- This is the process by which banks accept deposit from the public for safe keeping and lending out the deposits in form of loans.
- A bank is a financial institution that accepts money deposits from the public for safe keeping and lending out in terms of loans.

Commercial Banks

- These are financial institutions that offer banking services with a profit motive. Their activities are regulated by the Central bank.

Functions of commercial banks

1. Accepting deposits: They accept deposit from members of the public inform of current accounts, savings account and fixed deposit accounts. Such accounts help individuals to keep money safely.
2. Provision of safe means of payments: They provide safe and reliable means of payment such as cheques, bank drafts, credit transfers, electronic funds transfers etc.
3. Provision of loan facilities: They provide loans to members in form of short term and long term. These loans are repayable with interests thus income to the banks.
4. Facilitates foreign exchange payments: They provide foreign exchange that is used in international trade. They also make payments on behalf of their customers.
5. Provision of safe keeping of valuables: They provide security for valuables to their customers at a fee.
6. Discounting bills of exchange: This is process by which a bank accepts bills of exchange and promissory notes from its customers in exchange of cash less than the face value of the bill or note.
7. Provision of financial information: They advice their clients on financial matters affecting their businesses such as investment option and wise use of loans.
8. Money transfer: They provide varied, safe and reliable means of money transfer. Such means include cheques, standing orders, credit transfers, bank drafts, letters of credit, credit cards, travellers cheques etc.
9. Act as guarantors and referees: They act as guarantors to their customers who want to acquire credit facilities from other financial institutions.
10. Act as intermediaries: They act as a link between the savers and borrowers.
11. Credit creation: This is the process of creating money from the customer deposits through lending.
12. Provision of trusteeship: They can manage a business on behalf of the client especially if the client does not have managerial skills. They can also manage the assets of the deceased client if there was no will.

Types of accounts offered by commercial banks

1. Current account
- This is an account where money deposited can be withdrawn on demand by the customer by means of a cheque. This means that money can be withdrawn at any time during the official working hours so long as the account has sufficient funds.
- This account is also referred to as demand deposits.

Features characteristics of current accounts

• Deposits of any amount can be made at any time.
• Balances in this account do not earn any interest.
• The account holder is not required to maintain a minimum cash balance in this account.
• Withdrawals can be at any time without giving and advance notice as long as the customer has sufficient funds.
• Cheque books are issued to the account holder to be used as a means of payment/ cheques are usually used to withdraw money from the account.
• Monthly bank statements are issued to the account holder.
• Overdraft facilities are offered to the account holders’ i.e the bank can allow customers to withdraw more money than they have in their accounts.

Advantages of current account
1. No minimum balance is maintained hence the account holder can access all his/her money.
2. Withdrawals can be made at any time.
3. Transactions are made easier by use of cheques for example; one does not have to go to the bank in order to make payment.
4. Overdraft facilities are available.
5. It is possible to deposit any amount at any time during the office hours.
6. Use of cheques as means of payment serves as evidence of payments made.
7. Payments can be done even if there are insufficient funds in the account using post dated cheques.
8. The account holder can withdraw any amount at any time without notice as long as there are sufficient funds in the account.

Disadvantages of current account
1. Lengthy procedures of opening the account.
2. The account holder does not earn any income since the balances in the current account does not earn interest.
3. Initial deposit when opening the account is usually high hence discourages prospective customers.
4. Customers are not encouraged to save since they can access their money at any time.
5. Ledger fees are charged on the account making the operations of the account expensive.

2. Savings account (deposit account)
- This is an account operated by individuals and firms that have money to save.
Features of Savings account

• There is minimum initial deposit that varies from bank to bank.
• A minimum balance is maintained at all times.
• The withdrawals are up to a certain maximum within a given period. Withdrawal above this maximum will require notice.
• Account holders are issued with a pass book or a debit card (ATM card) for deposits and withdrawals.
• Overdraft facilities are not allowed.
• Ordinarily, withdrawals across the counter can only be done by the account holder.
• The balance on the account above a certain minimum earns some interest.

