iv) Do not provide foreign exchange services

(v) They provide capital for
development

(vi) Do not participate in clearing
house since they don’t offer

(vii) Do not offer facilities for safe
keeping of valuable items

(viii) Not usually in direct control of
the central bank

(ix) Do not offer overdraft facilities
to their customers

The Central Bank

This is a bank established by the government through the act of the parliament

into 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

Cash ratio = Cash held/Tatal deposits

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