DEPARTMENT
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BUSINESS ADMINISTRATION
UNIT TITLE
UNIT CODE
PREREQUISITE
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:
:
MONEY AND CAPITAL MARKETS
FIN 303
BCM 210 BUSINESS FINANCE
Purpose
The funding of business organizations depends on funds raised through money and capital
markets. An understanding of the functioning of such markets is therefore, a prerequisite of
choice entrusted with such responsibility. This unit acquaints the student with the necessary
knowledge concerning money and capital markets.
Course Objectives
The objective of this course is to provide an understanding of the nature and operations of money
and capital markets in an open market economy.
Course Contents
1.0
Role of Money and Capital Markets
2.0
Central Banking and Role of A Central Bank
3.0
Commercial Banks
4.0
Banking Legislation in Kenya
5.0
Non-Bank Financial Institutions (NBFIS)
6.0
Non-Bank Thrift Institutions
7.0
Other NBFIs
8.0
The Regulation of Financial Institutions
9.0
The Stock Exchange Market
10.0 Capital Markets
Money Market
Market for lending and borrowing for short-term cash flow needs
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What is the Money Market?
The money market is an organized exchange market where participants can lend and borrow
short-term, high-quality debt securities with average maturities of one year or less. The market
enables governments, banks, and other large institutions to sell short-term securities to fund their
short-term cash flow needs. It also allows individual investors to invest small amounts of money
in a low-risk market. Some of the instruments traded in this market include treasury bills,
certificates of deposit, commercial paper, federal funds, bills of exchange, and shortterm mortgage-backed securities and asset-backed securities.
Large corporations with short-term cash flow needs can borrow from the market directly through
their dealer while small companies with excess cash can borrow through money market mutual
funds. Individual investors who want to profit from the money market can invest through their
money market bank account or a money market mutual fund. A money market mutual fund is a
professionally managed fund that buys money market securities on behalf of individual
investors.
Functions of the Money Market
The money market contributes to the economic stability and development of a country by
providing short-term liquidity to governments, commercial banks, and other large organizations.
Investors with excess money that they do not need can invest it in the money market and earn
interest.
Here are the main functions of the money market:
#1 Financing Trade
The money market provides financing to local and international traders who are in urgent need of
short-term funds. It provides a facility to discount bills of exchange, and this provides immediate
financing to pay for goods and services. International traders benefit from the acceptance houses
and discount markets. The money market also makes funds available for other units of the
economy such as agriculture and small-scale industries.
#2 Central Bank Policies
The central bank is responsible for guiding the monetary policy of a country and taking measures
to ensure a healthy financial system. Through the money market, the central bank can perform its
policy-making function efficiently. For example, the short-term interest rates in the money
market represent the prevailing conditions in the banking industry and can guide the central bank
in developing an appropriate interest rate policy. Also, the integrated money markets help the
central bank to influence the sub-markets and implement its monetary policy objectives.
#3 Growth of Industries
The money market provides an easy avenue where businesses can obtain short-term loans to
finance their working capital needs. Due to the large volume of transactions, businesses may
experience cash shortages related to buying raw materials, paying employees, or meeting other
short-term expenses. Through commercial paper and finance bills, they can easily borrow money
on a short-term basis. Although the money market does not provide long-term loans, it influences
the capital market and can also help businesses obtain long-term financing. The capital market
benchmarks its interest rates based on the prevailing interest rate in the money market.
#4 Commercial Banks Self-Sufficiency
The money market provides commercial banks with a ready market where they can invest their
excess reserves and earn interest while maintaining liquidity. The short-term investments such as
bills of exchange can easily be converted to cash to support customer withdrawals. Also, when
faced with liquidity problems, they can borrow from the money market on a short-term basis as
an alternative to borrowing from the central bank. The advantage of this is that the money market
may charge lower interest rates on short-term loans than the central bank typically does.
Types of Instruments Traded in the Money Market
Several financial instruments are created for short-term lending and borrowing in the money
market, they include:
#1 Treasury Bills
Treasury bills are considered the safest instruments since they are issued with a full guarantee by
the United States government. They are issued by the U.S. Treasury regularly to refinance
Treasury bills reaching maturity and to finance the federal government’s deficits. They have a
maturity of one, three, six, or twelve months. Treasury bills are sold at a discount to their face
value, and the difference between the discounted purchases price and face value represents the
interest rate. They are purchased by banks, broker-dealers, individual investors, pension funds,
insurance companies, and other large institutions.
