NOTES ON THE LAW OF BANKING
Important Statutes to have:
The Bank of Tanzania Act, 2006
The Banking and Financial Institutions Act, 2006
The Foreign Exchange Act, 1992
The Bills of Exchange Act, Cap. 215
The Basel II Document, 2007
The Uniform Customs for Documentary Credits, 2007
Introduction.
What is a bank
A bank means an entity that is engaged in the banking business (s.3 BOT Act, 2006)
A banking business means the business of receiving funds from the general public through the acceptance of deposits payable upon demand or after a fixed period or after notice, or any similar operation through
the frequent sale or placement of bonds, certificates, notes or other securities, and to use such funds, in whole or in part, for loans or investments for the account of and at the risk of the person doing such business
Financial institution” means an entity engaged in the business of banking, but limited as to size, locations served, or permitted activities, as prescribed by the Bank or required by the terms and conditions of its license; or according to BOT an institution licensed by Bank of Tanzania and authorized to engage in banking business not involving the receipt of money on current account subject to withdrawal by cheque.
The word commercial bank has not been defined by statutes in Tanzania, we therefore subscribe to juristic definitions or those of merchants, thus a commercial bank can be defined as a bank that provides checking accounts, savings accounts, and money market accounts and that accepts time deposits. The BOT defined commercial bank as an institution authorized to receive money on current account subject to withdrawal by cheque.
Origin of the Word Bank
The name bank derives from the Italian word banco "desk/bench", used during the Renaissance by Florentine bankers, who used to make their transactions above a desk covered by a green tablecloth.[2] However, traces of banking activity can found even in ancient times.
In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders would set up their stalls in the middle of enclosed courtyards called macella on a long bench called a bancu, from which the words banco and bank are derived. As a moneychanger, the merchant at the bancu did not so much invest money as merely convert the foreign currency into the only legal tender in Rome- that of the Imperial Mint
Otherwise a commercial bank can be defined as the bank that operate or run accounts, accept deposits and which does business with the money deposited with them.
The role of commercial banks
Commercial banks engage in the following activities:
• processing of payments by way of telegraphic transfer, EFTPOS, internet banking, or other means
• issuing bank drafts and bank cheques
• accepting money on term deposit
• lending money by overdraft, installment loan, or other means
• providing documentary and standby letter of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet exposures
• safekeeping of documents and other items in safe deposit boxes
• sale, distribution or brokerage, with or without advice, of insurance, unit trusts and similar financial products as a “financial supermarket”
• traditionally, large commercial banks also underwrite bonds, and make markets in currency, interest rates, and credit-related securities, but today large commercial banks usually have an investment bank arm that is involved in the mentioned activities
THE RISE AND DEVELOPMENT OF BANKING
The rise and development of banking is closely related with commodity production. i.e. production for exchange.
The first form of exchange was barter system. This was a primitive medium of exchange where people exchanges things such as crops, animal skins etc. Out of these emerged a group of specioalised people in trade.
There followed development of exchange through precious metals such as silver, gold, etc.
The people concerned with precious metals looked for somewhere to keep their precious metals like in shrines and palaces.
Thereafter people inverted coins. The coin minted became the first money and accepted as medium of exchange. Each city minted its own money and not of another city states. It was out of this conflict when people known as money changers emerged in various city states.
They collected money from various city states and stated to exchange to people who wanted to trade or enter another city state.
With the development of trade, money changer became institutionalized and entrusted. People started to keep money with them. The money changer kept records of who deposited the money and of who withdrew the money.money changer had to keep books of accounts and ledgers in order to manage trade effectively. Later on the money changers decided to trade with the money deposited, to give loans with an interest and invest that money to get profit. It was out of this that money changers became so successful and transformed themselves into an institution called “bank”. Then many banks were opened but collapsed because they were operating blindly.
