1

CAT

Student’s Name

Professor’s Name

Institution

Course ID

Date
 2

Question 1.

i. Explain the main types of banking innovations.

Innovation means the introduction of new things; which banks did not practice banks before.

One of the fundamental things we need to note is that banking worldwide has undergone

dramatic changes over the last ten years. In Africa, most indigenous banks have now overtaken

the traditional global financial institutions in what has been attributed to economic liberalization,

institutional and regulatory upgrades, and technology that have much transformed the face of

financial systems across the region. Innovations have helped the banking sector across the

continent, particularly helping Africa leapfrog the most traditional banking models. These

innovations have shaped how people interact with one another and their behaviour.

a) Mobile Technology- It's a revolution that has changed the majority of banking practices

and systems. This technology is fueling growth, creating new opportunities, and

disrupting the way business has traditionally been conducted. For instance, the

introduction of the mobile money transaction platform MPESA in 2007 has been

acclaimed as a significantly disruptive technology. It allows customers using

smartphones to make and receive payments digitally in the comfort of their homes.

b) The introduction of the FINTECH industry-It began as disruption, a wave; however, it

quickly takes many shapes by getting organized. It is changing how financial services are

being offered. It has become a trailblazer hence redefining the financial sector in the

region and globally. The paperless money transactions are the new normal made by the

fintech.
 3

c) The internet Banking- the internet banking is also known as Online banking or web

banking. In the last few years, the internet has increased drastically, helping customers

perform their transactions effectively without going to the banking hall.

d) Introduction of Card-less ATM services- This is the industry's innovation, which has

enabled customers to perform their transactions easier and swiftly at ATM without a

debit card. It allows withdraws, pays bills, checks balance, and requests a min statement.

e) Digital innovations-It the most important that has taken place in the banking industry for

the last few years, thus allowing a customer to access a wide range of services in real-

time with the use of friendly banking and mobile devices hence handling almost the basic

banking transactions.

ii. Explain the CAMEL approach as a measure of bank performance.

The importance of evaluating bank performance has been given attention both locally and

internationally. The use of financial ratios to measure the overall financial health was somewhat

limited in scope. Five considered the CAMEL (Acronym representing five factors) rating system

to assess its performance wholly. It was started early in the 1970s in the USA by the federal

regulators to regulate possible risks in the banks and bridge the gap. The bank regulators use a

rating of one to five to measure a bank's performance as part of the CAMEL system. Below are

the five factors used to evaluate the strength of a bank

C → Adequacy Capital- Capital adequacy is used to measure the bank's ability to comply with

the regulation to maintain the minimum reserve amounts and the institution's position by looking

at the trend, composition, and liquidity of capital.

 4

A → Quality of Assets- under this factor, the quality of every bank asset is assessed. The assets

value like loan can be impaired rapidly; therefore, checking the quality is essential. This is

weighted by looking at the bank policies to invest and loan practices together with credit risks.

M → Management Capability-It assesses the ability of the management team to identify stress-

free finances and then react. The bank's strategy quality and plans are determined here, which

involves accumulating capital, growth rate, and identifying huge risks.

E → Earnings ability Earnings evaluates the viability of the bank in the long run. The authority

checks on the earnings' stability to enable the institutions to grow their operations and maintain

their competitiveness.

L → Liquidity_ This category evaluates the risk of the interest rate and liquidity. Inadequate

liquidity can lead to a bank run.

Each of the five factors is rated from one to five, with one being the most robust rating.

The overall composition of the CAMEL rating also ranges from one to five. The CAMEL rating

is used to categorize banks based on their financial soundness or health, status, and management.

A rating of 1 implies a bank exhibits good performance and complies with regulations. In

contrast, a scale of 5 denotes the lowest rating showing that the institution is at risk of unsound

management.

iii. Explain the concept of lending and lending risks in commercial banks.

Lending is the primary role of commercial banks, as evidenced by vast loans that

comprise banks' assets. Commercial banks give credit to both public and private sectors of the

economy. The concept of lending in the commercial bank is guided by credit policies that

involve various parameters. These parameters include: credit scoring, verification, credit
 5

reference, and customer affordability and known as debt service ratio. The employees must

observe these policies before granting or denying a lending request. There is the minimum

information required for verification, and thorough appraisal is done before a facility is released.

Good lending policies provide and encourage fundamental practices in the bank. The adoption of

digital finance has fueled the lending and advancement of credit.

When lending money, there are risks that commercial banks might take in full, or in part

that chances are they may lose in case loanees don't pay. When banks are issuing loans to a

person or companies, there is a possibility they won't payback, and this what we call credit risk.

However, the banks have their way of minimizing this risk.

Another risk associated when banks’ lending money is reputational risk. This is a

risk accrued due to human errors, and the losses from it can be huge. Also, we have market risk;

for instance, the change of government policies can have a significant impact on the money

lending institutions, especially the introduction capping interest rates. Liquidity risk is also

another risk that affects the lending institutions. The inability of a bank to meet its cash

obligations can also affect the lending obligations.

Question 2

i. Explain the monetary policy concept clearly, stating the tools of monetary

policy.

Monetary policy is the central bank's macroeconomic policy to regulate the money supply

in the economy and interest rate. It is used to manage inflation and unemployment. It is

formulated and implemented via different tools by the central bank. This includes adjusting the

interest rates, buying government securities, and controlling the cash flow in the economy. The
 6

government's demand side is to achieve macroeconomic objectives like inflation, growth,

consumption, and liquidity. The tools used by the Central bank to implement the policy include:

 Adjusting interest rate- The central bank influences the interest rate by changing the

discount rate, which is the rate at which it charges commercial banks for short term loans;

when the central bank increases the discount rate, the cost of borrowing goes up, and

banks will set their customer at high rate-when cost of borrowing is high, leads to low

borrowing hence lowering money supply in the economy.

 Change of reserve requirements Central banks set up the minimum amounts of reserves

to be held by banks, influencing the money supply. If it increases, there is less money to

lend to customers by banks, hence reducing the supply.

 When central banks sell or buy the securities issued by the government money supply,

such as purchasing government bonds, banks obtain more money, increasing their

lending and, subsequently, cash in the economy.

ii. Explain the primary contact of monetary policy in the banking sector.

The leading player in the monetary policy is the central bank to ensure a stable and consistent

money supply in the economy, and the government sets the prices. The principal objective of this

policy is to maintain price stability which aims at keeping the inflation. The central bank takes

action to maintain a low and stable inflation rate.

iii. Explain the main conflicting aspects in the goals of monetary policy in the

banking sector.

The monetary policy's goals or objectives include reasonable price stability, high

employment, faster economic growth, and exchange rate stability. In the long run, the economy
 7

does not experience conflict between price stability and economic development, but there is a

trade-off between them in the short run. This is because a quick economy will be realized via

advancing credit at a low-rate interest, increasing the money supply in the economy and vice

versa. An increase in consumer demand will prompt commodity prices to go up and cause

inflation hence raising the question' what is the minimum amount of money to remain in

circulation that doesn't act as growth- retarding factor.

Also, there is no conflict between the exchange rate stability and economic growth. If the

shilling depreciates in terms of the dollar, the central banks have to tighten their policies by

raising interest rates and reducing the banks' liquidity, which is in excess. To promote faster

economic growth, the bank has to lower interest rates and make more credit to the private sector,

which again fosters a dilemma.