#2 Certificate of Deposit
A certificate of deposit (CD) is issued directly by a commercial bank, but it can be purchased
through brokerage firms. It has a maturity date ranging from three months to five years and can
be issued in any denomination. Most CDs have a fixed maturity date and interest rate, and they
attract a penalty for withdrawing prior the time of maturity. Just like a bank’s checking account,
a certificate of deposit is insured by the Federal Deposit Insurance Corporation (FDIC).
#3 Commercial Paper
Commercial paper is an unsecured loan issued by large institutions or corporations to finance
short-term cash flow needs such as inventory and accounts payables. It is issued at a discount,
with the difference between the price and face value of the commercial paper being the profit to
the investor. Only institutions with a high credit rating can issue commercial paper, and it is
therefore considered a safe investment. Commercial paper is issued in denominations of
$100,000 and above. Individual investors can invest in the commercial paper market indirectly
through money market funds. Commercial paper has a maturity date between one month and
nine months.
#4 Banker’s Acceptance
A banker’s acceptance is a form of short-term debt that is issued by a firm but guaranteed by a
bank. It is created by a drawer, providing the bearer the rights to the money indicated on its face
at a specified date. It is often used in international trade because of the benefits to both the
drawer and bearer. The holder of the acceptance may decide to sell it on a secondary market, and
investors can profit from the short-term investment. The maturity date usually lies between one
month and six months from the issuing date.
#5 Repurchase Agreements
A repurchase agreement (repo) is a short-term form of borrowing that involves selling a security
with an agreement to repurchase it at a higher price at a later date. It commonly used by dealers
in government securities who sell Treasury bills to a lender and agree to repurchase them at an
agreed price at a later date. The Federal Reserve buys repurchase agreements as a way of
regulating the money supply and bank reserves. Their date of maturity ranges from overnight to
30 days or more.
DUTIES OF THE BOARD OF DIRECTORS UNDER THE
KENYAN COMPANIES ACT 2015
The Companies Act, 2015 has introduced and codified the general common law duties and
equitable principles of a director in the Act. The general duties however will continue to be
applied and interpreted in the same way as the corresponding common law rules and equitable
principles. This will act as a guide to the directors and ease the burden for non-specialized and
smaller companies to ensure improved corporate governance. These general duties are owed to
the Company
The duties include:
1.
The duty to act within powers(Section 142)
The Act provides that a director of a company must act in accordance with the company’s
Constitution and only exercise powers for the purposes for which they are conferred. In essence
this means that directors must abide by the memorandum and articles of association (the
constitution of a company) when carrying out their duties. They must also exercise the powers
conferred by the Constitution for proper purposes only and act in the best interests of the
company.
2.
Duty to promote the success of the company (Sec.143)
The Act provides:
A director of a company shall act in the way in which the director considers, in good faith, would
promote the success of the company for the benefit of its members as a whole, and in so doing
the director shall have regard to —
(a)the long term consequences of any decision of the directors;
(b) the interests of the employees of the company;
(c) the need to foster the company’s business relationships with suppliers, customers and others;
(d) the impact of the operations of the company on the community and the environment;
(e) the desirability of the company to maintain a reputation for high standards of business
conduct; and
(f) the need to act fairly as between the directors and the members of the company.
(2) If, or to the extent that, the purposes of the company consist of or include purposes other than
the benefit of its members, subsection (1) has effect as if the reference to promoting the success
of the company for the benefit of its members were to achieving those purposes.
(3) The duty imposed by this section has effect subject to any law requiring directors, in certain
circumstances, to consider or act in the interests of creditors of the company.
The duty essentially requires the Directors to act bonafide and in the benefit of the interests of
the members of the company. The directors are also required to give proper consideration in
decision making process and therefore in case of any consequences likely to arise, they would
still be held accountable. As also highlighted in sub-section 3, in some decisions of the company,
the Directors are required to act in the interests of its creditors.
3.
Duty to exercise independent judgment (Sec. 144)
A director of a company shall exercise independent judgment:
(2) The duty under subsection (1) is not infringed by the director acting1.
2.
in accordance with an agreement duly entered into by the company that restricts the future exercise of
discretion by its directors; or
in a way authorized by the constitution of the company.
