BBSE Research Projects (2014)

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Financial development and economic growth in Kenya 1990 to 2010
(Strathmore University, 2014) Mutiga, Brian Muchiri
This study is intended to investigate the link between financial development and economic growth with special emphasis on the banking sector and the stock market in Kenya. The nature of the relationship was determined through an econometric analysis off financial development on Kenyan economic growth. A time series analysis was employed through the Vector Error Correction framework after cointegration had been established among the variables through the Johansen cointegration test framework. The model was adopted to estimate the effects of the banking and stock market indicators on economic growth. The existence of a long term relationship between financial development and economic growth was achieved through the Johansen co integration test which confirmed the existence of a long run relationship and the construction of a Vector Error Correction framework which confirmed the significance of the long term relationship. The direction of causality between financial development and economic growth was carried out using the Granger-causality framework and established the existence of bi-directional causality between financial development and economic growth with banking development having a greater impact on economic growth than stock market development. The results of the study indicate that there exists a long run equilibrium relationship between financial development and economic growth in Kenya and bi-directional causality running from financial development to economic growth and also from economic growth to financial development.
The impact of microfinance institutions on savings culture in a rural farm - based region - a case of MFIs in Meru county, Kenya
(Strathmore University, 2014) Kimathi, Nelly Makena
The research project seeks to examine the microfinance sector and advances made by microfinance institutions towards facilitating rural finance in terms of savings, with the eventual impact on Kenyan savings culture. Credit creation has been the hub of microfinance institutions and initially, these institutions were purely microcredit. With time, the need to incorporate savings and other savings avenues like micro-pension has come up as credit is not the only solution to poverty alleviation. Specific issues that will be addressed are the question of household savings and incentive to save among the rural inhabitants, available savings products by microfinance institutions, challenges in accessing these products as well as policy issues. These shall depict the wider picture of financial inclusion and microfinance outreach in relation to savings culture. In this regard, the study will be based in Kenya with keen interest on microfinance institutions in a farm-based region, Meru County. Both primary and secondary data will be used, the ASCA (Accumulated Savings and Credit Associations) model applied and the research will take the shape of a cross-sectional, evaluative study.
Effects of government expenditure on economic growth in Kenya - (1990 - 2012)
(Strathmore University, 2014) Abwoga, Timothy
Given the recent fiscal scenario of the Kenyan government, an explanation of this required studying the impact of government expenditure on economic growth. The specific objectives of the study were to: investigate the existence of a long term relationship between the components of government expenditure and economic growth; and examine the effects of components of government expenditure on GOP growth rate. The data used were government expenditure components that included expenditure on government investment, and government consumption. Sources of data were Kenya government documents and international financial publications. The study applied Vector Auto Regression estimation technique using annual time series data for the period 1960 to 2012 to evaluate the impact of government expenditure on economic growth. The Johansen cointegration tests revealed a long-run relationship between GOP growth rate and the selected components of government expenditure. Further, the Granger- Causality test indicated bi-directional causality between GOP growth rate and components of government expenditure. The results of impulse response functions and variance decomposition revealed that government expenditure on investment, and total government expenditure had a positive effect on economic growth while government consumption had mixed effects. The study concludes by giving policy recommendations based on findings and suggests areas such as optimal level of government expenditure for future studies.
Examining the potency of foreign currency as an asset class - evidence from Kenya
(Strathmore University, 2014) Mwaniki, Maryanne Wairimu
In this study I allocate currency assets namely, the US dollar, the Great Britain Pound, the Japanese Yen and the Tanzanian shilling to a portfolio using mean variance optimization. Similarly, I analyze currency as an asset class within the Kenyan context and given the various attributes pertaining to asset classes, the currency portfolio exhibited all the characteristics. The portfolio had positive returns thus giving investors an opportunity to make profits; the assets are strictly mutually exclusive since they can only be classified under currency assets, homogenous and liquid. The Tanzanian shilling met the criterion that assets should have low correlations relative to other asset classes. However, the pound, the dollar and the Yen exhibited quite high correlations to the equity class. Mean variance analysis has been used to create portfolios that minimize risk for a given level of return and the resulting currency portfolio performed better than the equity class given that it had higher returns and lower risk. The study lead to the conclusion that currency is an asset class and can be allocated to portfolios using mean variance optimization.
