ADDITIONAL INFORMATION ON MONEY & BANKING

Kenya Bankers Association (KBA) – It is the financial (banking) sector's leading advocacy
group and the umbrella body of the institutions licenes and regulated by the Central Bank of
Kenya (CBK) with a current membership of 47 financial institutions. KBA continues to
reinforce a reputable and professional banking sector in a bid to best support Kenyans, who
entrust their ambitions and hard-earned resources with its member banks. KBA’s mandate is

1. Research Based Advocacy And Lobbying for Banks and all financial institutions
2. Banking / financial Industry Efficiency And Innovation
3. Ensure best Banking Practice And Sustainability
4. Ensure there is Bank’s/Financial Institution’s Consumer Education And Public
Affairs

Interest Rates Capping on Banks

It is a bill that was passed to amend the Banking Act by placing restrictions on the rate which
banks offer on loans and deposits. This amendment done in August 2016 put

(i) A cap (maximum interest rate limit) on lending rates at 4.0% above the Central
Bank Rate (CBR) and
(ii) A floor (minimum rate of interest) on the (Fixed, call, savings) deposit rates at
70% of the Central Bank Rate, CBR. Or minimum of 7% p.a.

Its effects of Capping;

a) More stringent measures on lending

b) Low profitability for Banks
c) Banks will change strategy away from over reliant on lending
d) Stiff competition among banks
e) Banks will prefer to lend to the Government through bonds which has better returns
than to the public
f) Some banks will lay off staff to cut down cost of operation.
g) There will be an increased demand by the public on cheap loans.

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A bank teller (often abbreviated to simply teller);

It is an employee of a bank who deals directly with customers. In some places, this
employee is known as a cashier or customer representative. Most teller jobs require
experience with handling cash and a high school diploma. Most banks provide on-the-job
training.

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What is 'Trade Finance'

Trade finance relates to the process of banks financing certain activities related to commerce
and international trade. Trade finance includes such activities as lending, issuing letters of
credit, factoring, export credit and insurance. Companies involved with trade finance include
importers and exporters, banks and financiers, insurers and export credit agencies, and other
service providers.

Bank Liquidation

In finance, liquidation is an event that usually occurs when a company is

insolvent, meaning it cannot pay its obligations as and when they come due. The company's
operations are brought to an end, and its assets are divvied up among creditors and
shareholders, according to the priority of their claims.

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Money Market Instruments

In the financial marketplace, a distinction is made between the capital markets and the money
markets.

The capital market is a source of intermediate-term to long-term financing in the form of

equity or debt securities with maturities of more than one year. The money market provides
very short-term funds to corporations, counties and the government.

Money market securities are debt issues with maturities of one year or less. For more
information, review our Money Market tutorial.

Characteristics of Money Market Instruments

Money market instruments give businesses, financial institutions and governments a means to
finance their short-term cash requirements. Their three important characteristics are:

1) Liquidity - Since they are fixed-income securities with short-term maturities of a year
or less, money market instruments are extremely liquid.
2) Safety - They also provide a relatively high degree of safety because their issuers have
the highest credit ratings.
3) Discount Pricing- A third characteristic they have in common is that they are issued
at a discount to their face value.

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What is a Financial Instrument?

Financial instrument is a general term used to describe a monetary asset. Depending on the
type of financial instrument, the owner is entitled to either part ownership in an entity

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(usually a corporation), or payment of interest and return of a principal amount equal to the
face value of the financial instrument.

Technically, savings accounts, loans and even accounts receivables are considered financial
instruments, although they are not as liquid as stocks and bonds because both parties have to
agree to their sale or transfer.

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What is a Bond (with reference to Money Market)?

Most simply, bonds represent debt obligations – and therefore are a form of borrowing. If a
company issues a bond, the money they receive in return is a loan, and must be repaid over
time.