This would mean that a person who is appointed on that basis must accept that their obligation to
the company cannot be discharged, and may be breached, by accepting instructions from the
appointer. A director is allowed to look after the interests of their appointer, but only in so far as
that is compatible with the interests of the company.
4.
Duty to exercise reasonable care, skill and diligence (Sec. 145)
This is provided as:
In performing the functions of a director, a director of a company shall exercise the same care,
skill and diligence that would be exercisable by a reasonably diligent person with
1.
2.
the general knowledge, skill and experience that may reasonably be expected of a person carrying out the
functions performed by the director in relation to the company; and
the general knowledge, skill and experience that the director has.
This means that Directors must continue to act with reasonable skill and care. If they have
special skills or knowledge then they will be expected to exercise them (i.e. an advocate serving
on the board is expected to discharge his/her duties with the competence of a lawyer). Otherwise
they will be measured against the standard of a reasonable person occupying their position.
5.
Duty to avoid conflict of interest (Sec. 146)
Under this section, a director must avoid a situation in which he has, or can have, a direct or
indirect interest that conflicts, or possibly may conflict, with the interests of the company. The
provision incorporates the long-standing common law rule that directors, like any other person
who has fiduciary responsibilities, must respect the trust and confidence placed in them and
should do nothing to undermine or abuse that trust and confidence.
The practical effect of the rule is that where directors find themselves in any situation where their
own personal interests clash or may clash with the interests of their company, the interests of the
company must be put first: indeed, directors should strive to ensure that situations where they
could be called upon to make such a decision do not arise in the first place.
6.
Duty not to accept benefits from third parties (Sec. 147)
A third party is defined as a person other than the company, an associated body corporate or a
person acting on behalf of the company or an associated body corporate.
In this section Directors should ensure that they do not receive any benefits not provided for, or
allowed, under the constitution of the company. The only exceptions will be benefits that are so
minor that they could not be thought to influence the director in any way.
This rule is also intended to ensure that a director is not distracted from performing his or her
duty to the company by rewards offered for doing unspecified things (or not doing any such
things). By virtue of section 147(4), however, there will be no breach of duty if the acceptance of
the benefit by the director cannot reasonably be regarded as likely to give rise to a conflict of
interest: so immaterial benefits and those which are entirely unrelated to the affairs of the
company may be accepted.
Kenya Companies Law
General and specific duties of directors
By Amit R Gadhia
Advocate and Solicitor
In the recent few years we have seen an explosion in the number of extensions of directors’ titles,
some very strange and bizarre. There are the known and coveted director’s titles of president,
chief executive officer, managing director but some less known titles like director of talent and
happiness and director of agile delivery. Some of these titles with their accompanying jobs
command a six-figure salary. The titles are sometimes given to add status to senior executives.
In the legal context how is a director defined and what are the duties of a director?
Under the Companies Act 2015 (the Act) of Kenya a “director”, is defined as
(a) any person occupying the position of a director of the body (by whatever name the person is
called); and
(b) any person in accordance with whose directions or instructions (not being advice given in a
professional capacity) the directors of the body are accustomed to act.
The main categories of directors known in law are executive directors, non-executive directors,
de-facto directors, shadow directors and alternate directors.
A de facto director is a person who has not been formally appointed but who is ‘occupying the
position of a director’. A shadow director is any person in accordance with whose directions or
instructions (not being advice given in a professional capacity) the directors of the body are
accustomed to act. The duties and responsibilities of each category and definition of directors
will be examined in later series of articles.
In this article we will be examining general and specific duties of directors under the Companies
Act 2015. Whether or not a director has been formally appointed as a director, the general and
the statutory duties are applicable. Any failure to adhere to the statutory duties can sometimes
result in criminal sanctions imposed against both the company and the director concerned to a
fine of up to one million Kenya shillings.
DIRECTORS GENERAL AND SPECIFIC DUTIES UNDER THE COMPANIES ACT
2015
Directors’ duties arise in different ways
– General duties arising under the Companies Act 2015
– Specific duties arising under the Companies Act 2015
GENERAL DUTIES UNDER THE COMPANIES ACT 2015
These are largely a statutory restatement of the common law and equitable rules. Indeed sec 140
says:
(3) The general duties are based on certain common law rules and equitable principles as they
apply in relation to directors and have effect in place of those rules and principles as regards the
duties owed to a company by a director.
