October 2022

What is Internal Control System?  The internal control structure of a company consists of the policies and procedures established to provide reasonable assurance that specific entity objectives will be achieved. Objectives of Internal Control System To ensure that the business transactions take place as per the general and specific authorization of the To make sure that there is a sequential and systematic recording of every transaction, with the accurate amount in their respective account and in the accounting period in which they take place. It confirms that the financial statement fulfils the relevant statutory To provide security to the company’s assets from unauthorized use. For this purpose, physical security systems are used to provide protection such as security guards, anti-theft devices, surveillance cameras, To compare the assets in the record with that of the existing ones at regular intervals and report to the those charged with governance (TCWG), in case any difference is To evaluate the system of accounting for complete authorization of the To review the working of the organization and the loopholes in the operations and take necessary steps for its To ensure there is the optimum utilization of the firm’s resources, e. men, material, machine and money. To find out whether the financial statements are in alignment with the accounting concepts and principles. An ideal internal control system of an organization is one that ensures best possible utilization of the resources, and that too for the intended use and helps to mitigate the risk involved in it concerning the wastage of organization’s funds and other resources. Preventive Controls: These controls are introduced in the firm to stop errors and irregularities from taking Detective Controls: These controls are implemented to reveal errors and irregularities, once they take Corrective Controls: These controls are designed to take corrective action for removing errors and irregularities after they are The type of internal control system implemented in the organization will be based on the company’s nature and requirements. Internal Control System is important for every organization, for efficient management as well as it also assist in the company’s audit. It includes all the processes and methods to help the company in reaching its ultimate objective. Components of Internal Control System 1. Controlling the environment The control environment is the basis of other elements of all other components of the internal control system. Moral values, managerial skills, the honesty of employees and managerial direction, etc. are included in the controlling environment. 2.       Risk assessment After setting up the objective of business, external and internal risks are to be assessed. The management determines risk controlling means after examining the risks related to every objective. 3.       Control activities The management establishes a controlling activities system to prevent risk associated with every objective. These controlling activities include all those measures that are to be followed by the employees. 4.       Information and communication Relevant information for taking decision are to be collected and reported in proper time. The events that yield data may originate from internal or external sources. Communication is very important for achieving management goals. The employees are to realize what is expected of them and how their responsibilities are related to the activities of others. Communication of the owners with outside parties’ like’s suppliers is also very important. 5.       Monitoring When the internal control system is in practice, the organization monitors its effectiveness so that necessary changes can be brought if any serious problem arises. Responsibility for Internal Control System It is the general responsibility of all employees, officers, management of a company to follow the internal control system. The under-mentioned three parties have definite roles to make internal control system effective: 1.       Management Establishment and maintenance of an effective internal control structure mainly depends on the management. Through leadership and example or meeting, the management demonstrates ethical behavior and integrity of character within the business. 2.       Board of directors The board of directors possessing a sound working knowledge gives directives to the management so that dishonest managers cannot ignore some control procedures. The board of directors stops this sort of unfair activity. Sometimes the efficient board of directors having access to the internal audit system can discover such fraud and forgery. 3.       Auditors The auditors evaluate the effectiveness of the internal control structure of a business organization and determine whether the business policies and activities are followed properly. The communication network helps an effective internal control structure in execution. And all officers and employees are part of this communication network. Characteristics of a Proper Internal Control System  An effective internal control system includes organizational planning of a business and adopts all work-system and process to fulfill the following targets: Safeguarding business assets from stealing and Ensuring compliance with business policies and the law of the Evaluating functions of each employee and officer to increase efficiency in Ensuring true and reliable operating data and financial It is to be kept in mind, a business organization, be its small or large, can enjoy the benefits of adopting an internal control system. Prevention of stealing-plundering and wastage of assets is a part of the internal control system. Protection of assets A business organization protects its assets in the following ways: 1.      Segregating the duties of the employees Segregation of the duties of the employees means that each employee is assigned with specific tasks. The person in charge of assets is not allowed to maintain accounts of the assets. Some other person maintains the accounts of these assets. Since different employees perform the same nature of transactions, the work of each is automatically checked. Segregation of the duties of the employees of an organization reduces the possibility of stealing assets and if stolen, detection becomes easier. For example, there is no scope for stealing cash by a cash-receiving employee where cash receipts accounts are maintained by a different employee. 2.      Assigning specific duties to each employee The employee assigned with a specific duty is held responsible for his assigned activities. If and when any problem arises

Definition of Cheque  A cheque is a type of bill of exchange, used for the purpose of making payment to any person. It is an unconditional order, addressing the drawee to make payment on behalf the drawer, a certain sum of money to the payee. A cheque is always payable on demand, i.e. the amount is paid to the bearer of the instrument at the time of presentment of the cheque. It is always in writing and signed by the drawer of the instrument. There are three parties involved in case of cheque: Drawer: The maker or issuer of the Drawee: The bank, which makes payment of the Payee: The person who gets the payment of the cheque or whose name is mentioned on the It should be noted that the issuer must have an account with the bank. There is a specified time limit of 3 months, during which the cheque must be presented for payment. If a person presents the cheque after the expiry of 3 months, then the cheque will be dishonored. The various types of cheques are: Electronic Cheque: A cheque in electronic form is known as an electronic Truncated Cheque: A cheque in paper form is known as truncated Bill of Exchange: The legal definition is “A bill of exchange is an instrument in writing containing an unconditional order signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.” It means that if an order is made in writing by one person on another directing him to pay a certain sum of money unconditionally to a certain person or according to his instructions or to the bearer, and if that order is accepted by the person on whom the order was made, the document is a bill of exchange. The following is a specimen of bill of exchange: 3. Cheques are also included among negotiable instruments. In the specimen bill of exchange shown above, M/s Lakhmi Chand & Sons are the drawers as well as the payees of the bill of M/s Aggarwal Stores are the drawees and the acceptors of the negotiable instrument. The drawees become habile to pay for the bill of exchange only after they have accepted it. Before acceptance, a bill of exchange is known as a draft. The following are the advantages of bills: Presumption of consideration: In a bill, consideration is presumed. In other words, the Court presumes that the acceptor of the bills of exchange or maker of the promissory note is indebted to the drawer of the bill or payee of the promissory note. It is a big advantage. In the absence of the bill, the seller of goods and services or the lender of the money has to prove the indebtedness of the purchaser or borrower in case of a default. 