Examining the effect of product innovation on financial risk management in SACCOs - evidence from Kenya
(Strathmore University, 2014-03) Njoroge, Alice Ngonyo
This purpose of this study was to identify the effect of product innovations on risk management in SACCOs. The study relied on data collected from SACCO staff through questionnaires, company websites and publications. 34 SACCOs in Nairobi County were chosen to represent Kenya deposit taking SACCOs. The study was purely qualitative. The main data collected included the types of product innovations adopted, the risks arising from them and the risk mitigation techniques in response. The findings indicated that product innovations had a positive correlation with credit risk and default risk. Risk management techniques had changed and increased in response to this with SACCOs becoming more concerned with their risk management. The main conclusions were that although effort has been made towards improving risk management in SACCOs, a lot of gaps remain. In most SACCOs, risk management is still a new concept and skills are inadequate. The researcher recommends more robust risk management techniques and policies from both the authority and the SACCOs. Additionally, the growth and contribution of SACCOs requires higher accounting standards to be put in place. The researcher recommends for further research in SACCOs specifically in formulating a risk index to provide a robust measurement of various risks.
Corporate governance and dividend payout - analysis of firms listed at the Nairobi Securities Exchange
(Strathmore University, 2014-03) Njugi, Mwangi Kevin
The study aims to examine the effect of corporate governance on dividend payout of firms listed at the Nairobi Securities Exchange. Based on agency theory, the study considers the effect of two conflicting hypotheses, the outcome and substitution hypothesis, where dividends can be an outcome of corporate governance or a substitute of corporate governance. Using a sample of 37 listed firms covering the period 2003-2012 the paper employs a fixed effects and random effects method of estimation. Corporate governance measured used were the size of the board, proportion of independent directors to the board size, institutional shareholding and women representation. The results show that the size of the board, proportion of independent nonexecutive directors and institutional ownership are not statistically different from zero in explaining dividend payout. Women representation in corporate boards represented, as a dummy variable is statistically significant in explaining dividend payouts as women are seen as more risk averse and will disgorge more cash in form of dividends to minimize agency costs. The results are consistent with the outcome hypothesis. This present study contributes to the corporate governance literature by looking at the importance of corporate governance in influencing fi1ms' dividend behaviour in Kenya.
Examining capital market intergration in Kenya and Uganda
(Strathmore University, 2014-03) Litunya, Sharon Okwako
This study examines the degree of stock market integration between Kenya and Uganda using daily closing equity prices from 14th July, 2009 to 28th March, 2013. Johansen cointegration approach is employed to capture the dynamic nature of stock market integration. Empirical results provide evidence of integration between the two markets as shown by the existence of two cointegrating vectors. The results change to three cointegrating vectors after controlling for USD foreign effects. Impulse response and variance decomposition reveal that shocks in the Nairobi stock market are due to their own i1movation averaging 99 per cent during the entire period. However, variations in Nairobi stock market seem to marginally impact the variation in Uganda stock exchange with around 3.68 per cent of Uganda stock market being influenced by Nairobi stock market. The main implication of our results is that investors cannot benefit from diversification by investing in Uganda and Nairobi stock exchanges.