(4) The general duties shall be interpreted and applied in the same way as common law rules or
equitable principles, and regard shall be had to the corresponding common law rules and
equitable principles in interpreting and applying the general duties.
SPECIFIC DUTIES UNDER THE COMPANIES ACT 2015
1) Duty to act within powers.
A director of a company must:
(a) act in accordance with the company’s constitution, and
(b) only exercise powers for the purposes for which they are conferred.
Any person who is appointed and accepts the title of a must ensure they are well versed with the
constitution of the company which are the articles of association of the Company. The articles of
the company are a legally binding contract between the directors and the Company.
2) Duty of director to promote the success of the company.
A director of a company must act in the way he considers, in good faith, would be most likely to
promote the success of the company for the benefit of its members as a whole, and in doing so
have regard (amongst other matters) to:
(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers, customers and others,
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business
conduct,
and
(f) the need to act fairly as between members of the company.
This duty of director to promote the success of the company is similar to section 172 of the UK
Companies Act 2006. The current UK Corporate Governance code 2018 (the UK code) which
came into effect in July 2018, among the main changes enables greater board engagement with
the workforce to understand their views.
This duty under Kenya Companies Act 2015 requires the directors to engage with a wide
spectrum of stakeholders ranging from employees, suppliers, customers and members of the
public so as to promote the success of the company.
3) Duty to exercise independent judgment.
(1) A director of a company must exercise independent judgment.
(2) This duty is not infringed by his acting:
(a) in accordance with an agreement duly entered into by the company that restricts the future
exercise of discretion by its directors, or
(b) in a way authorised by the company’s constitution.
4) Duty to exercise reasonable care, skill and diligence.
(1) A director of a company must exercise reasonable care, skill and diligence.
(2) This means the care, skill and diligence that would be exercised by a reasonably diligent
person with:
(a) the general knowledge, skill and experience that may reasonably be expected of a person
carrying out the functions carried out by the director in relation to the company, and
(b) the general knowledge, skill and experience that the director has.
5) Duty to avoid conflicts of interest.
(1) A director of a company must avoid a situation in which he has, or can have, a direct or
indirect interest that conflicts, or possibly may conflict, with the interests of the company.
(2) This applies in particular to the exploitation of any property, information or opportunity (and
it is immaterial whether the company could take advantage of the property, information or
opportunity).
6) Duty not to accept benefits from third parties.
(1) A director of a company must not accept a benefit from a third party conferred by reason of:
(a) his being a director, or
(b) his doing (or not doing) anything as director.
(2) A “third party” means a person other than the company, an associated body corporate or a
person acting on behalf of the company or an associated body corporate.
(3) This duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as
likely to give rise to a conflict of interest.
(4) A person who contravenes this duty commits an offence and is liable on conviction to a fine
not exceeding one million shillings.
7) Duty to declare interest in a transaction or arrangement.
This is contained in two parts (a) and (b).
(a) Proposed transaction or arrangement.
(1) If a director of a company is in any way, directly or indirectly, interested in a proposed
transaction or arrangement with the company, he must declare the nature and extent of that
interest to the other directors.
(2) The declaration may (but need not) be made:
(a) at a meeting of the directors, or
(b) by notice to the directors in accordance with:
(i) Notice in writing; or
(ii) General notice.
(3) A director need not declare an interest:
(a) if it cannot reasonably be regarded as likely to give rise to a conflict of interest;
(b) if, or to the extent that, the other directors are already aware of it (and for this purpose the
other directors are treated as aware of anything of which they ought reasonably to be aware); or
(c) if, or to the extent that, it concerns terms of his service contract that have been or are to be
considered:
(i) by a meeting of the directors, or
(ii) by a committee of the directors appointed for the purpose under the company’s constitution.
(b) Notice of interest in existing transactions
(These provisions largely echo those for proposed transactions)
Where a director is in any way, directly or indirectly, interested in a transaction or arrangement
that has been entered into by the company, he must declare the nature and extent of the interest
to the other directors in accordance with this section.
This section does not apply if or to the extent that the interest has been declared (duty to declare
interest in proposed transaction or arrangement).
A director who contravenes this section commits an offence and is liable on conviction to a fine
not exceeding one million shillings.