2. No locking of money: A bill provides the payee an option either to wait for money till the date of maturity of the bill or to get cash at any time by getting the bill discounted with the bank at a reasonable rate of interest. The bill can also be used to discharge the liability to a creditor by endorsing the bill in the creditor’s favour. Thus, the seller need not keep the money locked up for the period of credit allowed by him to the customer. 3. Source of finance:  Accommodation bills enable the businessmen to obtain funds at a low rate of interest to meet their temporary financial requirements. 4. Safe and convenient means of transmitting money:  Bill is a safe and convenient means of transmitting money by one person to the other; one can avoid the risk of carrying currency by using a bill. 5. Planning by creditors:  A bill fixes the exact date of payment. The creditor knows when he is required to make payment and can make arrangements accordingly. There are three parties involved in the bill of exchange, they are: Drawer: The maker of the bill of Drawee: A person on whom the bill is drawn, e., the person who gives acceptance to make payment to the payee. Payee: The person who gets the There are three days of grace allowed to the drawee, to make payment to the payee, when it becomes due. You might wonder about the days of grace, let’s understand it with an example: A bill is drawn on 5-10-2014 in the name of X, to make payment to Y after 3 months. The bill will become due on 5-01-2015 while the date of maturity is 8-01- 2015 because of 3 days of grace are added to it. The following are the types of bill of exchange: Inland Bill Foreign Bill Time Bill Demand Bill Trade Bill Accommodation Bill Key Differences Between Cheque and Bill of Exchange An instrument used to make payments, that can be just transferred by hand delivery is known as the An acknowledgment prepared by the creditor to show the indebtedness of the debtor who accepts it for payment is known as a bill of exchange. A Cheque is defined in section 6 while Bill of Exchange is specified in section 5 of the Negotiable Instrument Act, 1881 The drawer and payee are always different in the case of a In general, drawer and payee are the same persons in the case of a bill of exchange. The stamp is not required in Conversely, a bill of exchange must be stamped. A cheque is payable to the bearer on As opposed to the bill of exchange, it cannot be made payable to the bearer on demand. The cheque can be crossed, but a Bill of Exchange cannot be There is no days of grace allowed in cheque, as the amount is paid at the time of presentment of the cheque. Three days of grace are allowed in the bill of A cheque does not need acceptance whereas

Different types of bank accounts serve different needs. Depending on your goals, it’s wise to put money into the best account and use the right tools for spending and saving. Doing so allows you to maximize the return from your bank, minimize fees, and manage your money conveniently. Most banks and credit unions offer the following types of accounts, which we’ll cover in detail below: Savings accounts Checking accounts, including interest checking Money market accounts Certificates of deposit (CDs) Retirement accounts 1.       Savings Savings accounts are typically the first official bank account anybody opens. Children may open an account with a parent to begin a pattern of saving. Teenagers open accounts to stash cash earned from a first job or household chores. Savings accounts are an excellent place to park emergency cash. Opening a savings account also marks the beginning of your relationship with a financial institution. For example, when joining a credit union, your “share” or savings account establishes your membership. Good For Your first bank account: Kids, adults looking for a place to park savings or extra Drawbacks: Savings accounts typically yield a low-interest rate in comparison to money market accounts and CDs. They do not come with a debit card for purchases, and banks limit some types of withdrawals to six per Savings Account Tips: Online savings accounts pay the most interest and charge the lowest If local banks and credit unions are too expensive, look at online-only options. To build up your savings account, drop a lump sum of cash into an account or set up automatic monthly deposits into Checking Checking accounts provide you with a basic account to deposit checks, make withdrawals, and pay bills. Paper checks, though slowly losing popularity, are key features of checking accounts. More recently, the debit card (or check card) has taken over as a primary form of payment from checking accounts. Most banks now offer online bill pay services through checking accounts, helping to streamline payments. Good For: Anyone who needs a place to deposit a paycheck or cash, those who keep a relatively small balance, and people who enjoy the convenience of a check Drawbacks: Checking accounts are subject to a variety of fees, which can become expensive quickly. But many checking accounts let you skip maintenance fees and minimum balance Checking Account Tips: Balance your checking account every This exercise helps you manage your money, avoid fees, and spot fraud or errors before they cause major problems. Set up direct deposit of your wages into That way you get your money quickly, and you don’t need to visit a bank branch or ATM. For day-to-day spending, you might be better off using a credit card instead of a debit If there’s a problem with your debit card (an erroneous charge or the card number gets stolen, for example), an empty checking account can cause significant problems. 2.       Money Market Accounts  A money market account earns more interest than either a savings or checking account but combines features of both. For those who tend to carry higher balances in checking accounts, these can be a great option to park cash. The higher rates mean your cash is working for you and earning interest. Good for: People who hold average balances in their account of $5,000 or more and want to earn higher interest rates. Drawbacks: Some money market accounts have significant minimum balance requirements ranging from $5,000 to $10,000. Interest rates can be low, and you need to monitor Withdrawals are typically limited to three or so per month. Money Market Tips: Money market accounts can be a good place for larger emergency savings You won’t access the money frequently, but it’s there when you need it. If you can’t find an affordable money market account, look at online banks and cash management accounts, which are typically low-cost 3.       Certificate of Deposit (CD) A CD account usually allows you to earn more than any of the accounts listed above. What’s the catch? You have to commit to keeping your money in the CD for a certain amount of time. For example, you might use a six-month CD or an 18-month CD, which means you have to keep your funds locked up for six or 18 months. Learn more about how CDs work and how to use them. Good for: Money that you don’t need to spend any time You’ll earn more by locking it up for a while. Drawbacks: If you want to pull your funds out early, you’ll have to pay a penalty. That penalty might wipe out everything you earned, and even eat away at your initial deposit. In rare cases, banks refuse to honor early withdrawal requests, and you have to wait until the term ends. CD Tips: If you’re concerned about locking up all of your money, set up a basic CD ladder that makes a portion of your savings available Some banks offer flexible CDs that let you withdraw money early—without Those products might be a good fit for your needs but learn about the tradeoffs before you use them. 4.       Retirement Accounts Retirement accounts offer tax advantages. In very general terms, you get to avoid paying income tax on interest you earn from a savings account or CD each year. But you may have to pay taxes on those earnings at a later date. Still, keeping your money sheltered from taxes may help you over the long term. Most banks offer IRAs (both Traditional IRAs and Roth IRAs), and they may also provide retirement accounts for small businesses. Good for: Saving for your Retirement accounts can make it easier (by easing your tax burden) to save money, and they might result in larger account balances over the long-term. Drawbacks: Any tax benefit you get comes with strings Read up on your account agreement and ask your banker about the rules (including rules for eligibility). Speak with your tax preparer or a CPA to verify how your taxes may be affected