Just like the mortgage on a home or a credit card payment, the repayment of the loan also
entails periodic interest to be paid to the lenders. The buyers of bonds, then, are essentially
lenders. For example, if you have ever bought a government savings bond or treasury bond,
you became a lender to the government. Put differently, bonds are IOUs.

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BANKING INSTRUMENTS

1. Bank Cheque (or Check)

A cheque or check (American English; see spelling differences) is a document that orders a
bank to pay a specific amount of money from a person's account to the person in whose name
the cheque has been issued.

Image of a cheque;

2. Letter of Credit

A Documentary Letter of Credit (LC) is a bank instrument issued from an applicant’s bank
on behalf of a beneficiary to aid in mitigating risk and creating a layer of protection against

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non-payment. Similar to a bank guarantee it aids the beneficiary to have confidence a rated
financial institution will ensure payment for service rendered once all terms and conditions
contractually are met. However, unlike a bank guarantee, the LC, as in the case with a
standby letter, the instrument is required as the mechanism by which payment is made;
whereas bank guarantees are usually only drafted against or called in the event of default.

3. A Bank Guarantee

A Bank Guarantee is a negotiable financial debt instrument made by a Guarantor Bank on

behalf of the applicant to mitigate risk on behalf of the Beneficiary party. It may be used to
assist in trade finance, international trade, domestic trade, and various other types of
contracts where the backdrop of a vetting third-party (the issuing bank) could be used.

When a bank issues a Letter of Guarantee to a Beneficiary bank it looks at the credit
worthiness of the applicant, not the transaction at large. Thus the ability to acquire a
financial instrument like a Bank Guarantee largely is based on the relationship it has with its
client.

4. SWIFT MT799 (Proof of Funds)

There are times when a SWIFT MT799 is required as a bank to bank electronic
communication to verify funds on account. The SWIFT MT799 can also be used to do what
is called a “pre-advise” from one bank to another that another action is about to take place.
The follow up action could be a SWIFT MT760 message.

Common times when a SWIFT MT799 is required are for international import/export trade,
trade finance, bank debenture buy/sell transactions, and prior to a SWIFT MT760 being sent;
whether for the issuances of bank instruments like a Standby Letter of Credit (SBLC), or a
Bank Guarantee (BG); or for blocked funds on a cash collateral account.

5. Certificate Of Deposit - CD

A certificate of deposit (CD) is a savings certificate with a fixed maturity date, specified fixed
interest rate and can be issued in any denomination aside from minimum investment
requirements. A CD restricts access to the funds until the maturity date of the investment.
Depending on its nature it can be called Fixed Deposit Certificate/Receipt- (FDR) or Call
Deposit Receipt/Certificate (CDR)

Difference between RTGS and EFT in Money and Banking

'RTGS' stands for Real Time Gross Settlement. It is an online system through which the
funds can be transferred from one institution to the other in real time and on ‘gross’ basis.

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'EFT' stands for Electronic Fund Transfer. Like RTGS, in EFT settlements, the funds can
also be transferred from one EFT enabled branch of bank to the other EFT enabled branch of
same bank or other bank. EFT operates on a deferred net settlement (DNS) basis and the
settlements are done at particular timings and in batches (Not Real Time basis).

What is a capital reserve in banking?

Capital requirement (also known as regulatory capital or capital adequacy) is the amount
of capital a bank or other financial institution has to hold as required by its financial
regulator. This is usually expressed as a capital adequacy ratio of equity that must be held as
a percentage of risk-weighted assets.

TYPES OF CARDS IN BANKING AS INSTRUMENTS OF PAYMENTS

Payment card is a device that enables its owner (the cardholder) to make a payment by
electronic funds transfer. They include;

1. Credit card

2. Debit card

3. Charge card

4. ATM card

Credit card

The issuer of a credit card (Banks) creates a line of credit (usually called a credit limit) for the
cardholder on which the cardholder can draw (i.e. borrow), either for payment to a merchant
for a purchase or as a cash advance to the cardholder. Most credit cards are issued by or
through local banks or credit unions, but some non-bank financial institutions also offer cards
directly to the public.