The governments then set out rules to regulate and control the activities of commercial banks
FINANCIAL POSITION IN EA BEFORE 1914
Before 1914, Kenya and Uganda were under the british and deustche ostafrika was under the Germans. The currency in use for Kenya and Uganda were the Indian rupees and the pound. Rupee was recognized since 1898. The exchange rate of the rupee to pound was set in 1905, the rupee was equal to £1.
The currency in use in Tanganyika was a german rupee which had the same value as the Indian rupee. A german rupee was divided into 100 units and each unit was called hellar. Later the german crown was introduced. One GC was equal to 10 Deustche marks. Also double crown was another currency in use in Tanganyika. 1DC was equal to 20 DM and 1 crown was equal to 10 DM= 7.5. GR. The DC was equal to 20 DM and 15Rs.
GLOBAL FINANCIAL POSITION BEFORE WW1
Before 1914 the basis of financial dealings was the Gold standard. (GS). The GS meant that for notes printed there were always some gold stored somewhere so that a person could get equivalent in exchange of his money. The currencies in use in EA were also tied to gold standards, so did the british and German currencies.
EFFECTS OF WW1 ON BRITISH FINANCIAL POSITION
There was a printing of more notes than gold. The gold std was suspended in so far as it was not guaranteed. Paper money increased at faster rate than the amouns of goods produced in Britain causing a lot of inflation. The purchasing power of £ declined by 40% between 14 and 1920s.
POSITION OF INDIAN RUPEES
The Indian currency in east Africa currency became not tied to gold standard. Consequently, the paper rupee inflated market. The inflation of rupees had effects on the exchange rates. In 1913, the pound was equal to 10 Rs and by 1919, one pound was equal to less than 8Rs. The rupees became stronger and more valuable than the £.
THE EFFECTS OF CHANGING IN THE EXCHANGE RATES
The change in the exchange rate made the economy unstable and insecure. Settllers, farmers and also prosperous African farmers got very much worried. BY 1920 prices received for export were between 300% sand 800% lower than they were few moths before. In Uganda the white setllers collapsed, confidence in nthe money was lost. This led to the first economic crisis in Africa and the world at large.
After the war, Kenya, Uganda and Tanganyika were under british rule , Kenya as a colony and Tanganyika and Uganda was protectorates. The economic situations of these three had to be stabilized to avoid further crisis. The colonial govt used a number of ways to stabilize the economy, some of these were:-
(a) they though to stabilize the economy by pegging the Rs to £ by law. This step was not successful because by so pegging (£ +10Rs) became effective in EA alone not in india with the following results:-
(i) between June 1920 and February 1921, In the open market the value of the rupee against the pound declined by £1=15Rs
(ii) people began to take advantage of this situation and decided to trade between east Africa and India
(iii) as a result the Indian rupees flooded in the economy of EA leading to inflation
(b) a decision to provisionally fix the value of Indian rupee to 8.5 by £1. This was done by passing the law in order i.e. The East African (Currency) Order, intended to discourage the inflow of Indian rupees in EA but this also didn’t work
(c) they decided to have a local rupee- Florin. One florin was worth 2 shs/ sterling. This was done by a law called “The EA (Currency) Order No.2, 1920. This as well could not rectify the situation.
(d) It was decided to stop the inflow of the Indian rupees to east africa in February 1921 by declaring Indian rupee no longer a legal tender in EA. Thereafter, the florin became the basic unit of currency in EA however, the use of florin didn’t make the economy better.
(e) Therefore, the colonial government introduced another basic unit of currency called the East African Shilling and it became effective on 21st may 1921 and legalized by two orders as a legal tender. The two orders were , one “The Kenya and Uganda(Currency) Order, 1921 and secondly, The Kenya and Uganda (Currency Order) No.2 of 1922. They became effective in 1922. Despite these, the inflow of Indian rupee continued.
(f) A decision was later made to withdraw the Indian rupee from east Africa before 10th of june 1921.
(g) On the 8th of june 1921, the Indian rupee was demonetized in EA.