The Central Bank is the banker for the government, encompassing the national government, government ministries, departments & agencies (MDA’S) and county governments. These institutions hold a variety of accounts with the Central Bank, depending on their needs, which allow them to receive deposits and make payments. The Central Bank monitors these accounts to ensure that the institutions aren’t at risk of overdraft, and also advises the institutions on financial matters. Banking Services to the Government The Central Bank is the banker for the government, encompassing the national government, government ministries, parastatals and county governments. These institutions hold a variety of accounts with the Central Bank, depending on their needs, which allow them to receive deposits and make payments. The Central Bank monitors these accounts to ensure that the institutions aren’t at risk of overdraft, and also advises the institutions on financial matters. Kenya Revenue Authority As a parastatal, the Kenya Revenue Authority (KRA) houses its main tax collection account at the Central Bank. While select commercial banks are authorized to hold collection accounts on behalf of KRA, allowing the general public to conveniently make tax payments, money collected in those accounts is deposited into the main account at the Central Bank. Because the tax collection account is held at the Central Bank, funds deposited into the account cannot be interfered with. Once payments are deposited into the KRA account, they can only be transferred with permission from the Ministry of Finance. Banking Services to the County Governments The County Governments, which comprise the County Executives and County Assemblies also maintain various accounts at the Central Bank of Kenya which include: Recurrent Accounts Development Accounts Deposit Accounts County Projects Accounts County Assembly Accounts These accounts are used to facilitate receipt and payment of funds in accordance with the Public Finance Management Act. Banking Services to Commercial Banks and Microfinance Banks  The Central Bank provides the following services to Commercial Banks: Maintains accounts to enable commercial banks to effect and receive payments from other commercial banks, the government and other external financial institutions in Kenya shillings and foreign Provides a Real Time Gross Settlement (RTGS) system to enable commercial banks settle their interbank obligations on a real time Provides liquidity through the Intra-day Liquidity Facility (ILF) and the Overnight Loan These loans are secured by government securities. Hosts the Kenya Bankers Association’s Automated Clearing House (ACH). Facilitates completion of commercial banks and microfinance banks external audits by providing confirmation of balances in their clearing accounts and cash reserve ratio accounts in our books to their external Provision of the Daily Interbank Money Market Report, this is a summary of daily borrowings among commercial banks in the interbank market and guides the industry in pricing interbank loans. Banking Services to the East African Community The Central Bank also provides some services for the East African Community currently comprising of Kenya, Uganda, Tanzania, Rwanda and Burundi, facilitating payments, including the exchange of currencies, between countries. Internet Banking The Central Bank offers Internet Banking services to government ministries, departments & agencies, County Executives & County Assemblies, as well as Commercial & Micro-Finance Banks allowing them to monitor and manage their accounts online. 18 Types of Bank Services  In the modern world, banks offer a variety of services to attract customers, However, some However, some basic modern services offered by the banks are discussed below: List of 18 banking services are; Advancing of Discounting of Bills of Check/Cheque Payment Collection and Payment of Credit Instruments Foreign Currency Bank Remittance of Credit ATMs Debit Home Online Mobile Accepting Priority Private   1.   Advancing of Loans Banks are profit-oriented business organizations. So they have to advance a loan to the public and generate interest from them as profit. After keeping certain cash reserves, banks provide short-term, medium-term and long- term loans to needy borrowers. 2.   Overdraft Sometimes, the bank provides overdraft facilities to its customers through which they are allowed to withdraw more than their deposits. Interest is charged from the customers on the overdrawn amount. 3.   Discounting of Bills of Exchange This is another popular type of lending by modern banks. Through this method, a holder of a bill of exchange can get it discounted by the bank, in a bill of exchange, the debtor accepts the bill drawn upon him by the creditor (i.e., holder of the bill) and agrees to pay the amount mentioned on maturity. After making some marginal deductions (in the form of commission), the bank pays the value of the bill to the holder. When the bill of exchange matures, the bank gets its payment from the party, which had accepted the bill. 4.   Check/Cheque Payment  Banks provide cheque pads to the account holders. Account holders can draw cheque upon the bank to pay money. Banks pay for cheques of customers after formal verification and official procedures. 5.   Collection and Payment of Credit Instruments  In modern business, different types of credit instruments such as the bill of exchange, promissory notes, cheques etc. are used. Banks deal with such instruments. Modern banks collect and pay different types of credit instruments as the representative of the customers. 6.   Foreign Currency Exchange Banks deal with foreign currencies. As the requirement of customers, banks exchange foreign currencies with local currencies, which is essential to settle down the dues in the international trade. 7.   Consultancy Modern commercial banks are large organizations. They can expand their function to a consultancy business. In this function, banks hire financial, legal and market experts who provide advice to customers regarding investment, industry, trade, income, tax etc. 8.   Bank Guarantee Customers are provided the facility of bank guarantee by modern commercial banks. When customers have to deposit certain fund in governmental offices or courts for a specific purpose, a bank can present itself as the guarantee for the customer, instead of depositing fund by customers. 9.   Remittance of Funds  Banks help their customers in transferring funds from one place to another through cheques, drafts, etc. 10.    Credit cards A credit card

