I N O O R E R O

U N I V E R S IT Y

SCHOOL OF LAW
LEGAL STUDIES DEPARTMENT
DIPLOMA IN LAW DECEMBER 2009 MAIN EXAMINATIONS

L205: LAW OF BANKING

TUESDAY 8TH DECEMBER 2009 DURATION: 2 HOURS TIME: 9.00AM 11.00 AM
INSTRUCTIONS TO CANDIDATES

1. 2. 3. 4. 5. 6.

This examination paper has FIVE (5) questions. Candidates are required to attempt Question 1 and ANY OTHER TWO questions. No reference material OF ANY KIND should be carried into the examination room. DO NOT write on the question paper. Start every question on a FRESH page Marks may be lost for illegibility.

PLEASE TURN OVER

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Law of Banking

SECTION A: Compulsory Question One (a) Explain the mechanisms that have been put in place for protection of Depositors money (10 Marks) (b) Discuss with the aid of statutory provisions the mandate of Central Bank of Kenya. (10 Marks) (c) Explain the adequacy of the provisions of the law available on regulating the Banking Business. (10 Marks) SECTION B: Answer any TWO questions. Question Two Critically discuss the statutory requirements to be complied with before an entity can be allowed to operate as a bank. (20 Marks) Question Three (a) Explain the role played by the Deposit Protection Fund in the banking sector. (10 Marks) (b) Discuss the objects of the Central Bank of Kenya as laid out in section 4 of the Central Bank of Kenya Act cap 491, Laws of Kenya. (10 Marks) Question Four For every right, there is a corresponding duty. In light of this statement, explain with the aid of decided cases the rights and duties accruing to both the banker and customer. (20 Marks) Question Five (a) Discuss the main types of trustees available and if they are allowed under the law to operate Bank Accounts. (10 Marks) (b) Discuss the legal issues pertaining to the operation of bank accounts by minors. (10 Marks)
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Law of Banking

MARKING SCHEME pp1 Question One (a) The student should be able discuss the following regulations available to the customers through the following mechanisms: Protection through the powers of supervision and information gathering conferred upon the Central Bank of Kenya. Protection through restriction on a Banks lending capacity. Deposit Protection Fund (DPF) Restrictions on the kind of activities in which a Bank or financial institution may engage in because all Banks are registered under the companies Act. Question One (b) The student should discuss the following mandates: Information & reporting requirement CBK shall collect data other information assumed necessary to enable it maintain supervision and surveillance of the affairs of an institution and protection of depositors. Inspection and control of institutions CBK may inspect institutions through the minister of finance by an authorized person under the law and the perusal of its books of account. Management of other Banks in the following circumstances If a bank fails to meet its own obligations If the auditor of an institution makes a report that the institution cant meet its financial obligations. If CBK discovers circumstances which in the option of CBK warrants the exercise of this power for purposes of the interest of the institution or its depositors. Question One (c) The student to discuss: Protection through the powers of supervision and information gathering conferred upon the Central Bank of Kenya. Protection through restriction on a Banks lending capacity. Deposit Protection Fund (DPF) Restrictions on the kind of activities in which a Bank or financial institution may engage in because all Banks are registered under the companies Act. The student should discuss the powers of Central Bank Act and its adequacies on regulation on the following.
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Law of Banking

o CBK shall collect data other information assumed necessary to enable it maintain supervision and surveillance of the affairs of an institution and protection of depositors. o Inspection and control of institutions o CBK may inspect institutions through the minister of finance by an authorized person under the law and the perusal of its books of account. o Management of other Banks in the following circumstances o If a bank fails to meet its own obligations, if the auditor of an institution makes a report that the institution cant meet its financial obligations and If CBK discovers circumstances which in the option of CBK warrants the exercise of this power for purposes of the interest of the institution or its depositors. Question two. A bank must be first registered under the Banking Act. The Bank must be granted a license by the minister. Section 4 of the Banking lists the following as the conditions which he has to satisfy himself on: The financial conduct of the institution and the character of the management. The professional and moral suitability of the persons proposed to manage or control the institution. The adequacy of its capital structure and earning prospects. The convenient and needs of the area to be served. The public interest which will be served by the granting of a license. The institution meets the minimum capital requirement of ksh.250, 000,000 Question Three (a) The student should discuss that the banking industry is one of the most closely regulated by the state; the reason is in order to promote stability in the financial sector and to protect the interests of the depositors by avoiding insolvency of Banks. The DPF was established after 1985 financial crisis of many banks going under liquidation and receivership. The Banking Act is empowered to appoint a manager for the affairs of a Bank if it is satisfied that the affairs of a Bank are being carried irregularly. If the manager does not salvage the Bank then the DPF will come in, however the Bank or financial institution may voluntarily resort to the DPF when it is unable to meet its financial obligations.
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Law of Banking

The Fund is a way of protecting depositors from losing their monies in the event that a Bank goes under liquidation. The fund consists of money from several sources, which include contributions by banks and financial institutions which are required to contribute money to the DPF. Question Three (b) The objectives of the Banking Act include the following:The student should be able to demonstrate the understanding of the Banking Act and bring out its core objectives as flows: To regulate the issue of notes and coins To assist in the development and maintenance of sound monetary credit and banking system in Kenya conducive to the orderly and balanced economic development of the country. Maintain external stability of the currency To serve as a Banker and financial advisor to the Government Question Four (a) For every right, there is a corresponding duty- the student should demonstrate the understanding of the phrase and ring out the duties of the Bank as well as the customers as well as their rights: _ Customers right include:_ Right to repayment of the sum equivalent to the one paid into the customers account. The student to discuss the case of Joachmson vs. Swiss Bank Corporation Right to Draw Cheques up to the amount of any credit balance of his credit Right to interest in respect of credit balance in a saving account. Customers duties Duty of reasonable care in drawing of cheques in order to inform the bank if he customer suspects any fraud relating to his account. To take reasonable care in drawing cheques so as not to facilitate fraud, the case of London Joint Stock Bank LTD vs Macmilan and Arthur .where the Court found the customer negligent by leaving spaces in between the figures therefore facilitating fraud. Bankers Rights Right to commission the customer has a right to charge a commission for keeping the customers account and for banking services offered.
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Law of Banking

Right to interest interest is to be charged by the banker on money lent. Right to set off-there is an implied promise by the Banker to repay money lent to him by the customer who has a credit balance but owes money in another account; the banker may have the right to reduce hi liability to the customer. Bankers duties o Duty to receive money on customers account A bank undertakes to receive money and collect bills for the customers account. o Duty to honour customers cheque if drawn in a proper form and presented during working hours o Duty of secrecy to keep affairs of the customer confidential. Question Five (a) The student should be able to define a trust as a relationship which arises whenever a person is compelled in equity to hold property for the benefit of another person. The student should the following types of trusts while bringing out the differences and giving examples for each. Trustee of private trust Trustee of charitable /public trust Trustee in Bankruptcy Question Five (b) Infants and minors are allowed to open Bank accounts but only a person who has attained the age of majority will operate the same on behalf of them. Minors have a limited contractual capacity basically for contracts of necessaries. The student to discuss the case of Nash vs. Inman on the contracts of necessaries and what constitutes the same. The student should identify the dangers of lending money to minor due unenforceability.

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