Advantages of Savings account
1. Customers are encouraged to save because of the restricted withdrawals.
2. There are relatively low banking charges.
3. Initial deposit is usually low as compared to other accounts.
4. The balances earn interest to account holder hence an incentive to save.
5. ATM facilities have made account operations very convenient to customers.

Disadvantages Savings account
1. A minimum balance must be maintained at all times and the customer is denied access to that money.
2. For across the counter withdrawals, it is only the account holder who can withdraw cash.
3. Withdrawals are restricted and sufficient notice is required before large amounts are withdrawn.
4. The account holders do not enjoy services such as cheque books and overdraft facilities like the current account holders.
5. Easy access to the money through ATM cards encourages overdrawals.
6. Anybody who knows the pin of the card (ATM card) can withdraw money from the account.

3. Fixed deposit account
- This account is also known as time Deposit account. It is maintained by those who have money not meant for immediate use.
- Once money is deposited, there are no withdrawals until the time expires.

Advantages of Fixed deposit account
1. Interest earned is relatively high as compared to savings account.
2. There are no bank charges to the account holder.
3. Money held in fixed deposit account can be used as security to acquire bank loans.
4. Restricted withdrawals encourage savings.
5. The account holder has time to plan for the deposited money.

Disadvantages of Fixed deposit account
1. The account holder may lose the interest if the amount is withdrawn before the maturity time.
2. The initial minimum deposit is relatively high.
3. No further deposit after the first deposit in to the account.
4. A notice is required if you want to terminate the contract before the expiry period.
5. Access to money before the maturity time is not allowed.
6. No partial withdrawal can be made on this account before the expiry of the period.

Requirements for opening an account
- The following are some of the requirements for opening either a current account or a savings account:

• Photocopies of identification documents such as National Identity Card or Passport.
• Passport size photographs (number varies from bank to bank). Some banks are nowadays taking the photographs instead of the customers providing them.
• For current account holders, an introductory letter from an existing customer from the prospective customer’s employer.
• Filling in the application form provided by the bank.
• Signing of the specimen signature cards. Usually two.

NB: Once these requirements are fulfilled, the bank allocates the customer an account number.

Non-Banking financial institutions

- These are financial institutions that offer finances for development purposes to individuals and organizations.
- These institutions address themselves to the needs of specific sectors in the economy.
- They includes: Agricultural finance houses, Housing finance companies, cooperative societies, insurance companies, Development finance institutions, Micro Finance companies.
- They offer the finances inform of either short term or long term loans.
-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 in case 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
• 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.

- Examples include: Kenya Women finance Trust (KWFT), Faulu Kenya (as of 2020).

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	Non-Bank Financial Institutions
- Offer all types of accounts	- Offer only two types of accounts savings and fixed deposit
- Provide both short term and medium term finances to their customers	- Mainly provide medium term and long term finances
- Their finance is not restricted to any sector	- Their finance is restricted to a particular sector
- May offer foreign exchange services	- Do not provide foreign exchange services
- Their finance is mainly for working capital	- They provide capital for development
- Participate in clearing house as they offer cheque	- Do not participate in clearing house since they don't offer
- Offer facilities for safe keeping of valuable items such as title deeds	- Do not offer facilities for safe keeping of valuable items
- Always in direct control of the central bank	- Not usually in direct control of the central bank
- May offer overdraft facilities to their customers	- Do not offer overdraft facilities to their customers

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

Compulsory deposit requirements
- The commercial banks are required to maintain a certain amount of deposits with the central bank which will be held in a special account where the money stays frozen. This reduces the amount of money that the commercial banks hold and are able to spend in their operation, influencing the supply of money in the economy.
- The deposit may be increase to reduce the amount of money in the commercial banks, or reduced to increase the amount of money in the commercial banks.