What is a money transfer? A money transfer is when you transfer money from your credit card and pay it into your bank or building society account. It will form part of your credit card balance and is subject to repayments as part of your monthly statement balance. This service is available on some credit cards and is usually quite simple to arrange. Once the money has reached your account you can use it to pay for goods or services, pay off higher interest credit where appropriate, or unexpected bills (for instance, a broken boiler). You’ll usually be charged a money transfer fee on any transfers you make (usually a percentage of the transfer value). What is remittance? The term ‘remittance’ derives from the word ‘remit’, which means ‘to send back’. Remittance refers to an amount of money transferred or sent from one party to another, usually overseas. Remittances can be personal money transfers made to family and friends, as well as business payments. Today, more remittances are being sent than ever before, and there are two key factors driving this increase: Migration – More people are now choosing to live and work Therefore, many remittances are made by people working and living abroad to family back home. Globally connected businesses – The internet makes it easier than ever for businesses to connect and collaborate with suppliers, clients and employees all around the This has resulted in a sharp increase in overseas remittances paying for business invoices. How to send a remittance If you need to pay a remittance, there are several different methods for doing so, including: ·         Wire transfer Cash pick up ·         Mobile money Electronic payment ·         Bank draft Cheque ·         Post  The cost you need to pay depends on the provider and service that you choose. Generally, banks charge high fees and provide poor exchange rates on remittances. Offline companies like Western Union or MoneyGram used to be the big player in the past. Recently, people shifted towards online providers like as they offer the best value for money. At World Remit we make sending remittances online simple, secure and convenient. Our low fees and fair exchange rates are shown upfront; we promise, no hidden fees. Remittance jargon buster Ready to send a remittance? Use our handy jargon buster to demystify remittance jargon and simplify the process. 3D Authentication If your card uses 3D secure, a window will appear on the screen when you are making an online payment asking you to enter an additional security code before the payment can be put through. This extra layer of security is designed by your card provider and helps to protect you from credit and debit card fraud. ABA Number Also known as a bank routing number, an ABA number is a nine-digit code used to identify banks in the USA. ACH ACH (automated clearing house) payments are made through the USA’s ACH network. It’s a network that provides bank transfers between bank accounts in the USA. AML AML (anti-money laundering) processes are used by financial institutions to detect and prevent illegal money laundering activities used by criminals to disguise money they have gained illegally as lawful income. Card fraud When goods are purchased, or funds are taken from an individual’s credit or debit card without their permission. Credit and debit card fraud can happen when an individual’s card is lost or stolen, if their card is cloned or copied, or if their card details fall into the wrong hands. Cash advance A short-term loan offered by banks and other financial institutions. Cash advances often come with high fees and interest rates. Cashier’s cheque A cheque written and guaranteed by a financial institution, usually a bank. Cashier’s cheques are popularly used to make large payments where extra security and protection may be required as they guarantee that the funds will be available when the cheque is cashed. Chargeback A chargeback is a way of disputing a card transaction. If a chargeback is successful it will void the card transaction and the bank will remove the funds from the merchant’s account and credit them back onto the cardholder’s account. Clearing Clearing refers to the processes and procedures that take place between requesting to wire money and the point when the transaction is complete. Electronic wallet An electronic wallet (sometimes referred to as a digital wallet, mobile wallet, or eWallet) is a virtual system that stores payment cards or money on a mobile device. An electronic wallet can be used to make payments to participating merchants quickly and easily using a mobile device. Exchange rate The amount that one currency is worth when compared to another currency. Failed transaction A transaction that has been declined by your bank or card issuer. FCA The United Kingdom’s financial regulatory body. The FCA (Financial Conduct Authority) is an independent body that protects consumers and promotes healthy competition between the UK’s financial service providers. Financial Institution A company that provides financial services. Examples of financial institutions include banks, building societies, mortgage companies, credit unions, investment banks, insurance companies, pension funds, and money transfer services. Forex Forex (Foreign exchange market) is an electronic network of banks, brokers, institutions and traders exchanging foreign currencies. IBAN IBAN stands for International Bank Account Number. It is an internationally recognized way for banks around the world to identify an individual’s country, bank, and account when money is being sent overseas. An IBAN comprises up to 34 letters and numbers and can usually be found on your online banking or by contacting your bank. Interchange fee Every time a merchant takes a credit or debit card payment from a customer, they are charged an interchange fee by the card network. KYC A KYC (Know Your Customer) process is carried out by financial companies to verify the identity of their customers to prevent their services being used for money laundering and other illegal activities. Limit Most banks and money transfer services have rules in place that limit the amount of

What Is a Lender? Lenders are businesses or financial institutions that lend money, with the expectation that it will be paid back. The lender is paid interest on the loan as a cost of the loan. The higher the risk of not being paid back, the higher the interest rate. Lending to a business (particularly to a new startup business) is risky, which is why lenders charge higher interest rates and often they don’t give small business loans. Lenders do not participate in your business in the same way as shareholders in a corporation or owners/partners in other business forms. In other words, a lender has no ownership in your business. Lenders have a different kind of risk from business owners/shareholders. Lenders come before owners in terms of payments if the business can’t pay its bills or goes bankrupt. That means that you must pay lenders back before you and other owners receive any money in a bankruptcy. Banks follow the following principles of lending: Liquidity: Liquidity is an important principle of bank lending. Bank lend for short periods only because they lend public money which can be withdrawn at any time by depositors. They, therefore, advance loans on the security of such assets which are easily marketable and convertible into cash at a short notice. A bank chooses such securities in its investment portfolio which possess sufficient liquidity. It is essential because if the bank needs cash to meet the urgent requirements of its customers, it should be in a position to sell some of the securities at a very short notice without disturbing their market prices much. There are certain securities such as central, state and local government bonds which are easily saleable without affecting their market prices. The shares and debentures of large industrial concerns also fall in this category. But the shares and debentures of ordinary firms are not easily marketable without bringing down their market prices. So the banks should make investments in government securities and shares and debentures of reputed industrial houses. 2.   Safety: The safety of funds lent is another principle of lending. Safety means that the borrower should be able to repay the loan and interest in time at regular intervals without default. The repayment of the loan depends upon the nature of security, the character of the borrower, his capacity to repay and his financial standing. Like other investments, bank investments involve risk. But the degree of risk varies with the type of security. Securities of the central government are safer than those of the state governments and local bodies. And the securities of state government and local bodies are safer than those of the industrial concerns. This is because the resources of the central government are much higher than the state and local governments and of the latter higher than the industrial concerns. In fact, the share and debentures of industrial concerns are tied to their earnings which may fluctuate with the business activity in the country. The bank should also take into consideration the debt repaying ability of the governments while investing in their securities. Political stability and peace and security are the prerequisites for this. It is very safe to invest in the securities of a government having large tax revenue and high borrowing capacity. The same is the case with the securities of a rich municipality or local body and state government of a prosperous region. So in making investments the bank should choose securities, shares and debentures of such governments, local bodies and industrial concerns which satisfy the principle of safety. Thus from the bank’s viewpoint, the nature of security is the most important consideration while giving a loan. Even then, it has to take into consideration the creditworthiness of the borrower which is governed by his character, capacity to repay, and his financial standing. Above all, the safety of bank funds depends upon the technical feasibility and economic viability of the project for which the loan is advanced. 