BAF 2203Principles of Banking and Finance

Question One
a) the structure of financial system in Kenya

central banks
microfinances
commercial saccos and
and
bank mobile bankin
mortgages

The banking structure is made up of central bank at the helm then commercial
banks, microfinance, mortgages and Sacco’s
• This is made up of licensed institutions to carry out the business of financial
intermediation.
• They are guided by prudential guidelines issued by the Central Bank of Kenya.
mortgage finance companies and one is non-bank financial institution follows the
cluster.
• commercial banks institutions are further classified between locally owned and
foreign owned. locally owned banks have significant
government shareholding.

b) Explain the following instruments of money market:

i) Commercial bills (2 Marks)

ii) Treasury bills (2 Marks)
iii) Certificate of Deposit. (2Marks)
i) Private Sector Banks
these banks are those banks that are owned and run by private sector .an individual has
control over these banks in proportion to the shares held by him

iii) Provident Funds

Question Two
. a) Explain the features of Kenyan capital market. (5 Marks)
c) Discuss the operations of commercial banks in Kenya.

 Issuing letters of credit, travellers cheques, circular notes etc.

 Undertaking safe custody of valuables, important documents, and
securities by providing safe deposit vaults or lockers;
c) Providing customers with facilities of foreign exchange.
d) Transferring money from one place to another; and from one
branch to another branch of the bank.
e) Standing guarantee on behalf of its customers, for making
payments for purchase of goods, machinery, vehicles etc.
f) Collecting and supplying business information;
g) Issuing demand drafts and pay orders; and,
h) Providing reports on the credit worthiness of customers.
d) Explain any two recent reforms with reference to commercial banks in Kenya. (5
Marks)

Discuss the following functions of the Central Bank Kenya:

i) Supervision of banks. (3 Marks)

ii) Lender of last resort.

A lender of last resort is an institution which is willing to offer loans as a last resort. Such
institution is usually a country’s central bank. In this case, we talk of a wholesale lender of
last resort
The main task in front of the lender of last resort is to preserve the stability of the banking
and financial system by protecting individuals’ deposited funds and preventing panic-ridden
withdrawing from banks with temporary limited liquidity. For more than century and a half,
central banks have been trying to avoid great depressions by acting as lenders of last resort
in times of financial crisis. At first, this act provides liquidity at a penalty rate. Subsequently
trough open market operations, it lowers interest rates on safe assets. And finally, this
process involves direct market support.