The cardholder can choose either to repay the full outstanding balance by the payment due
date or to repay a smaller amount, not less than the "minimum amount", by that date. In the
former case, interest is typically not charged; while in the latter case, the cardholder will be
charged with interest.

Debit card

When purchasing goods with a debit card (also known as a bank card, check card or some
other description) when a cardholder makes a purchase, funds are withdrawn directly either

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from the cardholder's bank account, or from the remaining balance on the card, instead of
the holder repaying the money at a later date. In some cases, the "cards" are designed
exclusively for use on the Internet, and so there is no physical card.

Debit cards can also allow instant withdrawal of cash, acting as the ATM card, and as a
cheque guarantee card. Merchants can also offer "cashback"/"cashout" facilities to customers,
where a customer can withdraw cash along with their purchase. Merchants usually do not
charge a fee for purchases by debit card.

Charge card

With charge cards, the cardholder is required to pay the full balance shown on the statement,
which is usually issued monthly, by the payment due date. It is a form of short-term loan to
cover the cardholder's purchases, from the date of the purchase and the payment due date,
which may typically be up to 55 days. Interest is usually not charged on charge cards and
there is usually no limit on the total amount that may be charged. If payment is not made in
full, this may result in a late payment fee, the possible restriction of future transactions, and
perhaps the cancellation of the card.

ATM card

An ATM card (known under a number of names) is any card that can be used in automated
teller machines (ATMs) for transactions such as deposits, cash withdrawals, obtaining
account information, and other types of transactions, often through interbank networks. Cards
may be issued solely to access ATMs, and most debit or credit cards may also be used at
ATMs, but charge and proprietary cards cannot.

NOTE: The use of a credit card to withdraw cash at an ATM is treated differently to an POS
transaction, usually attracting interest charges from the date of the cash withdrawal. The use
of a debit card usually does not attract interest. Third party ATM owners may charge a fee for
the use of the ATM.

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Difference between Magnetic Strip Card and Smart (Chip) Cards

In magnetic stripe cards data is stored in the Magnetic stripe which can only be read by
physical contact and swiping past a reading head. The magnetic stripe contains all the
information appearing on the card face, but allows for faster processing at point-of-sale than
the then manual alternative as well as subsequently by the transaction processing company.
The magnetic stripe is in the process of being augmented by the integrated chip.

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Smart cards (Chip cards)

A smart card, chip card, or integrated circuit card (ICC), is any pocket-sized card with
embedded integrated circuits which can process data. This implies that it can receive input
which is processed — by way of the ICC applications — and delivered as an output. There
are two broad categories of ICCs. Memory cards contain only non-volatile memory storage
components, and perhaps some specific security logic. Microprocessor cards contain volatile
memory and microprocessor components. The card may embed a hologram to avoid
counterfeiting. Using smart cards is also a form of strong security authentication for single
sign-on within large companies and organizations.

Image of a smart card

EMV is the standard adopted by all major issuers of smart payment cards. EMV chip cards
were originally conceived of by Europay, MasterCard and Visa. They are more secure than
traditional debit and credit cards, because account information stored on cards is encrypted
uniquely each time it is accessed. This makes it more difficult for potential perpetrators of
fraud to pick up useful pieces of information. Traditional debit and credit cards have
magnetic stripes that store data statically.

The EMV standard is defined and managed by the privately held company EMVCo LLC.
The Japan Credit Bureau, China UnionPay, Visa, American Express, MasterCard and
Discover. Each hold a one-sixth interest in the organization.

EMV is short name for for Europay, MasterCard and Visa but they’re also called chip
cards or chip-and-PIN cards. (There's also a variant called chip-and-signature cards.) EMV is
a global payment system, conceived in 1999, that uses a small microchip embedded in the
credit card rather than a magnetic strip.