3.   Diversity: In choosing its investment portfolio, a commercial bank should follow the principle of diversity. It should not invest its surplus funds in a particular type of security but in different types of securities. It should choose the shares and debentures of different types of industries situated in different regions of the country. The same principle should be followed in the case of state governments and local bodies. Diversification aims at minimizing risk of the investment portfolio of a bank. The principle of diversity also applies to the advancing of loans to varied types of firms, industries, businesses and trades. A bank should follow the maxim: “Do not keep all eggs in one basket.” It should spread it risks by giving loans to various trades and industries in different parts of the country. 4.   Stability: Another important principle of a bank’s investment policy should be to invest in those stocks and securities which possess a high degree of stability in their prices. The bank cannot afford any loss on the value of its securities. It should, therefore, invest it funds in the shares of reputed companies where the possibility of decline in their prices is remote. Government bonds and debentures of companies carry fixed rates of interest. Their value changes with changes in the market rate of interest. But the bank is forced to liquidate a portion of them to meet its requirements of cash in cash of financial crisis. Otherwise, they run to their full term of 10 years or more and changes in the market rate of interest do not affect them much. Thus bank investments in debentures and bonds are more stable than in the shares of companies. 5.   Profitability: This is the cardinal principle for making investment by a bank. It must earn sufficient profits. It should, therefore, invest in such securities which was sure a fair and stable return on the funds invested. The earning capacity of securities and shares depends upon the interest rate and the dividend rate and

Credit creation separates a bank from other financial institutions. In simple terms, credit creation is the expansion of deposits. And, banks can expand their demand deposits as a multiple of their cash reserves because demand deposits serve as the principal medium of exchange. In this article, we will talk about credit creation. he two most important aspects of credit creation are: Liquidity – The bank must pay cash to its depositors when they exercise their right to demand cash against their Profitability – Banks are profit-driven enterprises. Therefore, a bank must grant loans in a manner which earns higher interest than what it pays on its The bank’s credit creation process is based on the assumption that during any time interval, only a fraction of its customers genuinely need cash. Also, the bank assumes that all its customers would not turn up demanding cash against their deposits at one point in time. Basic Concepts of Credit Creation Bank as a business institution – Bank is a business institution which tries to maximize profits through loans and advances from the Bank Deposits – Bank deposits form the basis for credit creation and are of two types: Primary Deposits – A bank accepts cash from the customer and opens a deposit in his This is a primary deposit. This does not mean credit creation. These deposits simply convert currency money into deposit money. However, these deposits form the basis for the creation of credit. Secondary or Derivative Deposits – A bank grants loans and advances and instead of giving cash to the borrower, opens a deposit account in his name. This is the secondary or derivative deposit. Every loan crates a deposit. The creation of a derivative deposit means the creation of credit. Cash Reserve Ratio (CRR) – Banks know that all depositors will not withdraw all deposits at the same time. Therefore, they keep a fraction of the total deposits for meeting the cash demand of the depositors and lend the remaining excess CRR is the percentage of total deposits which the banks must hold in cash reserves for meeting the depositors’ demand for cash. Excess Reserves – The reserves over and above the cash reserves are the excess These reserves are used for loans and credit creation. Credit Multiplier – Given a certain amount of cash, a bank can create multiple times credit. In the process of multiple credit creation, the total amount of derivative deposits that a bank creates is a multiple of the initial cash Credit creation by a single bank  There are two ways of analyzing the credit creation process: Credit creation by a single bank Credit creation by the banking system as a whole In a single bank system, one bank operates all the cash deposits and cheques. The limitations of credit creation process (as shown in Figure-3) are explained as follows: 1.    Amount of Cash: Affects the creation of credit by commercial banks. Higher the cash of commercial banks in the form of public deposits, more will be the credit creation. However, the amount of cash to be held by commercial banks is controlled by the central bank. The central bank may expand or contract cash in commercial banks by purchasing or selling government securities. Moreover, the credit creation capacity depends on the rate of increase or decrease in CRR by the central bank. 2.   CRR: Refers to reserve ratio of cash that need to be kept with the central bank by commercial banks. The main purpose of keeping this reserve is to fulfill the transactions needs of depositors and to ensure safety and liquidity of commercial banks. In case the ratio falls, the credit creation would be more and vice versa. 3.   Leakages:  Imply the outflow of cash. The credit creation process may suffer from leakages of cash. The different types of leakages are discussed as follows: Excess Reserves: Takes place generally when the economy is moving towards recession. In such a case, banks may decide to maintain reserves instead of utilizing funds for lending. Therefore, in such situations, credit created by commercial banks would be small as a large amount of cash is resented. Currency Drains: Imply that the public does not deposit all the cash with it. The customers may hold the cash with them which affects the credit creation by banks. Thus, the capacity of banks to create credit reduces. 4.   Availability of Borrowers: Affects the credit creation by banks. The credit is created by lending money in form of loans to the borrowers. There will be no credit creation if there are no borrowers. 5.    Availability of Securities: Refers to securities against which banks grant loan. Thus, availability of securities is necessary for granting loan otherwise credit creation will not occur. According to Crowther, “the bank does not create money out of thin air; it transmutes other forms of wealth into money.” 6.   Business Conditions: Imply that credit creation is influenced by cyclical nature of an economy. For example, credit creation would be small when the economy enters into the depression phase. This is because in depression phase, businessmen do not prefer to invest in new projects. In the other hand, in prosperity phase, businessmen approach banks for loans, which lead to credit creation. In spite of its limitations, we can conclude that credit creation by commercial banks is a significant source for generating income. The essential conditions for creation of credit are as follows: Accepting the fresh deposits from public Willingness of banks to lend money Willingness of borrowers to Process of credit creation commercial bank has two types of deposits, and the two processes have been discussed below. Once is ‘Loan Creations from Deposit’ and another ‘Deposit Creation through Loan. So stay with us and achieve your required information from here. Also, we have additional info for you. These are the primary functions of commercial banks and the Characteristics of commercial banks. Loan Creation from Deposit The commercial banks will pay back the people’s lazy

