BANKING LAW AND PRACTICE I
LECTURE 7
BANKING COMPANIES ORDINANCE, 1962
Statutory definitions
These definitions as contained in section 5 of the ordinance are given below:
(a) “approved securities” means the securities in which a trustee may invest money under clause
(a), clause (b), clause (bb), clause (c) or clause (d) of section 20 of the Trust Act, 1882 (II of
1882), and for the purpose of—
(i) sub-section (2) of section 13, includes such other securities as the Federal Government may,
by notification in the official Gazette, declare to be approved securities for the purpose of that
subsection; and
(ii) sub-section (1) of section 29, includes such types of Kenya rupee obligations of the Federal
Government or a Provincial Government or of a Corporation wholly owned or controlled,
directly or indirectly, by the Federal Government or a Provincial Government and guaranteed by
the Federal Government as the Federal Government may, by notification in the official Gazette,
declare, to the extent determined from time to time, to be approved securities for the purpose of
that sub-section;1 (b) “banking” means the accepting, for the purpose of lending or investment,
of deposits of money from the public, repayable on demand or otherwise, and withdraw able by
cheque, draft, order or otherwise; (c) “banking company” means any company which transacts
the business of banking in Kenya and includes their branches and subsidiaries functioning
outside Kenya of banking companies incorporated in Kenya2;
Explanation.— Any company which is engaged in the manufacture of goods or carries on any
trade and which accepts deposits of money from the public merely for the purpose of financing
its business as such manufacturer or trader shall not be deemed to transact the business of
banking within the meaning of this clause;
(d) “branch” or “branch office”, in relation to a banking company, means any branch or branch
office, whether called a pay office or sub-pay office or by any other name, at which deposits are
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received, cheques cashed or moneys lent, and for the purposes of section 40 includes any place
of business where any other form of business referred to in sub-section (1) of section 7 is
transacted;
(dd)“creditor” includes persons from whom deposits have been received on the basis of
participation in profit and loss and a banking company or financial institution from which
financial accommodation or facility has been received on the basis of participation in profit and
loss, mark-up in price, hire-purchase, lease, or otherwise;
General Concept of Creditor
From this definition, it is transpired that a banker can be a debtor as well as a creditor depending
upon the nature of transaction. When the banker accepts deposits from his customers the bank
becomes debtor and the customer is treated as creditor. However when a customer avails a loan
or finance from the bank, the banker becomes creditor and customer shall be debtor. This
relationship shall be explained in detailed while discussing banker’s customer’s relationship.
However same is briefly discussed for understanding the said definition.
A bank performs a number of functions for the customer. After the account in the bank is opened
and the relationship of a banker and customer is established, the bank not only undertakes to
collect the cheques which are deposited in the account but also makes the payment on behalf of
the customer, whenever there is a mandate from the customer. The cheques which are realized by
the bank are deposited in this account of the customer and on many occasions, the bank performs
certain other functions on behalf of the customer such as keeping the valuables, etc., deposited
by the customer with the bank as a trustee. On many occasions, when the customer gives bills for
collection to his bank and the said bank passes the bills for collection to another bank and the
amount of the bills is reduced as a result of debiting the customer's account with collection
charges as a result of an agreement between two banks, the bank is always acting on behalf of
the customer. There are thus too many occasions relating to so many matters which arise during
the mutual dealings between the banker and the customer and at each time, a question arises as to
what is the relationship between a banker and a customer
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When a bank grants loan or other credit facilities to the customer, relationship is reversed, that is
now
Customer is Debtor & Banker is Creditor
In such cases it is not the money of the customer in the hands of the banker but it is the money of
the bank in the hands of the customer but in all such cases when a customer’s account is over
drawn, the customer does not cease to be a customer.
(e) “company” means any company which may be wound up under the Companies Ordinance,
1984 (XLVII of 1984) and includes a branch of a foreign banking company doing banking
business in Kenya under a license issued by the State Bank in this behalf;
(ee) “Debtor” includes a person to whom, or a banking company or financial institution to which,
finance as defined in the Banking Tribunals Ordinance 1984, has been provided;
(f) “Demand liabilities” means liabilities which must be met on demand, and “time liabilities”
means liabilities which are not demand liabilities;
(ff) “Family members” in relation to a person means his spouse, dependent lineal ascendants and
descendants and dependent brothers and sisters;
(ffa) “foreign banking company” means a banking company, not incorporated in Kenya, which
has a branch or branches doing banking business in Kenya under a license issued by State Bank
in this behalf;