Since then up to june 1967, the east African shilling was the basic unit of currency in east Africa and it was equivalent to 1 shilling. From this time the money that circulated in EA became the shilling stirling, the east African shilling and the east African rupee i.e. the florin.
THE ORIGIN OF THE WORD SHILLING
The shilling is a unit of currency used in current and former English Commonwealth countries and still used in countries which have become republics, such as Kenya. The word shilling comes from schilling, an accounting term that dates back to Anglo-Saxon times where it was deemed to be the value of a cow in Kent or a sheep elsewhere. The word is thought to derive from the base skell-, "to ring/resound" and the diminutive suffix -ing. [1]
The abbreviation for shilling is s, from the Latin solidus, the name of a Roman coin. Often it was informally represented by a slash, standing for a Long s: e.g., "1/6d" meaning 1 shilling and sixpence (often pronounced "one and six"); a price with no pence was written with a slash and a dash, e.g., "11/–". Quite often a triangle or (serif) apostrophe would be used to give a neater appearance, e.g., "1'6" and "11'-". In Africa it is often abbreviated sh.
In the United Kingdom, a shilling was a coin used from the reign of Henry VII until decimalisation in 1971. Before decimalisation, there were 20 shillings/pound and 12 pence/shilling, and thus 240 pence/pound. Two coins denominated in multiple shillings were also in circulation at this time. They were the florin, which adopted the value of 10 new pence (10p), and the crown, the highest denominated non-bullion UK coin in circulation at decimalisation. At decimalisation, the shilling was superseded by the new 5 pence piece, which initially was of identical size and weight and had the same value, and inherited the shilling's slang name of a b The East African shilling was in use in the British colonies and protectorates of British Somaliland, Kenya, Tanganyika, Uganda and Zanzibar from 1920, when it replaced the rupee, until after those countries became independent, and in Tanzania after that country was formed by the merger of Tanganyika and Zanzibar in 1964. Upon independence in 1960, the East African shilling in the Northern Region of Somalia (former British Somaliland) and the Somali Somalo in the Southern Region (former Italian Somaliland) were replaced by the Somali Shilling.[2] In 1966 the East African Monetary Union broke up, and the member countries replaced their currencies with the Kenyan shilling, the Ugandan shilling and the Tanzanian shilling respectively.[3] Though all these currencies have different values at present, there are plans to reintroduce the East African shilling as a new common currency by 2009.[4]
ESTABLISHMENT OF THE EACB
The EACB was established in 1919 for Kenya, Uganda and Tanganyika. Its functions were:-
(a) To organise the change from rupee based currency to the shilling base curency for the whole of EA by buying up the rupee in EA
(b) To issue EA notes and coins against the backing of sterling at the rate of 20 EAShs = £1
(c) To obtain british and colonial govt security for the sterling it collected.
Note:
The main aim again was to stabilise the currency in EA to make its economy stable and fit for exploration. The headquarters of the board was in london until 190 when the headquarters were moved to Kenya.
During this time, if one wanted to bring in EA 100 pounds you will be required to place £100 with a commercial bank. The governing law of the boards was the regulations made in 1920 but were revoked by regulations of 1924 which were also revoked by regulation of 1932. These were also revoked by regulation of 1945 and 1949 respectively. The 1949 regulations were also revoked by the 1966 regulations.
DEVELOPMENT OF BANKING IN AFRICA
The history of banking in africa started by the establishment of braches of metropolitan banks in Africa. This was a result of imperialism curiosity to overthrow beyond their borders to invest in Africa. After colonization it became important to establish braches in colonies to cater for capitalist needs. The banks were operated according to the applicable rules to mother-banks.
These banks could not issue currency or control the supply of currencies. These factors necessitated the establishment of the currency board, thus in 1903 the currency board of kenya and uganda was established and in Tanganyika.
The board had no control over the commercial banks as there was no need for such control because:-
(a) The commercial banks operated according to the EACB system- but they complied to the EACB regulations
(b) The board didn’t have fiduciary issue but had no power to issue currencies that was not backed up by sterling.
AFTER 1955.