Financial institutions are needed to resolve the problems of imperfect markets. They receive requests from surplus and deficit units on what securities are to be sold. They use this requests to match up buyers and sellers of securities in this markets. However financial institutions in order to provide for divisibility, they may at times un-bundle the securities by spreading them across several investors until the entire amount is sold. Without financial institutions, transaction costs and information cost would be expensive and prohibitive. ROLE OF DIPOSITORY INSTITUTIONS Depository institutions accept deposits from surplus units or savers and provide credit to deficit units or borrowers through loans and purchase of securities. The importance of depository institutions in the financial market includes the following; They offer deposit accounts that can accommodate the amounts and liquidity characteristics desired by most savers. They package funds received from deposits to provide loans of the sizes and maturity desired by They accept the risks on loans provided They have more expertise than most individual surplus units in assessing the credit worthiness of deficit units They diversify their loans among numerous deficit units and therefore they can absorb defaulted loans better than individual surplus units The importance of depository institutions can be appreciated if we consider what would happen if the institutions were not there. Role of commercial banks as depository Institutions. Commercial banks are the most dominant depository institutions. They offer a wide range of deposit accounts. They transfer the deposits to deficit units through loans, advances, overdrafts, letters of credit, letters of guarantee and they can also buy debt securities. Commercial banks serve both private and public. Their services are utilized by households, businesses and government. Savings institutions These institutions are also called thrift institutions. They include; savings and loans (S&L) and savings banks. Like commercial banks, S&L offer depository facilities to surplus units they then channel these surplus to deficit units. S&L concentrates on residential mortgage loans unlike commercial banks who concentrate on commercial loans Credit unions These institutions differ from commercial banks and savings institutions in that they are Nonprofit making organizations, Restrict their credit to the credit union members who share a common bond g. common employer, common business, common geographical location etc. they use most of their funds to advance loans to their members (these are normally referred to as savings and credit organizations. Examples include Mwalimu Saco Nakuru Role of non-depository financial institutions None depository financial institutions generate funds from other sources other than deposits. But also play a major role in financial intermediation. These institutions include: ·         Finance companies Most finance companies obtain funds from issuing securities then lend the money to individuals and small businesses. Although the functioning of finance companies overlap those of depository institutions, each type of institution concentrates on a particular segment of the financial market. Many large finance companies are owned by multinational corporations ·         Mutual funds These types of companies sell shares to surplus units and use these funds to buy a portfolio of securities. The Kenyan capital market is still in its infancy and such companies are not very common. Some mutual funds concentrate their investment in capital market securities, such as stocks or bonds. Others Known as money market mutual funds concentrate in the money market securities. ·         Security firms Securities firms use their information sources to act as brokers, executing securities transactions between two parties. In order to ease the securities trading process the transactions are normally in multiples of 100 shares and the delivery procedure is somewhat standard. Brokers earn their profits by charging a brokerage fee by differentiating between bid and asking prices. Small or unique transactions are likely to have a higher commission due to time taken to complete the transactions. Securities firms also provide investment banking services. Securities firms also underwrite new issues for government and private companies. Securities firms also act as dealers in which case they i.e. they can make a market for a specific security by adjusting their portfolio inventory. Securities firms also provide investment banking services which include advisory services on mergers and other forms of corporate restructuring. And also execute the change in the firm’s capital structure by placing the securities issued by the firm. Insurance companies They provide insurance services to individuals and other firms that reduce the financial burdens associated with death illness and damage to properties including theft. Insurance companies charge premiums in exchange of the insurance that they provide. The funds collected in form of premiums, is invested (mainly in stocks or bonds issued by companies or bonds issued by the government) by the insurance companies until the funds are required to pay for the risks insured when it happens. Pension funds The working population, know very well that their energy to work is limited. To guard themselves against the eventuality, employers and employees save for old age where they contribute periodically. Such funds are available for a long time i.e. until retirement. The pension funds manage the funds until they are required when the employee retires. The money saved is normally invested in securities and bonds issued by corporations and governments. This way they pension savings are used to finance the deficit units thus acting as intermediaries. The Features of Central Bank:  The features or natures of central bank are as follows – 1.       Single Organization:  In a country there has only one central bank exist. In the world, there has been no existence of two or more central bank in any country. So central bank can be called as single organization. For this reason, it does not require to compete with other banks. 2.       Legal entity: Central bank is established by the special act of Government. As a result, legal entity of central bank is much more strong than other banks. This strong legal entity gives special privilege to other banks. 3.       Nature ownership: The ownership of central bank can be fully government or joint venture of government and private ownership. But the reality said

History of banking Earliest Banking Systems It is impossible to say exactly when banking properly began. We do, however, have evidence that it may have started to properly occur around 8000 BC, although these were not banking in the way that we see things now. It was more record keeping of trades that were being made. There may have been specific institutions developed specifically for banking, but we can’t possibly know for sure. All we have records of are people making trades and record their trades down in a log. The Earliest ‘Proper’ Banks The first proper banks would have sprung up in ancient Mesopotamia. We have evidence that there were temples and palaces throughout Babylonia and other cities which provided lending activities. Although, a lot of this was not in the form of financial lending. Instead, banks would lend out seeds and the like. The idea is that by lending out seeds, farmers would have products that they could work with. When it came to the harvest, the farmers would pay back their seed loan from the harvest. There are also records of credit from around this time. In fact, we have a history of credit and other banking activities throughout Asian civilization. The Temple of Artemis, for example, was a deposit for cash and there were records of debts held here. Mark Anthony plays a