THE CATHOLIC UNIVERSITY OF EASTERN AFRICA

FACULTY OF LAW

UNIT TITLE: BANKING LAW

UNIT CODE: CLS 305

LECTURER: DR. ANDY CONS MATATA

STUDENT’S NAME: OCHWADA E. VANCE

REGISTRATION NO. : 1034786

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 QUESTION: Banks and the banking system evolved into a vital socio-economical

institution in the modern age and is a backbone of any country. Discuss the above

statement.

SUBMISSION DATE: 17TH JUNE 2021

Financial institutions, of which banks are part of, are of great importance to any economy. Banks
contribute to numerous positive developments within the financial services sector. Through the
various fundamental roles that banks play, banks increasingly channel resources towards various
sectors that drive sustainable economic growth and development. In Kenya, banks have proven
to be an important driver of the economy’s prosperity while contributing to programs that have
immediate and long term impacts on the society. This paper aims to highlight in detail the
importance of banks and the banking system here in Kenya as a vital socio-economical
institution.

First and foremost, the Kenyan banking industry has proven to be innovative when it comes to
financing Small and Medium-sized enterprises (SMEs). Banks have been a major go-to solution
for the increasing number of SMEs that are now able to access funding from commercial banks.
This is so simply because banks in Kenya do not shy away from supporting SMEs; in fact, they
actively compete to channel investments towards growing these businesses1. Banks are
continually developing unique solutions, including structured financing, cash management
consulting, innovative savings products, client relationship management structures and various
other services in order to harness the business potential SMEs present. This reinforces the view
that commercial banks see SMEs as an important component with substantial growth potential
thus stimulating economic activity in the community. Hence, it is evident from the above
argument that the banking industry is a vital socio-economic institution and plays an important
role in financing SMEs, subsequently promoting economic activities in the community

1
FinAccess Business – Supply: Bank Financing of SMEs in Kenya (September 2015)

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Secondly, banks are at the forefront of promoting financial inclusion in order to reach the
“unbanked” and the “underbanked”. Financial inclusion means that individuals and businesses
have access to useful and affordable financial products and services that meet their needs 2 i.e.
transactions, payments, savings, credit and insurance. Financial inclusion is regarded as an
important measure of economic development simply because it is a critical step towards poverty
reduction. Besides making financial markets accessible, strategies meant to enhance financial
inclusion help reduce socio-economic barriers, thus enabling the poor and unreached to save and
access credit from formal financial services. The rapid uptake of financial products in Kenya has
been driven largely by, among other factors, the mobile phone money transfer revolution led by
M-Pesa and the role banks have played in integrating mobile payment platforms into their
service delivery models. In addition, the agency banking model that was introduced in 2010 has
gained significant traction, enabling many Kenyans to access banking services within a short
distance from their homes or businesses3.

Currently, Kenya is ranked second behind South Africa in the proportion of citizens with access
to financial services in Africa4; which simply illustrates the importance of banks and the banking
system in Kenya as a vital socio-economic institution through its promotion of financial
inclusion to a large percentage of our society.

The third way that banks and the banking system are evident as a key socio-economic institution
is that they have proven to be a major source of employment opportunities in Kenya both directly
and indirectly. As mentioned in the preceding point, the agency banking model was introduced in
2010 and this created a source of employment, especially among the youth in rural areas, through
the establishment of bank agents. Furthermore, since most banks here in Kenya are actively
involved in financing Small and Medium-sized Enterprises (SMEs), this subsequently
contributes to creation of employment opportunities simply because every small business on
average creates employment for approximately 10 people and for every job created there is a
multiplier effect as the money spent from their income further stimulates economic activity in

2
https://www.worldbank.org/en/topic/financialinclusion.
3
Central Bank of Kenya Annual Bank Supervision Report (2014)
4
Financial Access in Kenya: Results of the 2006 National Survey.

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their local community5. Thus, we see the importance of banks and the banking system in Kenya
as a vital socio-economic institution through its promotion of employment opportunities.

Another way we see the importance of the banking industry in Kenya is through the banks’
contribution to Government Revenue. One of the ways banks contribute to Government revenue
is through payment of corporate taxes which serves as a key aspect of the industry’s role in
promoting economic development. It should however be noted that Banks’ contribution to
Government revenue goes beyond corporate taxes. When factoring in the other taxes, including
payroll taxes arising from the industry’s 30,000 workers 6, the banks’ contribution to the
Government’s tax revenue is much higher. Yet another form of contribution that banks make
directly to Government revenue is through funding public sector initiatives through direct
subscription to instruments such as infrastructure bonds. Hence we clearly see the banking
industry’s role in the promotion of economic development through contributing to Government
Revenue.

The fifth way banks serve as a vital socio-economic institution is through their role as financial
intermediaries. Financial intermediation is the process of matching for a fee the needs of the
ultimate lenders i.e. the possessors of surplus loanable funds in the personal, corporate and
public sectors, with those of the ultimate borrowers i.e. the individuals, units or sectors in the
economy which are in need of liquid funds7. As a bank functions as an intermediary, it takes on
certain risks, removing these risks from savers. This activity encourages saving and, hence,
increases the funds available to borrowers for productive uses within an economy. Furthermore,
it can be argued that as a result of this activity encouraging saving, it ultimately encourages
individuals to put their money to good use as the interest accrued through the savings can be
termed as a form of investment of one’s surplus funds.

The sixth way the importance of the banking industry is evident is through the involvement of
banks in community development projects. Over the years, commercial banks in Kenya have not
only acted as financial intermediaries, but also invested increasingly in community development
projects. Commercial banks have been investing in cause-related sponsorships primarily in the

5
Ingrid Johnson and Nedbank: Business Banking Case Study by Ingrid Johnson
6
Central Bank of Kenya Annual Bank Supervision Report (2020)
7
Gardner, M. J. (2000). Managing Financial Institutions, Fourth Edition, The Dryden Press.

