Explain four functions of commercial banks in Kenya
Commercial banks are significantly important in the economic development of a country like Kenya. They are crucial components of the financial system which support individuals’ and business’s financial needs. The key functions of commercial banks in Kenya are elaborated below:
- Taking Deposits: Commercial banks are deposit takers. The primary function of a bank is to accept deposits from customers. Customers can earn interest from those deposits, encouraging saving and providing security of funds. Customers can also deposit their money and withdraw them when needed, providing liquidity and easy access to their money for daily transactions. Fixed deposits for longer periods do not allow easy withdrawal but they earn interest over specified period.
- Providing loans: another important function of a commercial bank in the economy of Kenya is to provide loans to customers who require cash for emergencies, personal needs, or investments. Businesses can take loans to finance an investment, while individuals may borrow funds to meet their personal expenses such as education and health.
- Credit Creation: Commercial banks also play a crucial role in the economy of Kenya by creating new money in the economy through credit. When banks provide loans, they do not give physical cash; instead they credit the borrower’s account, hence effectively creating money in the economy, leading to increased money supply and boosting the economy.
- Facilitating Payments: Commercial banks in Kenya are also important in the economy because they provide checking and payment services to allow individuals and firms to make transactions easily. For instance, people can make electronic transfer of money to each other or they can use credit and debit cards to make payments.
- Foreign Exchange Services: Another important function of a commercial bank is providing foreign exchange services. Individuals and businesses can do business internationally or make international travels by exchanging currencies of different countries.
- Investment Services: Commercial banks also perform the function of trust and wealth management. They manage estates and trusts for individuals.
- Agency functions
- Risk management and financial consultancy
- Promoting trade and commerce😊
This question was adopted from KNEC past paper 2013, Business Finance Module I. KNEC past papers, revision questions and answers help students prepare for their KNEC exams with revision.