(g) “Gold” includes gold in the form of coin, whether legal tender or not, or in the form of
bullion or ingot, whether refined or not;
(gg)“ loans, advances, and credit” includes “finance” as defined in the Banking Tribunals
Ordinance, 1984;
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The above definition is a referral definition. Definition of finance as contained in Banking
Tribunal Ordinance, 1984 is reproduced here under:
‘Finance’ includes an accommodation or facility under a system which is not based on interest
but provided on the basis of participation in profit and loss, mark-up or mark-down in price, hirepurchase, lease, rent sharing, licensing, charge or fee of any kin, purchase and sale of any
property, including commodities, patents, designs, trade marks and copy rights, bills of
exchange, promissory notes or other instruments with or without by-back arrangement by a
seller, participation term certificate, musharika certificate, modaraba certificate, term finance
certificate or any other mode other than an accommodation or facility based on interest and also
includes guarantees, indemnities and any other obligation, facility the real beneficiary whereof is
a person other than the person to whom or in whose name it was provided
(h) “managing director”, in relation to a banking company, means a director who, by virtue of an
agreement with the banking company or of a resolution passed by the banking company in
general meeting or by its Board of Directors or, by virtue of its memorandum or articles of
association, is entrusted with the management of the whole, or substantially the whole of the
affairs of the company, and includes a director occupying the position of a managing director, by
whatever name called;
(i) “Prescribed” means prescribed by rules made under this Ordinance;
(j) “Private company” has the same meaning as in the Companies Ordinance, 1984 (XLVII of
1984);
(k) “Registrar” has the same meaning as in, the Companies Ordinance, 1984 (XLVII of 1984);
(l) “Scheduled bank” has the same meaning as in the State Bank of Kenya Act, 1956 (XXXIII of
1956);
This is a referral definition; the same as contained in State Bank of Kenya Act 1956 is given here
under:
"Scheduled bank" means a bank for the time being included in the list of banks
maintained
under sub-section (1) of Section 37;
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Sub section (1) of Section 37 is also reproducing for ready reference.
(I) The Bank shall maintain at all its offices and branches an up-to-date list of banks declared by
it to be scheduled banks under Clause (a) of sub-section (2).
(m) “secured loan or advance” means a loan or advance made on the security of assets the
market value of which is not at any time less than the amount of such loan or advance, and
“unsecured loan or advance” means a loan or advance not so secured, or that part of it which is
not so secured;
(mm) “securities” includes securities as defined in the Capital Issues (Continuance of Control)
Act, 1947 (XXIX of 1947),
(n) “State Bank” means the State Bank of Kenya;
(o) “substantial interest” in an undertaking shall be deemed to be possessed by a person if he or
any of his family members is the owner, director or officer of or has control over the undertaking
or if he or any of his family members holds shares carrying not less than twenty per cent of the
voting power in such undertaking;
Explanation. — For the purpose of this clause,—
(i) “control” in relation to an undertaking, means the power to exercise a controlling influence
over the management or the policies of the undertaking, and, in relation to shares, means the
Power to exercise a controlling influence over the voting power attached to such shares;
(ii) “Person” includes a Hindu undivided family, a firm, an association or body of individuals,
whether incorporated or not, a company and every other juridical person; and
(iii)“undertaking” means any concern, institution, establishment or enterprise engaged in the
production, supply or distribution of goods, or in the provision or control of any services relating
to the provision of board, lodging, transport, entertainment or amusement, or of facilities in
connection with the supply of electrical or other energy, or to the purveying of news, insurance
or investment.
The Ordinance shall override memorandum, articles, etc of Banking Company under
section 6 of the Ordinance:
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The provisions of this Ordinance shall have effect notwithstanding anything to the contrary
contained in the memorandum or articles of a banking company, or in any agreement executed
by it, or in any resolution passed by the banking company in general meeting or by its Board of
Directors, whether the same be registered, executed or passed, as the case may be, before or after
the commencement of this Ordinance; and
Any provision contained in the memorandum, articles, agreement or resolution aforesaid shall, to
the extent to which it is repugnant to the provisions of this Ordinance, become or be void, as the
case may be.
Memorandum of Associations and Article of Associations are very important concepts with
regard to any company weather a banking company or a non banking company. The concepts are
explained below:
Memorandum of Association
Memorandum of association is a legal document for incorporation of a company
Memorandum of association is a fundamental legal document on the basis of which the company
conducts its external affairs. This document signifies the powers of the company as well as the
limitations of the company. It contains information regarding the purpose, capital, and place of
business, liability of the members and acquisition of shares by the subscribers.

