ST PAUL’S UNIVERSITY

DEGREE OF BACHELORS OF BUSINESS

ADMINISTRATION AND MANAGEMENT

BFI 305 – FINANCING SMALL BUSINESS

GROUP ASSIGNMENT

PRESENTED BY

CHARITY NANGILA
STUDENT NO: B/P/077/07

SUBMITTED TO:
MR. DAN NGUMBAO

18TH MARCH 2011

A PAPER SUBMITTED IN PARTIAL FULFILLMENT

FOR THE AWARD OF BACHELOR OF BUSINESS
ADMINISTRATION AND MANAGEMENT OF ST.
PAULS UNIVERSITY
ABBREVIATION

FI s - Financial Institutions
BFIs - Bank Financial Intermediaries
NBFIs - Non-Bank Financial Intermediaries
ATM - Automated Machines
BOU - Bank of Uganda
KCB - Kenya Commercial Bank
REGIONAL FINANCE INSTITUTIONS

INTRODUCTION

The term financial institution may refer to an institution or firm that performs
intermediation between two or more parties in a financial context. Thus a
financial institution also referred to as a financial intermediary is an
organization that may be either for-profit or non-profit, that takes money
from clients and places it in any of a variety of investment vehicles for the
benefit of both the client and the organization.

Other definitions that describe a financial institution include:

1. A financial institution is an institution which collects funds from the public
and places them in financial assets, such as deposits, loans, and bonds,
rather than tangible property.
2. A financial institution is defined as an enterprise such as a bank whose
primary business and function is to collect money from the public and
invest it in financial assets such as stocks and bonds.
3. Financial intermediaries are banking and non-banking institutions which
transfer funds from economic agents with surplus funds (surplus units) to
economic agents (deficit units) that would like to utilize those funds.

FIs are basically two types: Bank Financial Intermediaries, BFIs (Central
banks and Commercial banks) and Non-Bank Financial Intermediaries, NBFIs
(insurance companies, mutual trust funds, investment companies, pensions
funds, discount houses and bureau de change).

Examples of financial intermediaries are:

• Banks;
• Building Societies;
• Credit Unions;
• Financial adviser or broker;
• Insurance Companies;
• Life Insurance Companies;
• Mutual Funds; or
• Pension Funds.

FRAMEWORK

There are two types of financial institutions: depository institutions and

non depository institutions. Depository institutions, such as banks and
credit unions, pay you interest on your deposits and use the deposits to
make loans. Non depository institutions, such as insurance companies,
brokerage firms, and mutual fund companies, sell financial products.
1. Deposit-type financial institutions

The deposit-type financial institutions mainly banks fall under four

classifications: commercial banks, savings and loan associations, credit
unions, and Internet banks.

• Commercial banks generally compete by offering the widest variety of

services; however, they generally do not offer the highest interest rates
on deposits or the lowest interest rates on loans.
• Savings and loan associations have slightly different ownership
arrangements than banks, but they are similar to commercial banks.
Savings and loan associations may offer slightly higher rates than
commercial banks on deposits and somewhat lower rates than
commercial banks on loans.
• Credit unions are similar to savings and loan associations, but they are
not-for-profit organizations and are owned by their members. They can
sometimes offer higher rates on savings accounts and lower rates on
loans because they are not driven to provide a profit to shareholders.
• Internet banks are electronic banks that do not have traditional brick-and-
mortar branches. Because they have fewer branches, employees, and
capital expenditures than traditional banks, they can generally pay higher
interest rates on deposits and charge less for loans than traditional banks
do.

2. Non-deposit-type financial institutions i.e. nonbanks

Non-depository sell financial products e.g. insurance companies and mutual

funds (unit trusts) collect funds by selling their policies or shares (units) to
the public and provide returns in the form periodic benefits and profit
payouts. They consist of two main kinds: mutual fund companies and
brokerage firms.

• Mutual fund companies have broken into the banking arena. With many
mutual fund companies, you can now write checks against your mutual
fund account.
• Brokerage firms have also gotten into the act. Many brokerage firms now
allow you to write checks, issue credit cards and ATM cards, and make
loans. Brokerage firms offer these and many other account features that
were once reserved for traditional banks.