Determinants of stock price - a case study on the Nairobi Stock Exchange
(Strathmore University, 2014-03) Gichinga, Hilda Nyokabi
Various studies have been conducted to identify variables that influence share price movements such as that done by Karanathassis and Philapaas (1988) which indicated that the share price in Greece was affected by dividends, retained earnings and company size.Another similar research that was conducted recently in Bangladesh stock market revealed that share price and net asset value (Uddin, 2009). Other empirical investigation have been increasing over the years especially in developed financial markets around the world. just recently, developing countries such as Nigeria whose stock markets yield attractive returns have captured the interest of researchers who want to determine the variables that have an impact on the market prices of the shares (Olowoniyi A.O, 2012)
Evolving roles of SACCOs - the case of 14-seat transport SACCOs in Kenya
(Strathmore University, 2014-03) Bii, Collins Kiprotich
Paratransit is a mode of transport that operates parallel to an organized, usually large-scale government or government subsidized transport system. Paratransit is the main public transport in Kenya and it is estimated that it controls 80 per cent of the public transport. The number of ' matatus' is estimated at eighty thousand; twenty and sixty thousand, in Nairobi and upcountry, respectively. Seventy per cent of the "matatus" commonly referred to as "Nissans" and valued at ksh.50 billion IUSD 625millions, are 14-seater vehicles. The intention of the Legal Notices No. 161 of2003, No. 83 of2004 and No. 65 of2005 was to regulate the public transport sector as part of the Integrated National Transport Policy (INTP). The National Road Safety Action Plan (NRSAP) was meant to restore order, reduce accidents, increase passenger safety, reduce conflicts and safeguard private investment in the public transport sector. Other objectives were, to facilitate the transition of the paratransit business from the informal to the formal economy, increase employment opportunities and inculcate a culture of respect for the motor sector regulations. The Government's preferred strategy to tame this sector and reap the expected benefits was to direct all current and potential paratransit operators to upgrade their 14-seater vehicles to high capacity of more than 25 seats and to establish matatu SACCOs, as a condition for licensing of their vehicles to operate as public service vehicles. The formulation and implementation of this policy was top down, rather than bottom up. However, inadequate stakeholder consultation and consensus building during policy formulation and implementation resulted in low understanding of the policy, low ownership and low implementation. Individual paratransit operators and existing matatu SACCOs that were operating predominantly 14-seater matatus started fiercely resisting these preconditions terming them, insensitive, draconian, too expensive to implement and likely to force them out of business. The purpose of this study therefore, was to analyze the socio economic impact of the 14-seat transport SACCOs in Kenya.
A study on the relationship between remittance inflows and local currency movement in Kenya
(Strathmore University, 2014-03) Karanja, Brian Gachichio
This study seeks to shed some light on the relationship between movement of local currency and migrant remittances into Kenya, investigating if at all a relationship exists, and if so, the impact of that relationship on the Kenya Shilling. this investigation is done on the backdrop of the effects of local currency appreciation in foreign countries, whereby Foreign Direct investment (FDI) as an inflow has been observed to have an appreciatory effect on the recipient country's local currency. For Kenya, major currency appreciation would reduce export competitiveness and potentially make the country's poor balance of payment position worse.
The role of development financial institutions (DFIs) in the development of the manufacturing sector - a case of industrial and commercial development corporation (ICDC) in Kenya
(Strathmore University, 2014-03) Mwongeli, Musya Mercy
The manufacturing sector has been argued to be the engine of growth for most countries, both developing and developed countries. This study seeks to identify the role of DFIs in the development of the manufacturing sector. The study majorly focuses on the contribution of the manufacturing sector to GOP, employment and exports. It also identifies the amount of investment channeled to the manufacturing sector and consequently the importance of DFIs, and specifically ICDC, in increasing investment. The study made use of semi-structured interviews to collect primary data and economic abstracts and reports for secondary data. The manufacturing sector provides significant contribution to the economy through creation of employment and exports. However the sector has remained fairly stagnant and the study identifies that this is probably as a result of the limited investment pumped into the sector. FDI as well is directed to other sectors of the economy such as the services sector hence not flowing optimally to the manufacturing sector. The prevalence of SMEs in the manufacturing sector also provides a constraint to the growth of the sector as they do not qualify for loans from commercial banks. This comes in to highlight the role that DFIs play in providing financing. DFIs invest in the core sectors of the economy and ICDC reflects the same by largely funding the manufacturing sector. Strategies such as long-term financing as well, equity financing, technical advisory services have served as a support to ensuring development impact is obtained. DFIs provide an avenue of channeling funds to crucial sector, and their investment encourages the growth of the manufacturing sector. It would be important if the government intervened to direct investment to the manufacturing sector and offer manufacturing firms benefits and growth incentives. Likewise DFIs consolidation will be crucial to expand the asset base to allow greater investment into the manufacturing sector.