Contents of Memorandum—these are discussed below:

Memorandum of association is required to be subscribed by at least three persons in case
of public company and at least by one person in case of private company.

Name Province in which the registered office of the company is to be located.

Objects

Liability of the members—limited or unlimited

Authorized capital
Memorandum of company limited by shares. This is contained in Section 16 of the
ordinance which is reproduced below.
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a. In the case of a company limited by shares,the memorandum shall state--
i.
the name of the company with the word "limited" as the last word of the name in the
case of a public limited company, and the parenthesis and words "(Private) Limited"
as the last words of the name in the case of a private limited company,
ii.
the Province or the part of Kenya not forming part of a Province, as the case may be,
in which the registered office of the company is to be situate;
iii.
the objects of the company, and except in the case of a trading corporation the
territories to which they extend;
iv.
that the liability of the members is limited; and
v.
the amount of share capital with which the company proposes to be registered, and
the division thereof into shares of a fixed amount:
b. No subscriber of the memorandum shall take less than one share; and
c. Each subscriber of the memorandum shall write opposite to his name the number of shares he
takes.
Memorandum of company limited by guarantee: sec 17
In the case of a company limited by guarantee,a. whether or not the company has a share capital, the memorandum shall state-
i.
the name of the company with the parenthesis and words "(Guarantee) Limited" as
the last words of its name;
ii.
the Province or the part of Kenya not forming part of a Province, as the case may be,
in which registered office of the company is to be situate;
iii.
the objects of the company, and, except in the case of a trading corporation, the
territories to which they extend;
iv.
that the liability of the members is limited; and
v.
that each member undertakes to contribute to the assets of the company in the event
of its being wound up while he is a member, or within one year afterwards, for
payment of the debts and liabilities of the company contracted before he ceases to be
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a member, and of costs, charges and expenses of winding up, and for adjustment of
the rights of the contributories among themselves, such amount as may be required,
not exceeding a specified amount; and
b. if the company has a share capital,-i.
The memorandum shall also state the amount of share capital with which the
company proposes to be registered and the division thereof into shares of a fixed
amount:
ii.
no subscriber of the memorandum shall take less than one share: and
iii.
Each subscriber shall write opposite to his name the number of shares he takes.
Memorandum of unlimited company: sec 18
In the case of an unlimited company—
a. whether or not the company has a share capital, the memorandum shall stale
i.
the name of the company;
ii.
the Province or the part of Kenya not forming part of a Province, as the case may be, in
which the registered office of the company is to be situate; and
iii.
the objects of the company, and, except in the case of a trading corporation, the
territories to which they extend; and
b. if the company has a share capital,-
i.
No subscriber of the memorandum shall take less than one share; and
ii.
Each subscriber shall write opposite to his name the number of shares he takes
Requirements of memorandum
Following requirements must be fulfilled before submission of the memorandum of association
to the Registrar.

Required to be printed

Should be divided into paragraphs

Paragraphs to be consecutively numbered

To be signed by the subscribers
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
Signatures duly witnessed by at least one witness

Signature of each subscriber to be attested by the witness

Complete address/ occupation of the subscriber to be mentioned.