REGULATIONS

Legal Structure

Financial institutions in most countries operate in a heavily regulated

environment as they are critical parts of countries' economies. The specific
aims of financial regulators include enforcing applicable laws, license
providers of financial services, protecting clients, investigating complaints
and most importantly maintaining confidence in the financial system.

Within the East African region, financial institutions are either privately
owned (shareholder-owned) or publicly owned (government-owned).
However all are regulated and mandated to operate through the legal
system set by the country. Legislation of the banks and or financial
institution especially in the East African region is mainly administered by the
rules of government which are Acts of parliament and the central bank.

The main role of government and central bank in regard to the legal
structure of financial institutions is:

- Provide licensing of the financial institutions

- Formulate and implements policies that dictate operation and
management of the banks funds
- Determine capital and reserve of the banks to be able to operate
- Enact acts of parliament which regulates the banking business
- Review the financial audits of the banks and financial institutions
MAJOR PLAYERS IN THE REGION

1. Central Bank of Kenya

The Central Bank of Kenya was established in 1966 through an Act of

Parliament - the Central Bank of Kenya Act of 1966. The establishment of the
Bank was a direct result of the desire among the three East African states to
have independent monetary and financial policies.

Structure of the Bank

Responsibility for determining the policy of the Central Bank is given by the
Central Bank of Kenya Act to the Board of Directors. The Board consists of
eight members:-

• the Governor, who is also its chairman

• the Deputy Governor, who is the deputy chairman
• the Permanent Secretary to the Treasury who is a
non-voting member
• five other non executive directors

All members are appointed by the President to hold office for a term of four
years and are eligible for reappointment. In the case of the Governor,
appointment is for a maximum of two terms of four years each and can only
be terminated by a tribunal appointed by the President to investigate his
conduct.

The executive management team comprises the Governor, the Deputy

Governor and fifteen heads of department who report to the Governor.

The Central Bank Act and its relations with the Government

The Central Bank of Kenya Act of 1966 set out objectives and functions and
gave the Central Bank limited autonomy. Since the amendment of the
Central Bank of Kenya Act in April 1997, the Central Bank operations have
been restructured to conform with ongoing economic reforms. There is now
greater monetary autonomy.

Though required to support the general economic policy of the Government,

the Central Bank has independence in exercising the powers conferred on it
by the Central Bank of Kenya (Amendment) Act, 1996. However, both the
Government and the Central Bank make mutual consultations on
important policy issues. The Central Bank, for example, is required to
advise the Government on monetary and fiscal policy issues and other
economic issues that may have important ramifications on the Bank's
monetary policy.
 Function of the Central Bank

The Central Bank of Kenya has the following primary duties:

i. To formulate and implement monetary policy directed to achieving and
maintaining stability in the general level of prices;
ii. To foster the liquidity, solvency and proper functioning of a stable market-
based financial system;
iii. To formulate and implement foreign exchange policy;
iv. To hold and manage its foreign exchange reserves;
v. To license and supervise authorized dealers;
vi. To formulate and implement such policies as best promote the
establishment, regulation, and supervision of efficient and effective
payment, clearing and settlement systems;
vii. To act as banker and adviser to, and as fiscal agent to the Government ;
and
viii. To issue currency notes and coins.

2. Bank of Uganda

The Bank of Uganda (BOU) is the Central Bank of the Republic of Uganda.
Established in 1966, by Act of Parliament, BOU is 100% owned by the
Government of Uganda, but is not a government department.

Structure of the Bank of Uganda

The Board of Directors of the Bank of Uganda is the supreme policy making
body of the Bank. The Board formulates Bank policies and ensures that
anything required to be done by the Bank under the statute as well as
anything else that is within or incidental to the functioning of the Bank is
carried out.

The Governor and Deputy Governor;

• Are appointed by the President with the approval of Parliament.
• They serve a five year term and are eligible for re- appointment.

The office of Governor and Deputy Governor are public offices where the
Governor and Deputy Governor are respectively Chairperson and Deputy
Chairperson of the Board of Directors.

Other members of the Board (not less than four (4), and not more than six
(6), are appointed by the Minister of Finance for three-year renewable terms.
The Secretary to the Treasury is an ex-officio member of the Board.