major role in these banks. He is said to have stolen cash from these banks. Banks During the Medieval Period Banks really started to come into their own during the medieval period. Most of these banks were merchant banks, however. Again, this was a lot about crop loan and for financing expeditions across the silk routes. Some of the earliest forms of brokering took place in these banks. It is actually from around this time that bankruptcy started to spring up. The earliest banks were in Italy. Bankrupt comes from the word ‘banca rotta’ in Italian. When a trade failed to deliver on their promised route, then they would have been declared ‘banca rotta’. Modern Banking in the 17th to 19th Centuries Perhaps the biggest changes to the world of banking came in the 17th to 19th centuries, particularly in London. In fact, the way in which banks work will be based completely around these banking concepts, i.e. issuing bank debt, allowing deposits to be made into banks etc. The first ‘proper’ bank could be said to be the Goldsmiths of London. It is now a bank, but back then it was more a series of vaults which charged a fee for their services. People would deposit their precious materials into these vaults, and they would be able to collect them. Over time, Goldsmiths started to provide loans. The first bank to offer banknotes was the Bank of England. Bank notes were, initially, promissory notes. You would deposit cash into the bank and be offered a note to say that it was there. Over time, the bank started to offer cheques, overdrafts, and traditional banking services. This was important when the Industrial Revolution in the United Kingdom was starting to get into ‘full swing’. Rothschilds International financing in the 19th Century took hold due to the Rothschilds. They got started by loaning money to the Bank of England and purchasing stocks. Over time, the Rothchild family (still the richest family in history), started to invest in multiple projects around the world and financing military efforts. They were also taking in deposits from people and creating new banks. 20th Century It was in the 20th Century when banks started to pop up in the way we know them properly. Post-World War II, banks started to lend money to countries as a whole, and retail banking started to become a proper ‘thing’. In fact, a lot of the technology that was developed throughout the 20th Century is still in use today, e.g. the ATM systems and SWIFT payments. Evolution of Kenyan banking system The banking sector in Kenya is ever evolving. Despite the numerous economic challenges that have been witnessed within the sector, the industry remains strong and vibrant. At the moment, three banks have been placed under receivership with only one having recovered and back to operations. Kenya currently has 44 banks. 31 of the banks are locally owned while the remaining 13 are foreign owned. Among the 31 locally owned banks, the government of Kenya has a shareholding in three of them, 27 of them are commercial banks and one is a mortgage finance institution, known as Housing Finance. When did the banking journey in Kenya start? The treacherous financial journey in Kenya dates back to the colonial times. The British Empire declared Kenya a British Sphere of Influence and established the East African Protectorate in the year 1865 and officially declared Kenya as a colony in the year 1920. During that 19th Century, the East African region engaged in trading activities and there was need for the use of currency. That was when the revolution in the banking sector kicked off. In 1986, a year after the establishment of the British Administration in Kenya, National Bank of India came into being. Many people think that the British were the first people to establish banks in the country but the first bank ever in Kenya came from India; National Bank of India. In 1910, Standard Bank of South Africa came into being. Six years after coming to Kenya, the National Bank of South Africa merged with Anglo-Egyptian Bank Ltd to form Barclays Bank. Barclays Bank was, therefore, born in 1910 as a merger between National Bank of South Africa and Anglo-Egyptian Bank Ltd. In 1951, General Bank of Netherlands was set up. In 1953, Bank of India and Bank of Baroda were set up. In 1956, Habib Bank (overseas) Ltd was set up. In the year 1955, the Ottoman Bank and the Commercial Bank of Africa were established. Cooperative Bank of Kenya opened its doors in the year 1968. In 1968 National

Definitions  According to R.P. Kent, “Money is anything that is commonly used and generally accepted as a medium of exchange, or as a standard of value.” According to Marshall, “All those things which are (at any time and place) generally accepted without doubt or special enquiry as a means of purchasing commodities and services and defraying expenses are included in the definition of money.” According to Geoffry Crowther, “Money can be defined as anything that is generally accepted as a means of exchange and at the same time acts as a measure and as a store of value.” Money is derived from a Latin word, Moneta, which was another name of Goddess Juno in Roman history. The term money refers to an object that is accepted as a mode for the transaction of goods and services in general and repayment of debts in a particular country or socio- economic framework. Different Approaches of Money: Economists have given a number of approaches to explain the concept of money. They have defined the concept of money off on the basis of different aspects of money. However, in recent time, there has been a controversy on which aspects of money should be included in the definition of money.   The different approaches of money (as shown in Figure-2) are explained below: 1.       Conventional Approach: The conventional approach is considered as one of the oldest approach for defining the concept of money. It takes into consideration only two functions of money, namely, medium of exchange and measure of value. Therefore, as per this approach, any good or service that fulfills these two functions is termed as money, regardless of the fact that money is always a subject of authentication by the government. According to this approach, commodities that serve the purpose of money are cattle (cow, sheep, horse, and bull), grains (wheat, jowar, and rice), stones and metals (copper, brass, silver, and gold). These commodities considered as money as long as they fulfilled the two conditions of money. Some of the definitions of money given by economists who support conventional approach are as follows: According to R.P. Kent, “Money is anything that is commonly used and generally accepted as a medium of exchange, or as a standard of value.” According to Marshall, “All those things which are (at any time and place) generally accepted without doubt or special enquiry as a means of purchasing commodities and services and defraying expenses are included in the definition of money.” According to Geoffry Crowther, “Money can be defined as anything that is generally accepted as a means of exchange and at the same time acts as a measure and as a store of value.” 2.       Modern Approach:  Over a passage of time, it was realized that conventional approach provides a restrictive definition of money. In addition, the functions of money are not only confined to medium of exchange and measure of value rather it performs a large number of functions. The modern approach of money is broadly classified into three categories, which are as follows: Chicago Approach:  Lays emphasis on extending the definition of money given in conventional approach. This approach was given by Milton Friedman and his associates in Chicago University. They have extended the definition of money given in conventional approach by including three more concepts, namely, currency, checkable demand deposits, and time deposits. However, economists having conventional viewpoint of money were against the addition of the concept time deposit in the definition of money. According to conventional approach, time deposits are not available easily in liquid form or spent directly; therefore, do not serve the purpose of money. However, the Chicago school of thought has given two points emphasizing the importance of time deposits in the definition of money. These two points are as follows: 1. Advocated that national income and money are interrelated to each other and this interlink can be more strengthen if time deposits are included in money 2. Propounded that definition of money should include the close substitutes of money and time deposit is one of those substitutes However, both of the explanations are not strong enough to include time deposits in the definition of money. 