The relationship between macroeconomic variables and firm performance in the Nairobi Securities Exchange
(Strathmore University, 2014-03) Wangui, Njoroge Valentine
Perspectives on Energy Security Increased exposure of national economies to global markets has at the level of corporate stakeholders meant increased attention to exchange rates, interest rates, inflation rates and relative prices. These variables cannot be viewed as independent, since they adjust in various ways to macroeconomic shocks and thereby influence the performance of firms. This study dealt with theoretical and empirical aspects of the interactions between the macroeconomic variables; interest rates, inflation rates and exchange rates and firm performance in the Nairobi Securities Exchange using the Nairobi All Share Index (NASI) and the Earnings Per Share (EPS) as proxies for the stock market and firm earnings respectively. In the theoretical part reviewing literature revealed that many researchers argue that the specific macroeconomic variables researched do in fact affect the overall position of a firm although there has been inconclusive evidence on the ability to measure the impact of earnings. The empirical findings in this study found that save for the exchange rate variable, there exist sufficient evidence to suggest that share price movements are influenced by movements in macroeconomic variables hence these may be used to predict future share prices. With regards to earnings, there is no general trend in the EPS function with the selected macroeconomic variables. Sufficient evidence to suggest that EPS movements are influenced by movements in macro-economic variables and hence may be used to forecast earnings can only be inferred since the data points were too few to allow judgment. Hence the F stat, P values and error terms could not be computed. Therefore, instead, the study illustrated results for simulated data points over a period of 43 years. These results showed that the above the impact of macroeconomic variables on earnings would hold with a larger data set. Furthermore, this study also went on to look at, theoretically, the need to improve traditional methods of accounting for fluctuations in the firm's macroeconomic environment so as to obtain a clear picture of the long term sustainable profits, and thus a picture of how the company's intrinsic competitiveness is fostered. The study concluded that the recognition, the monitoring, and the consequent incorporation of the macroeconomic environment of the firm are paramount to a firm's performance and ultimately its survival.
Effect of market concetration and competition on the technical efficiency of Commercial Banks in Kenya
(Strathmore University, 2014-03) Nyandia, Ndiho Hazel
Market structure as represented by market concentration and competition affects the technical efficiency of the banking industry. However, the direction of the relationship between market structure and technical efficiency is mixed given the existence of two opposing schools of thought, specifically the structure-conduct-performance paradigm and the efficient market hypothesis. The purpose of this research study is to determine which of these schools of thought holds in the Kenyan banking industry by studying the impact of bank competition and concentration on the technical efficiency of commercial banks in the country. The study uses interest revenue as a measure of technical efficiency while considering other factors such as bank specific risk and the macroeconomic factors. It seeks to answer the question whether a high market concentration and low market competition leads to excessively high interest revenue. The study is based on a panel dataset of the entire banking population in Kenya ranging from the years 2007-2012. It incorporates the Panzar-Rosse model to obtain the determinants of the interest revenue earned by banks and includes the Herfindahl index as one of the possible determinants. A fixed effects estimation method is employed to determine the significance of market concentration on bank interest revenue. The estimation method also gives rise to the H statistic- a key variable in the Panzar-Rosse model that serves as a measure of market competition. The results reveal that market concentration is not significant in determining the interest revenue earned by banks possibly as a result of the smaller focus that the Panzar-Rosse model directs to the effects of market concentration as represented by the Herfindahl index. They also reveal that the Kenyan banking industry faces a mildly oligopolistic structure with an H statistic of 0.23 which is statistically insignificant from zero. The low level of competition is attributed to market fragmentation as observed by the varying levels of competition from one segment to another. This market fragmentation may be based on size or on the ownership structure of the commercial banks.