Selective credit control
- The central bank may issue a special instruction to the commercial bank and other financial institution only to lend more in a particular sector to control the amount of money reaching the economy. The instruction may be removed, if the bank feels that the supply in the economy has reduced and needs to be increased.

Directives
- The central bank may issue a directive to the commercial banks on the interest rate they should charge on their lending and to increase or reduce the margin requirement for borrowing to make it harder or easier for the customers to obtain loan.
- Margin requirement is the proportion of money expected to be raised by the client to finance the project he/she wants to obtain the loan for, before being given a loan to complete the project with.

Request (Moral suasion)
- The central bank may appeal to other financial institutions to exercise restrain in their lending activities to the public to help in controlling the money supply.

Trends in Banking

- These are the positive changes that have taken place in the banking sector to improve their service deliveries to their customers. They include;

• The use of Automatic Teller Machines (ATMs), which has made it possible for the customers to access their money any time of the day. The ATM cards that are used for withdrawals from the ATM machines can also be used as a debit card to make purchases.
• Networking all their branches, which has enable the customers to carry out their transactions in any of the branch.
• E-Banking, which is the banking through the internet. This has made it possible for the customers to transact their financial businesses on-line.
• Relaxation of some of the conditions on opening and operating some of the accounts to make them be more attractive to their customers.
• Offering varieties of products which includes easier credit facilities to their customers to attract more customers.
• Liberalization of foreign exchange dealings by licensing Forex bureaus to offer services to the customers, improving the accessibility to the service.
• Improving the customers care services, with some bank setting up a departments known as the customer care department to offer detailed assistance to their customers.
• Allowing non bank financial institutions to offer banking services to the members of the public, for example; KWFT, SACCOs, FOSA, Faulu Kenya, etc
• Mobile Banking services (M-Banking), which allows the customers to carry out their financial transactions over their mobile phones. It has brought about several benefits/ advantages to their customers which includes;

Advantages of m-banking

1. Easy transfer of funds from one account to the other in the same bank (inter account transfer).
2. Easy transfer of money from ones account to his mobile phone for other transactions.
3. Ability to check ones account balance in the bank with ease.
4. Easy to monitor your financial transactions by checking your transaction details over the phone.
5. Easy payment of the bills such as electricity bill, Dstv bills, etc and other wages.
6. Ability to transfer money from one mobile number to other in collaboration with the service providers.
7. Easy request for new cheque books and bank statements from the banks.
8. Able to top up air time to your mobile phones in collaboration with the service providers.
9. Reduced risk of carrying large sums of money in cash or cheques that may be stolen.

Disadvantages of m-banking

1. Registration to enjoy all these services must physically be done in the banking hall, which subject the customers to stress queues of the bank.
2. Only the registered mobile number can carry out these transactions which limits the customer to only using one number.
3. Users requires a mobile phone with a screen that can display the transaction which a times some may not a ford.
4. Mobile phones can easily be lost or stolen from the owner, inconveniencing him from carrying out the transactions.
5. Bank transaction information may load slowly, which may makes it expensive for the user.
6. Possibility of transferring the funds to a wrong account, due to error in typing of the account number.
7. Introduction of agency banking, which has made them to make their services to be more accessible to even areas where they may have not put up a banking hall.

- Agency banking is whereby a retail stores, supermarket, or any other commercial businesses are authorized by the financial institutions to carry out financial transactions on their behalf. They may offer the following services;

• Receiving customer deposits.
• Offering withdrawal services.
• Transfer of funds for customers.
• Pay bills for the customers.
• Balance inquiry services.
• Opening new accounts for the customers.
• Fill loan application forms for them.

Advantages of agency banking

1. Reduction of set up and delivery cost to the banks, which in turn passes to the customers in form of reduced cost of accessing services.
2. Time saving as the agents are located close to the customer and the customer may carry out other transactions as he withdraw the money.
3. More convenient for the customer to bank with their local retailers other than the traditional banking halls.
4. Enable the bank to reach far places within the country.