(a) New set of regulations was made.
The Bank of Tanzania Act, 2006
The Banking and Financial Institutions Act, 2006
The Foreign Exchange Act, 1992
The Bills of Exchange Act, Cap. 215
The Basel II Document, 2007
The Uniform Customs for Documentary Credits, 2007
Introduction.
What is a bank
A bank means an entity that is engaged in the banking business (s.3 BOT Act, 2006)
A banking business means the business of receiving funds from the general public through the acceptance of deposits payable upon demand or after a fixed period or after notice, or any similar operation through
the frequent sale or placement of bonds, certificates, notes or other securities, and to use such funds, in whole or in part, for loans or investments for the account of and at the risk of the person doing such business
Financial institution” means an entity engaged in the business of banking, but limited as to size, locations served, or permitted activities, as prescribed by the Bank or required by the terms and conditions of its license; or according to BOT an institution licensed by Bank of Tanzania and authorized to engage in banking business not involving the receipt of money on current account subject to withdrawal by cheque.
The word commercial bank has not been defined by statutes in Tanzania, we therefore subscribe to juristic definitions or those of merchants, thus a commercial bank can be defined as a bank that provides checking accounts, savings accounts, and money market accounts and that accepts time deposits. The BOT defined commercial bank as an institution authorized to receive money on current account subject to withdrawal by cheque.
Origin of the Word Bank
The name bank derives from the Italian word banco "desk/bench", used during the Renaissance by Florentine bankers, who used to make their transactions above a desk covered by a green tablecloth.[2] However, traces of banking activity can found even in ancient times.
In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders would set up their stalls in the middle of enclosed courtyards called macella on a long bench called a bancu, from which the words banco and bank are derived. As a moneychanger, the merchant at the bancu did not so much invest money as merely convert the foreign currency into the only legal tender in Rome- that of the Imperial Mint
Otherwise a commercial bank can be defined as the bank that operate or run accounts, accept deposits and which does business with the money deposited with them.
The role of commercial banks
Commercial banks engage in the following activities:
• processing of payments by way of telegraphic transfer, EFTPOS, internet banking, or other means
• issuing bank drafts and bank cheques
• accepting money on term deposit
• lending money by overdraft, installment loan, or other means
• providing documentary and standby letter of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet exposures
• safekeeping of documents and other items in safe deposit boxes
• sale, distribution or brokerage, with or without advice, of insurance, unit trusts and similar financial products as a “financial supermarket”
• traditionally, large commercial banks also underwrite bonds, and make markets in currency, interest rates, and credit-related securities, but today large commercial banks usually have an investment bank arm that is involved in the mentioned activities
THE RISE AND DEVELOPMENT OF BANKING
The rise and development of banking is closely related with commodity production. i.e. production for exchange.
The first form of exchange was barter system. This was a primitive medium of exchange where people exchanges things such as crops, animal skins etc. Out of these emerged a group of specioalised people in trade.
There followed development of exchange through precious metals such as silver, gold, etc.
The people concerned with precious metals looked for somewhere to keep their precious metals like in shrines and palaces.
Thereafter people inverted coins. The coin minted became the first money and accepted as medium of exchange. Each city minted its own money and not of another city states. It was out of this conflict when people known as money changers emerged in various city states.
They collected money from various city states and stated to exchange to people who wanted to trade or enter another city state.
With the development of trade, money changer became institutionalized and entrusted. People started to keep money with them. The money changer kept records of who deposited the money and of who withdrew the money.money changer had to keep books of accounts and ledgers in order to manage trade effectively. Later on the money changers decided to trade with the money deposited, to give loans with an interest and invest that money to get profit. It was out of this that money changers became so successful and transformed themselves into an institution called “bank”. Then many banks were opened but collapsed because they were operating blindly.
