Topic 9: Money and Banking

1. Barter Trade

Barter is the direct exchange of goods and services for other goods and services without using money.

Problems of Barter

1. Lack of double coincidence of wants.
2. No common measure of value.
3. Indivisibility of some goods.
4. Difficulty storing wealth (many goods are perishable).
5. Difficulty of deferred payments.
6. Transport difficulty for bulky goods.

2. Evolution of Money

1. Barter
2. Commodity money (cattle, salt, beads, shells)
3. Metallic money (coins)
4. Paper money (notes)
5. Bank money (cheques, cards)
6. Electronic and mobile money (e.g. M-Pesa)

3. Functions of Money

1. Medium of exchange
2. Unit of account (measure of value)
3. Store of value
4. Standard of deferred payment

Qualities of Good Money

• Generally acceptable
• Durable
• Portable
• Divisible
• Scarce (limited in supply)
• Stable in value
• Difficult to forge
• Homogeneous (uniform)

4. Banking

Commercial Banks

Functions:

1. Accept deposits (current, savings, fixed).
2. Give loans and overdrafts.
3. Provide payment services: cheques, cards, transfers, mobile banking.
4. Safe custody of valuables and documents.
5. Foreign exchange services.
6. Financial advice and agency services.

Central Bank of Kenya (CBK)

1. Issues currency (notes and coins).
2. Banker to the government and to commercial banks.
3. Controls the money supply and credit.
4. Regulates and supervises banks.
5. Manages foreign reserves and exchange rate policy.
6. Lender of last resort to commercial banks.

5. Importance of Banking to Businesses

• Safe keeping of money.
• Access to credit.
• Convenient payment methods.
• Records of transactions.
• Financial advice.