Function of the Bank

 In the process of fulfilling the Bank's mission, the Bank carries out the
following functions:
i. Issue Uganda's national currency/legal tender, the Uganda Shilling
ii. Regulate money supply using monetary policy
iii. Act as Banker to the Government of Uganda
iv. Act as Banker to Commercial Banks
v. Supervise and regulate Financial Institutions in Uganda
vi. Manage the country's external/foreign reserves
vii. Manage Uganda's external debt
viii. Advise the Government of Uganda on financial and economic issues
 3. Bank of Tanzania

The Bank of Tanzania is the central bank of the United Republic of Tanzania.
The bank was established under the Bank of Tanzania Act 1965. However, in
1995, the government decided that the central bank had too many
responsibilities, and was thus hindering its other objectives. As a result, the
government introduced the Bank of Tanzania Act 1995, which gave the bank
the single objective of monetary policy.

Structure of the Bank of Tanzania

The Board of Directors of the Bank of Tanzania (the Bank) is the supreme
policy decision making organ in the institution’s hierarchical structure. The
Board of Directors is responsible for determining policies of the Bank,
approval of its budget and allocation of profits arising from its operations.

The Board consists of ten persons, four of whom are executive directors and
two are ex-officio. In addition, there are four non-executive Directors
appointed by the Minister of Finance.

The current composition of the Board of Directors is as follows:

• Governor (the Chairman)
• Three Deputy Governors, Deputy Chairmen in the order determined by
the Governor;
• The Permanent Secretary to the Treasury of the Government
• Four non-executive Directors

The Governor and Deputy Governors are appointed by the President for a
period of five years. Their tenure of office is statutorily limited to two five
year terms. Non-executive Directors are appointed by the Union Minister of
Finance for a period of three years, and are eligible for a reappointment.

Functions of the Bank of Tanzania

i. The Bank of Issue: the sole right to issue notes and coins in Tanzania
for the purpose of directly influencing the amount of currency in circulation
outside banks, thereby providing the economy with sufficient, but if
possible, non-inflationary liquidity.
ii. The Bankers' Bank: act as prudential reserves for these banks (i.e., the
Minimum Reserves), the willingness to discount commercial and
government paper, and the commitment to act as lender of last resort to
these banks. It also involves the provision of central clearance facilities for
interbank transactions.
iii. The Governments' Bank: The Bank is the banker and the fiscal agent
for the Governments, and may be the depository of the Governments.
iv. The Advisor to the Governments: The Bank may advise the
Governments on any matter relating to its functions, powers, and duties.
 v. The Guardian of the Country's International Reserves: The Bank is the
depository of the official external assets of Tanzania, including gold and
foreign currency reserves.
vi. Supervision of Banks and Financial Institutions: licensing of banks and
financial institutions, this activity involves ensuring that commercial banks
and other financial institutions conduct their business on a sound prudential
basis and according to the various laws and regulations in force.
vii. facilitation and monitoring of a Deposit Insurance Fund, the purpose of
which is the protection of small depositors, and
viii. Promotion of Financial Development: the establishment of an effective
financial system, with the aid of which financial transactions necessary for
the smooth functioning of the economy can be carried out with a minimum
amount of cost and time involved.
KENYA COMMERCIAL BANK

Kenya Commercial Bank (KCB) is a financial services provider headquartered

in Nairobi, Kenya. It is amongst the three largest commercial banks in Kenya.
KCB has the largest branch network in Kenya with 168 branches distributed
across the country.

Ownership

Shares of the stock of Kenya Commercial Bank Group (KCB Group), the
parent company of Kenya Commercial Bank, are listed on the Nairobi Stock
Exchange (NSE), under the symbol (KCB). The Group's stock is also cross
listed on the Uganda Securities Exchange (USE).

As of August 2010, the Government of Kenya owns 17.74% of Kenya

Commercial Bank. The remaining 82.26% is owned by institutional and
private investors.[

Management
The Board of Directors of the KCB Bank are responsible for the strategic
planning of the bank and ensure that anything required to be done by the
Bank under the statute as well as anything else that is within or incidental to
the functioning of the Bank is carried out.