The governments then set out rules to regulate and control the activities of commercial banks
FINANCIAL POSITION IN EA BEFORE 1914
Before 1914, Kenya and Uganda were under the british and deustche ostafrika was under the Germans. The currency in use for Kenya and Uganda were the Indian rupees and the pound. Rupee was recognized since 1898. The exchange rate of the rupee to pound was set in 1905, the rupee was equal to £1.
The currency in use in Tanganyika was a german rupee which had the same value as the Indian rupee. A german rupee was divided into 100 units and each unit was called hellar. Later the german crown was introduced. One GC was equal to 10 Deustche marks. Also double crown was another currency in use in Tanganyika. 1DC was equal to 20 DM and 1 crown was equal to 10 DM= 7.5. GR. The DC was equal to 20 DM and 15Rs.
GLOBAL FINANCIAL POSITION BEFORE WW1
Before 1914 the basis of financial dealings was the Gold standard. (GS). The GS meant that for notes printed there were always some gold stored somewhere so that a person could get equivalent in exchange of his money. The currencies in use in EA were also tied to gold standards, so did the british and German currencies.
EFFECTS OF WW1 ON BRITISH FINANCIAL POSITION
There was a printing of more notes than gold. The gold std was suspended in so far as it was not guaranteed. Paper money increased at faster rate than the amouns of goods produced in Britain causing a lot of inflation. The purchasing power of £ declined by 40% between 14 and 1920s.
POSITION OF INDIAN RUPEES
The Indian currency in east Africa currency became not tied to gold standard. Consequently, the paper rupee inflated market. The inflation of rupees had effects on the exchange rates. In 1913, the pound was equal to 10 Rs and by 1919, one pound was equal to less than 8Rs. The rupees became stronger and more valuable than the £.
THE EFFECTS OF CHANGING IN THE EXCHANGE RATES
The change in the exchange rate made the economy unstable and insecure. Settllers, farmers and also prosperous African farmers got very much worried. BY 1920 prices received for export were between 300% sand 800% lower than they were few moths before. In Uganda the white setllers collapsed, confidence in nthe money was lost. This led to the first economic crisis in Africa and the world at large.
After the war, Kenya, Uganda and Tanganyika were under british rule , Kenya as a colony and Tanganyika and Uganda was protectorates. The economic situations of these three had to be stabilized to avoid further crisis. The colonial govt used a number of ways to stabilize the economy, some of these were:-
(a) they though to stabilize the economy by pegging the Rs to £ by law. This step was not successful because by so pegging (£ +10Rs) became effective in EA alone not in india with the following results:-
(i) between June 1920 and February 1921, In the open market the value of the rupee against the pound declined by £1=15Rs
(ii) people began to take advantage of this situation and decided to trade between east Africa and India
(iii) as a result the Indian rupees flooded in the economy of EA leading to inflation
(b) a decision to provisionally fix the value of Indian rupee to 8.5 by £1. This was done by passing the law in order i.e. The East African (Currency) Order, intended to discourage the inflow of Indian rupees in EA but this also didn’t work
(c) they decided to have a local rupee- Florin. One florin was worth 2 shs/ sterling. This was done by a law called “The EA (Currency) Order No.2, 1920. This as well could not rectify the situation.
(d) It was decided to stop the inflow of the Indian rupees to east africa in February 1921 by declaring Indian rupee no longer a legal tender in EA. Thereafter, the florin became the basic unit of currency in EA however, the use of florin didn’t make the economy better.
(e) Therefore, the colonial government introduced another basic unit of currency called the East African Shilling and it became effective on 21st may 1921 and legalized by two orders as a legal tender. The two orders were , one “The Kenya and Uganda(Currency) Order, 1921 and secondly, The Kenya and Uganda (Currency Order) No.2 of 1922. They became effective in 1922. Despite these, the inflow of Indian rupee continued.
(f) A decision was later made to withdraw the Indian rupee from east Africa before 10th of june 1921.
(g) On the 8th of june 1921, the Indian rupee was demonetized in EA.
Since then up to june 1967, the east African shilling was the basic unit of currency in east Africa and it was equivalent to 1 shilling. From this time the money that circulated in EA became the shilling stirling, the east African shilling and the east African rupee i.e. the florin.