Foreign direct investment and the performance of manufacturing sector in Kenya
(Strathmore University, 2014-03) Stephen, Willy Ngumbi
The purpose of this study is to examine the (Aitken, B and Harrison, A, 1999)relationship between foreign direct investment (FDI) and the performance of manufacturing sector in Kenya. In the methodology, annual data of aggregate foreign direct investment, manufacturing quantum index, manufacturing value add and manufacturing exports were used. In the analysis test for stationarity was carried out using augmented Dickey- Fuller test and cointegration test using Johansen cointegration test. Vector Error Correction Model was used for causality test. In empirical findings after the data satisfied the stationarity test, a long-run relationship between FDI and the performance of manufacturing sector in Kenya was established. However, there was no short-run relationship between FDI inflows and the indicators (manufacturing quantum index, manufacturing exports and manufacturing value add) used to measure the performance of manufacturing sector. The practical implications of the study is that since there is a long-run relationship among the variables, policies to attract FDI into the manufacturing sector should have a long range view and should be sustainable. The policy direction should focus on improving productivity and innovative capabilities of the manufacturing sector and strengthening the supporting industries and institutions. Specifically, policies like provision of tax relief to manufacturers on importation of new technology and expatriate that will bring about efficiency and effectiveness in production This paper is one of the few studies that attempt to examine the relationship between FDI and manufacturing sector in Kenya. The study draws attention of policy makers in Kenya to the fact that diversification of the economy can be achieved through a viable manufacturing sector.
The relationship between human capital of an individual and pension fund asset allocation
(Strathmore University, 2014-03) Kipchirchir, Letting Albert
There is a worldwide trend toward defined contribution saving plans and growing interest in pension schemes asset allocation. In both environments, individuals are given some responsibility to make their own asset-allocation decisions, raising concerns about how well they do at this task. This paper investigates one aspect of the task, namely diversification. Considerably, the role of an individual's human capital is questioned in determining its influence on asset allocation of his retirement benefits. This study aims to investigate comparatively whether firn1s whose employees have equity like human capital and those whose employees' have bond-like human capital take into account diversification in their strategic asset allocation. Human capital characteristics are derived from the optimal lifecycle saving and investment theory credited to Bodie, Merton and Samuelson (1992). An important implication of these models is that the proportion of financial assets invested in equity should decrease over the life cycle, thereby increasing the proportion of relatively safer securities such as bonds. Furthermore, it explains that young employees have more human capital than older employees do. As long as the correlation between labour income and stock market returns is low, a young worker may better diversify away equity risk with their large holding of human capital. The findings from this research reveal that the relationship between human capital and asset allocation of a pension fund is weak. Even so, a scenario analysis reveals that when human capital is considered in asset allocation, the returns obtained outperform the average market returns over a one-year period. The correlation of an individual's labour and other assets is a subjective aspect that requires the probing of investors' heuristics. Any typical investor need not worry about his or her human capital being highly correlated with the stock market when making asset allocation decisions; thus, most investors can invest the majority of their financial wealth in risky assets.