The Board consists of 11 members Mr. Peter Muthoka. The management

team consists of 20 managers. The Managing Director and the Chief
Executive Office are held by one individual Mr. Martin Oduor-Otieno.[12]

ROLE OF A FINANCIAL INTERMEDIARY

Financial intermediaries perform as provider of funds to those who need

money. From banks, credit unions, savings & loans, mutual funds, insurance
companies and pension funds, financial intermediaries provide funds for all
manner of borrowers and investors. Whether it's a bank providing a personal
loan, a mortgage lender or financial entities creating investment markets,
financial intermediaries keep the flow of funds moving.

Financial intermediaries provide 3 major functions:

1. Maturity transformation: Converting short-term liabilities to long term
assets (banks deal with large number of lenders and borrowers, and
reconcile their conflicting needs)
2. Risk transformation: Converting risky investments into relatively risk-
free ones. (Lending to multiple borrowers to spread the risk)
3. Convenience denomination: Matching small deposits with large loans
and large deposits with small loans

General functions of financial intermediaries

• Financial institutions perform major task of capital formation, they
motivate and encourage common people to save and earn interest.
• Accepting deposits: the banks for example mobilize deposits from the
public. People who have surplus income and savings find it convenient to
deposit the money in the banks
• Granting of loans, overdrafts, and advances: loans are key to businesses
thus the various financial intermediaries offer loans to its clients so as to
support their various developments. Also loans are sources of income for
the institutions as the interest charged to the loan is an income to the
bank..
• Processing of payments by way of telegraphic transfers, internet banking
etc
• Providing documentary and standby letters of credit, guarantees,
performance bond security etc
• Undertaking safe custody of valuables, important documents, and
securities by providing safe deposit vaults or lockers;
• Providing customers with facilities of foreign exchange.
• Transferring money from one place to another; and from one branch to
another branch of the bank.
• Standing guarantee on behalf of its customers, for making payments for
purchase of goods, machinery, vehicles etc.
• Credit quality improvement by providing reports on the credit worthiness
of customers.
• Financial institutions also act as portfolio managers and advisers over
most of the primary securities owned by investors by collecting and
supplying business information. For example information on home
mortgages, commercial mortgages, consumer loans, state and local
government securities, and business loans
• Risk evasion: Financial institutions provide a convenient place where
savers can safely invest excess money and consumers can easily borrow
funds. Investments are protected against unscrupulous borrowers by the
institution’s qualified loan officer prevention. Well-trained investment
 analysts and loan officers seek good investment opportunities and screen
prospective securities so as to obtain the best yield available for the risk
level that suits the investor’s preferences.

Economic functions of financial intermediaries

• Efficient provision of savings, credit and insurance facilities can enable

the public to smoothen their consumption, manage risks better, gradually
build assets, develop micro-enterprises, enhance income earning
capacity, and generally enjoy an improved quality of life.

• Micro-finance services contribute to the development of rural financial

markets and to strengthening the social and human capital of the poor.

• Financial intermediaries appear to have a key role in the restructuring and

liquidation of firms in distress. Financial intermediaries play an active role
in the reallocation of displaced capital, meant both as the piece-meal
reallocation of assets (such as the redeployment of individual plants) and,
more broadly, as the sale of entire bankrupt corporations to healthy ones.
A key part of reorganization under main bank supervision or management
is the implementation of a plan of asset sales with proceeds typically used
to recover bank loans.

• Financial intermediaries arise as internal, centralized markets where

information on machines and buyers is readily available. Financial
intermediaries perform this role by aggregating the information on firms
collected in the credit market. The function of intermediaries as
matchmakers between savers and firms in the credit market can support
their function as internal markets for assets.

• Credit creation: it is the collective ability of finance companies, banks, and

other lenders of money to make money available to borrowers. Thus, it is
the increase of credit lent to customers by banks who lend money
deposited with them on to other banks who then lend it to their customers
REFERENCES

http://en.wikipedia.org/wiki/Bank_of_Uganda

http://personalfinance.byu.edu/?q=node/583

http://www.bot-tz.org/AboutBOT/BOTFunction.asp

http://www.bou.or.ug/bouwebsite/opencms/bou/home.html

http://www.businessdictionary.com/definition/financial-institution.html

http://www.investorwords.com/1950/financial_institution.html

http://www.ehow.com/about_4700299_what-roles-financial-

intermediaries.html

http://www.indianmba.com/occasional_papers/op125/op125.html

http://www.kcbbankgroup.com

http://www.nios.ac.in/srsec319/319-33.pdf