THE ORIGIN OF THE WORD SHILLING
The shilling is a unit of currency used in current and former English Commonwealth countries and still used in countries which have become republics, such as Kenya. The word shilling comes from schilling, an accounting term that dates back to Anglo-Saxon times where it was deemed to be the value of a cow in Kent or a sheep elsewhere. The word is thought to derive from the base skell-, "to ring/resound" and the diminutive suffix -ing. [1]
The abbreviation for shilling is s, from the Latin solidus, the name of a Roman coin. Often it was informally represented by a slash, standing for a Long s: e.g., "1/6d" meaning 1 shilling and sixpence (often pronounced "one and six"); a price with no pence was written with a slash and a dash, e.g., "11/–". Quite often a triangle or (serif) apostrophe would be used to give a neater appearance, e.g., "1'6" and "11'-". In Africa it is often abbreviated sh.
In the United Kingdom, a shilling was a coin used from the reign of Henry VII until decimalisation in 1971. Before decimalisation, there were 20 shillings/pound and 12 pence/shilling, and thus 240 pence/pound. Two coins denominated in multiple shillings were also in circulation at this time. They were the florin, which adopted the value of 10 new pence (10p), and the crown, the highest denominated non-bullion UK coin in circulation at decimalisation. At decimalisation, the shilling was superseded by the new 5 pence piece, which initially was of identical size and weight and had the same value, and inherited the shilling's slang name of a b The East African shilling was in use in the British colonies and protectorates of British Somaliland, Kenya, Tanganyika, Uganda and Zanzibar from 1920, when it replaced the rupee, until after those countries became independent, and in Tanzania after that country was formed by the merger of Tanganyika and Zanzibar in 1964. Upon independence in 1960, the East African shilling in the Northern Region of Somalia (former British Somaliland) and the Somali Somalo in the Southern Region (former Italian Somaliland) were replaced by the Somali Shilling.[2] In 1966 the East African Monetary Union broke up, and the member countries replaced their currencies with the Kenyan shilling, the Ugandan shilling and the Tanzanian shilling respectively.[3] Though all these currencies have different values at present, there are plans to reintroduce the East African shilling as a new common currency by 2009.[4]
ESTABLISHMENT OF THE EACB
The EACB was established in 1919 for Kenya, Uganda and Tanganyika. Its functions were:-
(a) To organise the change from rupee based currency to the shilling base curency for the whole of EA by buying up the rupee in EA
(b) To issue EA notes and coins against the backing of sterling at the rate of 20 EAShs = £1
(c) To obtain british and colonial govt security for the sterling it collected.
Note:
The main aim again was to stabilise the currency in EA to make its economy stable and fit for exploration. The headquarters of the board was in london until 190 when the headquarters were moved to Kenya.
During this time, if one wanted to bring in EA 100 pounds you will be required to place £100 with a commercial bank. The governing law of the boards was the regulations made in 1920 but were revoked by regulations of 1924 which were also revoked by regulation of 1932. These were also revoked by regulation of 1945 and 1949 respectively. The 1949 regulations were also revoked by the 1966 regulations.
DEVELOPMENT OF BANKING IN AFRICA
The history of banking in africa started by the establishment of braches of metropolitan banks in Africa. This was a result of imperialism curiosity to overthrow beyond their borders to invest in Africa. After colonization it became important to establish braches in colonies to cater for capitalist needs. The banks were operated according to the applicable rules to mother-banks.
These banks could not issue currency or control the supply of currencies. These factors necessitated the establishment of the currency board, thus in 1903 the currency board of kenya and uganda was established and in Tanganyika.
The board had no control over the commercial banks as there was no need for such control because:-
(a) The commercial banks operated according to the EACB system- but they complied to the EACB regulations
(b) The board didn’t have fiduciary issue but had no power to issue currencies that was not backed up by sterling.
AFTER 1955.
(a) New set of regulations was made.
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