3.   Gurley-Shaw Approach: Includes the liabilities of non-banking financial intermediaries in the definition of money. The main contributors of this approach were John G. Gurley and Edward S. Shaw. Gurley and Shaw, while explaining the concept of money, highlighted the substitution relationship among various factors, such as currency, demand deposits, time deposits, and saving bank deposits. These factors act as the sources for storing value. Therefore, according to Gurley-Shaw, money can be defined as the weighted sum of currency, demand deposits, and other deposits and claims against the financial intermediaries. The weights should be allotted on the basis of substitutability of currency. However, the practical implication of this approach is not possible as it is difficult to determine the degree of substitutability of deposits and claims against the financial intermediaries. Moreover, assigning weights to measure the money supply is a challenging task. 4.   Central Bank Approach: Constitutes the broader view of the whole concept of money. The function of the central bank is to control and regulate the flow of money in an economy. Therefore, the central bank formulates and implements a monetary policy to achieve its goals and objectives. For this purpose, it needs to determine all the sources and modes of payment and flow of credit in the economy, which are treated as money. According to the central bank view, currency and all other assets that can be converted into money (realizable assets) are included in the money supply. Radcliffe Committee of United States endorsed the central bank approach. According to this committee, “the similarity between currency and other realizable assets or means of purchasing to the point of rejecting money in favor of some broader concept, measurable or immeasurable.” In other words, money can be any form through which the borrowers receive credit. On the basis of monetary policy and

Co-operatives should analyse the recorded data and comments on the poster at regular intervals. Some information is recorded for quarterly periods and the results of this should be analysed and be presented to the Management Committee at their regular meetings. This should help them understand how the co-operative is performing, during the year, and place them in a position to make good decisions on current and future actions. At the end of each year the Accounting and Audit team should analyse all the findings from the poster and use that information to help review actual progress against the plans. Over time the poster will show three year trends and will provide critical evidence of how successful the co-operative has been and what can be expected from future plans. This should help the cooperative develop or amend their plans for the next year. A National Registrar of Co-operatives A National Registrar of Co-operatives may have a national database; if so the findings from the poster results will be able to feed into the database. Aggregated results provide useful information about what co-operatives are doing and how good their management planning systems are and their ability to implement plans. Financial analysis can be strengthened by aggregating the results of financial ratios. The SWOT comments and ideas can be analysed to see how the membership views the co-operatives and what ideas they have on improving performance, and on new products and services. To deepen the analysis the information can be categorised for geographical areas, sectors and co-operative size. 4.1 Methods for Analysing Data The Co-op Accounting and Audit method uses three categories for identifying and recording data; under the headings of: Strong Co-operatives; Strong People; and Strong Communities. This provides three difference data sources and methods of data collection: this can be used to triangulate data. Triangulation of data means that the results from the analysis will be most reliable. If only one method is used results may be accepted without question; if two methods are used, the results may clash; by using three methods it is likely that consistent and verifiable results can be obtained. Using the results from the Co-op Accounting and Audit poster, under the different headings, you can undertake different types of analysis, as outlined below. Planned and Actual Analysis This type of analysis focuses on examining the step by step approach from the plan to the result. It does mean that co-operatives have got to have plans and these plans have got to be clear enough for management to schedule the activities and state the targets to achieve the plans. If achievement of targets begin to lag behind then action needs to be taken early to get the plan back on track to achieve the result on time and within budget. Alternatively, the final result can be put back to accommodate the delays. Quantitative Analysis Quantitative Analysis is used for a direct comparison usually against numerical indicators or benchmarks. Often this is done by calculating a ‘before and after’ number or percentage in relation to a benchmark and/or baseline figure. Planned and actual targets are quantitatively analysed to measure achievement of the commercial, social environmental plans. Ratio Analysis Ratio Analysis is used to compare relationship between two figures to arrive at a percentage which can be used to compare, say net profit this year with net profit last year irrespective of the actual income and expenditure for the period. Different types of ratio analysis can be used to assess liquidity of current assets/current liabilities or profit margin for a sector average against an individual co-operative. Qualitative Analysis Qualitative Analysis is used when the finer details of experience need to be described. Questions are used to obtain comments, ideas and attitudes on set topics. Responses are then categorised in relation to the topic so that comparisons can be made. The SWOT provides qualitative analysis. A Qualitative Question Grid (as below) can be used to capture the information from the SWOT statements members have written on the poster. Categorise and list the responses, and use quotes to illustrate the points made; then make conclusions about each category out of the many statements and how these categories compare with each other. This should be done for comments that have been made a number of times, not necessarily for every comment. So decide which are the most common statements and opinions and use these to report on the SWOT findings.  Reporting Reporting results from the poster will take place both on the poster and in separate short reports. The key to good reporting is to keep reports short, focused and relevant. The poster itself will act as a report when filling in the planned and actual, quarterly reviews will can provide reports and annual audit will also report on achievements. How a co-operative decides which ones to use will depend on the how involved the membership is in trading with the co-operative and how the AGMs are managed. Members will be able to see the planned and actual results as they are recorded on the poster in the quarterly target boxes. This will include information on planned targets, savings and loans deposits, comments and ideas from the SWOT, the commercial, social and environmental plans. The Accounting and Audit team should discuss the findings from the poster on a quarterly basis. The manager should report the information to the Management Committee. The Management Committee should discuss the interim quarterly findings and if necessary take action to deal with any identified problems. The responses from the SWOT might identify problems or solutions that the committee can immediately act upon and put into action using the ‘Plans from the SWOT’ planning grid in the poster, otherwise they will need to be included in next year’s annual plans. Once the accounts have been audited officers from the National Registrar of Co-operatives should write the final figures, plus the financial ratios, for the current year on the poster. They may also assist the co-operative in reviewing