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area of sports talent development. Among the causes that have been supported is the Baringo
Half Marathon that has been sponsored by ABC Bank since the year 2013. The event draws
athletic talent from across the country and is endorsed by the Paul Tergat Foundation. Another
more popular and more historic cause supported is the KCB Safari Rally that generally happens
every year between the months of June and July, sponsored by the Kenya Commercial Bank,
which happens to be both a tourist attraction as well as a sport development project. Hence we
see the banking sector being of great importance through the involvement in community
development projects.

A seventh importance of the banking industry is its contribution in funding education to children
and young individuals who come from poor or disadvantaged backgrounds. Across the country,
there is evidence of a number of high-impact projects initiated by commercial banks to uplift the
standards of living among the different communities in which they operate. One key area that
banks especially support is the area of Education. The education sector is Kenya’s top priority
and by the same measure the banking industry is playing its part to support the national agenda 8.
As a result many banks, some through their foundations, as in the case of the Co-Op Bank
Foundation and Equity Bank’s ‘Wings to Fly’ program, and others through their corporate social
investment budgets, sponsor poor but bright students from disadvantaged families to pursue
secondary school, tertiary education and university studies. In conjunction with these efforts,
beneficiaries also gain from mentorship opportunities through the thousands of bank employees
and affiliates who volunteer their time to mentor these young bright individuals.

It cannot be understated how important the banking industry is, especially during these times of
the Corona Virus Pandemic, to the health sector. The Covid-19 Virus was declared a global
pandemic in March 2020 by the World Health Organization. When the first Covid-19 case was
announced in Kenya, around the same time, the Central Bank of Kenya immediately took a
frontline position to ensure the Kenyan financial sector remained resilient despite the threats
posed by the pandemic and this subsequently led to instituting a series of emergency measures to
mitigate the health and economic effects of the pandemic 9. The measures were informed by: the
need to reduce cash transactions and facilitate digital transactions to abate the risk of Covid-19

8
Highlights from the Budget Speech by Kenya’s CS for the National Treasury, Henry Rotich (2014/15) published
by The Standard Digital Reporter and Reuters.
9
Central Bank of Kenya Annual Bank Supervision Report (2020)

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transmission; the need to cushion borrowers from the likely adverse economic effects arising
from the pandemic; supporting operations of the financial institutions by ensuring there was
adequate liquidity to support both banks and borrowers as a result of the pandemic; and ensuring
health and safety of bank customers and staff among other vital aspects. Thus it is clearly evident
how vital the measures taken by the banking industry are to ensure safety of the citizens for their
health and also financial concerns.

Finally, one of the most common roles and importance of the bank and banking system is easing
financial transactions between parties. One of the mechanisms that exist to facilitate this is the
National Payment System. The National Payment System (NPS) is a core component of the
broader financial system and serves as the platform that provides the economy with highways for
processing payments resulting from various economic activities. It encompasses all payment
related activities, processes, mechanisms, infrastructure, and institutions 10. Advancements in the
nation’s NPS strategy are primarily promoted by the Government of Kenya which has taken
major steps towards driving the digital payments agenda across all public sector operations. Most
recently, the National Transport and Safety Authority has issued regulations that require
operators of public service vehicles to collect fares using electronic systems as well as the
traditional method and already, there are ongoing initiatives by commercial banks to tap into
these opportunities. Other than easing transactions, the aforementioned practice can also be a
beneficial factor in reducing cash transactions and facilitating digital transactions to abate the
risk of Covid-19 transmission and thus being more beneficial given the current situation in the
country and the need to go ‘cashless’. Thus the importance of the banking sector as a vital socio-
economic institution can once again be witnessed in that it eases financial transactions between
parties.

In conclusion the bank and banking system are indeed a vital socio-economic institution and the
backbone of Kenya’s economy. The discussion contained in this paper has clearly and in a
detailed fashion laid out how important the banking industry is in Kenya across various sectors,
from creation of employment; contribution to Government revenue; funding education among
the disadvantaged among other aspects with the list being exhaustive. The banking sector truly is
the backbone of Kenya.

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Kenya National Payments System Vision and Strategy 2021-2025

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BIBLIOGRAPHY

 Central Bank of Kenya Annual Bank Supervision Report (2014)

 Central Bank of Kenya Annual Bank Supervision Report (2020)
 FinAccess Business – Supply: Bank Financing of SMEs in Kenya (September 2015)
 Financial Access in Kenya: Results of the 2006 National Survey.
 Gardner, M. J. (2000). Managing Financial Institutions, Fourth Edition, The Dryden
Press
 Highlights from the Budget Speech by Kenya’s CS for the National Treasury, Henry
Rotich (2014/15) published by The Standard Digital Reporter and Reuters.
 https://www.worldbank.org/en/topic/financialinclusion.
 Ingrid Johnson and Nedbank: Business Banking Case Study by Ingrid Johnson
 Kenya National Payments System Vision and Strategy 2021-2025

LIST OF REFERENCES

 Banking Act CAP 488

 CBK (1972) Money and Banking in Kenya.
 CBK Annual Reports (2011-2020)
 Central Bank of Kenya Act CAP 491
 Gardner, M. J. (2000). Managing Financial Institutions, Fourth Edition, The Dryden
Press.
 Kenya National Payments System Vision and Strategy 2021-2025

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 Obiero, D. (2002), The banking sector regulatory framework in Kenya: Its adequacy in
reducing bank failures, an Unpublished MBA Project, U.O.N.
 Oloo, O. (2002) "Kenya's Banking Sector is making a shaky recovery". Market
Intelligence - The Business and Finance Journal, June, 2002,