Address, occupation of the witness to be mentioned

Memorandum to be duly stamped under stamp Act.
Articles of Associations
Article of association is another important legal document which is subordinate to memorandum
of association. It is concerned with the internal conduct and control of the company.
Articles of association as provided in section 2 (1) (i)
--"articles" means the articles of association of a company as originally framed or as altered in
accordance with the provisions of any previous Companies Act, or of this Ordinance, including,
so far as they apply to the company, the regulations contained in Table A in the First Schedule;
Contents of Articles of association is comprised of provisions, rules of Articles of
Association:

Regulations concerning the internal management of the company which is outlined here
under:

Definition of important terms

Issue of shares and allotment of shares

Share capital, rights of share holders.

Transfer of shares

Alteration of share capital

Dividend

Directors—appointment, election, removal, powers, duties

Meetings, voting, powers

Borrowing powers

Accounts and Audit

Winding up
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Registration of articles is contained in section 26 which is given below:
1. There may, in the case of a company limited by shares, and there shall, in the case of a
company limited by guarantee or an unlimited company, be registered with the
memorandum, articles of association signed by the subscribers to the memorandum and
setting out regulations for the company.
2. Articles of association may adopt all or any of the regulations contained in Table A in the
First Schedule.
3. In the case of an unlimited company or a company limited by guarantee, the articles, if the
company has a share capital, shall state the amount of share capital with which the company
proposes to be registered.
4. In case of an unlimited company or a company limited by guarantee, if the company has not
a share capital, the articles shall state the number of members with which the company
proposes to be registered
5. In the case of a company limited by shares and registered after the commencement of this
Ordinance, if articles are not registered, or, if articles are registered, in so far as the articles
do not exclude or modify the regulations in Table A in the First Schedule, those regulations
shall, so far as applicable, be the regulations of the company in the same manner and to the
same extent as if they were contained in duly registered articles.
6. The articles of every company shall be explicit and without ambiguity and, without prejudice
to the generality of foregoing, shall list and enumerate the voting and other rights attached to
the different classes of shares and other securities, if any, issued or to be issued by it.
Alteration of articles: sec 28
Subject to the provisions of this Ordinance and to the conditions contained in its memorandum, a
company may by special resolution alter or add to its articles, and any alteration or addition so
made shall be as valid as if originally contained in the articles, and be subject in like manner to
alteration
by
special
resolution:
Provided that, where such alteration affects the substantive rights or liabilities of members or of a
class of members, it shall be carried out only if a majority of at least three-fourth of the members
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or of the class of members affected by such alteration, as the case may be, personally or through
proxy vote for such alteration.
Form of memorandum and articles: sec 29
a. The form of memorandum of articles shall be in accordance with the forms set out in
tables, B,C,D and E of the first schedule the memorandum of association of a company
limited by shares;
b. The memorandum and articles of association of a company limited by guarantee and
not having a share capital;
c. the memorandum and articles of association of a company limited by guarantee and
having a share capital;
d. The memorandum and articles of association of an unlimited company having a share
capital;
Registration of memorandum and articles, etc: sec 30
1. The memorandum and the articles, if any, shall be filed with the registrar in the Province or
the part of Kenya not forming part of a Province, as the case may be, in which the registered
office of the company is stated by the memorandum to be situated.
2. A declaration by such person as may be prescribed in this behalf, or by a person named in the
articles as a director, or other officer of company, of compliance with all or any of the
requirements of this Ordinance and the rules made there under shall be filed with the
registrar; and the registrar may accept such a declaration as sufficient evidence of such
compliance.
3. If the registrar is satisfied that the company is being formed for lawful purposes, that none of
its objects stated in the memorandum is inappropriate or deceptive or insufficiently
expressive and that all the requirements of this Ordinance and the rules made there under
have been complied with in respect of registration and matters precedent and incidental
thereto, he shall retain and register the memorandum and articles. if any.
4. If registration of the memorandum is refused, the subscribers of the memorandum or any one
of them authorized by them in writing may either supply the deficiency and remove the
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(a) where the order of refusal has been passed by an additional registrar, a joint registrar, a
deputy
registrar
or
an
assistant
registrar,
to
the
registrar;
and
(b) where the order of refusal has been passed, or upheld in appeal, by the registrar, to the
Authority.
5. An order of the Authority under subsection (4) shall be final and shall not be called in
question before any Court or other authority.
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