Examining the relationship between market liquidity and equity returns - a case study of firms listed on the Nairobi Securities Exchange
(Strathmore University, 2014-03) Mwangi, Ibutiti Allan
This study uses a panel regression of 42 actively traded equities listed on the Nairobi Securities Exchange over 58 days to relate a stock's bid-ask spread and its return. The study results show that in the NSE, there is no significant relationship between a stock's bid-ask spread and its return in both the conventional regression sense and the Granger Causality sense. This result leads us to believe that the state of liquidity, as measured by the bid-ask spread of a stock, has no effect on the returns of a stock. Investors therefore do not include a liquidity premium, as measured by the bid-ask spreads, in their prices. This information is useful for both market regulators and market makers. Regulators require another measure of liquidity in order to properly quantify the effect that market liquidity has on the prices of stocks in the market while market makers may demand large spreads and have no effect on the returns of the stocks.
An evaluation of pension fund views of investments in infrastructure assets in Kenya
(Strathmore University, 2014-03) Oile, Kenneth Ogola
With the increasing infrastructure gap and budgetary deficits, we have had an increase in the need for investment from the private sector. More so by pension funds because they are attracted to protect with low correlation aspects and long term growth because of their long duration hedging and liability driven investments. Infrastructure is divided into economic infrastructure such as transport and social infrastructure such as hospitals and schools. This paper however focuses on economic infrastructure as compared to social infrastructure because of the desirable characteristics of the former to pension fund investments. Despite increased interest from investors in in infrastructure. There is little evidence on actual investment ultimately flowing to the sector and the different treatment of infrastructure assets in the varying portfolios of these investors. This paper is based on a recent survey on some of the largest pension funds in Kenya with a significant amount of asset under management. We look at the different views these investors have to infrastructure assets: how much these investors have allocated to infrastructure. What is considered as infrastructure? Where does it tit in the total portfolio allocation, what are the approaches and forms of investment taken, what are recent trends in relation to infrastructure and asset allocation.
The effect of money supply on stock market volatility in Kenya
(Strathmore University, 2014-03-14) Nyaribo, Meshack Mogambi
This paper considers the effect of money supply on stock market volatility, using M2 as a measure of money supply since it is a measure of broad money in the economy. This relationship is important because the level of money supply determines the amount of disposable income available to individuals to consume and invest, with the stock market being one of the avenues to invest. The study finds that the money supply has an impact on stock market volatility and the impact is persistent.
Quantifying premium risk faced by the Kenyan Insurance companies using the solvency 2 directive
(Strathmore University, 2014-03-19) Ng'ang'a, Catherine Muthoni
Solvency 2 is an EU Directive that is concerned with the amount of capital that European Insurance Companies must have to reduce the risk of Insolvency. It applies to all European Union insurers and reinsurance companies with gross premium incomes exceeding €5 million or gross technical provisions in excess of €25 million. It aims to strengthen EU- wide requirements on capital adequacy and risk management for insurers. Solvency 2 was developed because of the inadequacies of solvency 1. In Solvency 1 capital requirements were based on simple specified solvency margins (as is the case in Kenya) which were not risk sensitive. One of the major objectives of solvency 2 is to align capital requirements with the underlying risks faced by an insurance company.
The status of private equity in Kenya - a comparative study with South Africa
(Strathmore University, 2014-03-21) Mumbi, Mbugua Cynthia
This paper gives an insight into the Kenyan Private Equity Industry compared to that of South Africa as well as the underlying reasons for the stark differences. It also highlights challenges that the industries, including that of the African Private Equity Industry, are facing given their different markets and economic environments. Additionally, the paper highlights the particular challenges and trends that are unique to Kenya. Further, it discusses the views of industry experts concerning the prospects for growth and the sectors that seem to bear this promise of growth. The discussions around the trends are mainly to highlight certain characteristics about the industry in order to gain a proper perspective of the actual situation on the ground. The evidence provided in this paper, shows that the Kenyan Private Equity Industry, is indeed a growth hub for those seeking high growth potential in emerging and frontier markets. Despite the growth story the numerous challenges will need to be properly addressed and these problems will indeed be areas for further study in order to increase the knowledge base concerning the Kenyan Private Equity Industry.

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