TOPICS COVERED:
1. Introduction to regulations in the banking sector
2. The central bank
3. Licensing of institutions
4. Reserves, dividends, accounts and audit
5. Inspection and control of institutions
6. The bank and credit
7. Consumer protection
8. Global financial markets issues
What i...
1. Introduction to regulations in the banking sector
2. The central bank
3. Licensing of institutions
4. Reserves, dividends, accounts and audit
5. Inspection and control of institutions
6. The bank and credit
7. Consumer protection
8. Global financial markets issues
What is Banking Law?
Law of Banking comprises common law, rules of equity and statements. It may be defined as
the law that governs the operations of banks and banking transactions and relationships that
arise therefrom. This may be common or customary law that has evolved over time in
commercial world with respect to banking. It includes statutes passed by parliament to control
the activities of the bank. Because of the importance of Banks to the health of the nation’s
economy, operations of banks are a major concern of governments the world over. This is the
main reason for the existence of legislations all over the world for the licensing and
monitoring of banking operations.
Evolution of Banking Institutions
There seems to be no unanimity amongst the economists about the origin of the word ‘bank’.
According to some economists, the word ‘Bank’ has been derived from the German word
‘BANC’ which means a joint stock firm. While others say that it has been derived from the
Italian word ‘BANCO’ which means a heap. As a matter of fact, at the time of establishment
of Bank of Venice in 1157, the Germans were influential and hence, perhaps the word ‘Banc’
or ‘Banco’ was used by Italians to denote the accumulation of securities or money with a joint
stock firm which later on with the passage of time came to be known as ‘Bank’.
There is still another group of people who believe that the word ‘Bank’ has been derived from
the Greek word ‘BANQUE’ which means a bench. In the olden days Jews entered into money
transactions sitting on benches in a market place. When a banker was not in a position to meet
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,its obligations, the bench on which he was carrying on the money business was broken into
pieces and he was taken as bankrupt.
However, the first view of the origin of the ‘Bank’ from the words ‘Banc’ or ‘Banco’ seems
to be more convincing since it was used in the establishment of the bank of Venice which is
supposed to be the most ancient bank.
The business of banking is as old as civilization itself. As early as 2000 BC, the Babylonians
had developed a system of banks. They used their temples for lending at higher rates of
interest against gold and silver which had been left with them for safe custody. Around the
same time, the Greek temples were used as depositories for people’s surplus funds and these
were the centres of money lending transactions. The priests of the temples acted as agents till
they lost public confidence on account of people’s disbelief in religion.
The development of banking in the ancient Rome resembled the Greek pattern. After the
death of Emperor Justinian in 565 A.D, the mighty Roman Empire failed resulting in severe
damage to the banking business. It was only with the revival of the trade and commerce in the
Middle Ages that the lessons of finance were learnt afresh from the beginning. However,
during this period, banking was mainly confined to money-lending activities which were
largely in the hands of the Jews. The Christians were forbidden by their religion to lend
money on interest since it was considered to be sinful activity. However, with the passage of
time, the hold of the church on the Christians weakened and with the development of process
of trade and commerce around the 13th century, the Christians also started money lending
business. They thus started giving competition to the Jews who hitherto, monopolized the
business.
In the initial stages, the banking largely meant money-lending and it was restricted to selected
number of families working as sole proprietary firms. The Bank of Venice founded in Italy in
1157 was the first banking institutions, followed by the Bank of Barcelona in Spain which
was established in 1401. The Bank of Geneva was founded in 1407, while the Bank of
Amsterdem was established in 1609. All these banks accepted the deposits which could be
drawn or demand on transferred from the account of one person to another.
In England, the development of banking business can mainly be attributed to the London
Goldsmiths during the reign of Queen Elizabeth I. They used to receive their customers
valuables and funds for safe custody. The business of Goldsmith suffered a rude set back as a
2
,result of the ill treatment of Government of Charles II in 1640. The Goldsmiths used to
deposit their funds in the exchequers with the sanction and under the care of the Government.
However, King Charles II issued a directive in his regime that no payment would be made to
the Goldsmiths and as a result, the Goldsmiths were ruined. The ruin of Goldsmiths proved a
turning point in the history of English banking. It led to the growth of private banking and
later on establishment Bank of England in 1694.
Geoffrey Crowther, a noted economist has identified three ancestors of the present day
banker; the merchant, the money-lender, and the goldsmith. The merchant because of his high
and widespread reputation on credit. They were able to collect money from their customers
and issue documents that were accepted as “titles of money”. The money-lender usually
conducted business with his own money. Later, they also started accepting money from
clients when they found it profitable to borrow at low interest rates and lend it as higher
interest rates. The Goldsmiths which functioned mostly in England received gold and silver
for safe custody and the receipts issued by them acknowledging the same were initially used
for withdrawals of the deposits made with them. These receipts with passage of time became
payable to the bearer on demand and enjoyed considerable circulation. In this way, the
‘goldsmith’ note becomes the fore-runner of modern bank note. Later on when the goldsmiths
started transferring the deposits made with them on the basis of letter issued by the depositors,
it led to the origin of modern cheque currency. Thus, in a way the goldsmiths can rightly be
termed as the fore-runners of the modern banking institutions.
Though the banking business in its naïve form was in operation since ancient times the
banking in its present form is of recent origin. It was only in the 19th century that the modern
joint stock commercial banking system developed in most of the leading countries, including
enactment of laws and regulations to govern the Banking business.
Evolution of Banking in Kenya
Prior to the establishment of colonial rule in Kenya, there were four different items used as
currency
Indian rupee and its coins
The Maria Teresa dollar
Cowrie shells
Beads and cloth
Currency was introduced by colonialists because of trade along the East African coast with
Arabs, Indians and Europeans. With the establishment of colonial government however, the
need arose for a more convenient and standardized form of currency because the major
3
, objective of colonialism was the exploitation of the resources in the territory for the
advancement of the home country.
In 1888 the Imperial British East Africa began its plans to administer Kenya and Uganda and
it introduced currency for the two territories. They introduced a silver rupee coin and the
continuation of the Indian rupee that was already in circulation. The Indian Rupee was most
widely used because of the trade along the coast with British India.
In 1922 the East African shilling convertible with the British shilling was introduced as the
primary unit of exchange which remained the currency for Kenya till independence.
The establishment of the currency system for Kenya had a direct bearing on how banking
would evolve. British commercial banks started operating in Kenya in the 1890s and until the
attainment of independence these banks had principally the following characteristics:
There was a high degree of concentration in the major towns
There was an exclusive concern with the financing of trade
There was an elaborate system of branch banking
There was a virtual lack of interest in or involvement with the African
population.
Throughout the advanced period and into the first half of the 1960s Kenya’s banking sector
was dominated by the British Banks.
The first bank was the National Bank of India which was established in 1896. The bank later
changed its name to National Grindlays Bank which is now known as Kenya Commercial
Bank. It was joined by Standard Bank of South Africa in 1950 which later became the
Standard Bank now the Standard Chartered Bank.
Thereafter the National Bank of South Africa came into the country and later merged with
two other British Banks to form Barclays Bank which later became Barclays Bank of Kenya.
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