BBSE Research projects (2015)

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Customer protection in mortgage financing industry in Kenya
(Strathmore University, 2014-03) Ndungu, Muhindi Wanjugu
Consumer protection is an especially important instrument in creating long-term banking relationships. These relationships influence uptake of banking products such as mortgages especially if they are built on trust and confidence. The real estate industry in Kenya has been growing over the past few years and since mortgage financing is the primary way of financing real estate in developing countries such as Kenya, uptake of mortgages should be increasing as well. Despite this fact, uptake of mortgages is very low in Kenya compared to other banking products. This study sought to evaluate consumer protection within the mortgage financing industry and establish whether consumer protection practices are being applied in the Kenyan context or not. The study tested various opinions of different bank customers derived through the use of questionnaires. The opinions of the customers on different factors affecting mortgage uptake were subjected to Wilcoxon Signed Test to test how much significant each of the factor was. A conclusion was reached that high interest rates leading to unaffordable mortgage prices was the fundamental factor affecting low uptake of mortgages. It was also established that there was information asymmetry in the mortgage financing industry since potential customers did not feel confident in the information being provided to them by mortgage financing industries.
Market efficiency and its consequences on profit warnings in the Nairobi Stock Exchange
(Strathmore University, 2014-03-09) Waweru, Kamau
My project comes up with a very interesting implication on academia and in practice I studied the occurrence of a profit warning in the NSE. It is important not to look at events in isolation but rather a general assessment is critical. In lieu with this i assessed how information filters into the market in cases of a profit decline is the information received on announcement of profit warnings. The results are interesting. The flaws of the EMH are once again exposed .in economics however we say that we cannot prove theories just disapprove them so the weaknesses of EMH ought to be assessed not by critiquing but disapproving it. Moving further ahead when put in context EMH becomes very powerful hence its application is not futile. I assessed the level of efficiency in the NSE and went ahead to place this in the context of a profit warning using a GARCH model to explain the trickling of information.
Capital market integration in EAC progress ahead of the monetary union formation
(Strathmore University, 2014-11) Kaungu, Kamene Sylvia
The East African Community countries Kenya, Uganda, Tanzania, Rwanda and Burundi have increased efforts towards achieving regional integration which is expected to address the liquidity and capitalization challenges and increase the regions competitiveness. The integration involves the formation of a Custom Union, a Common Market, a Monetary Union and ultimately a Political Federation. Currently, the EAC has been able to achieve the formation of a Customs union and is working towards the Common Market requirements. Capital Market integration; involving liberalization of Capital Accounts and Harmonization of Market infrastructure through taxation, accounting, regulations, trading systems and cross listings is an aspect of the Common Market through Capital Mobility; it is an important pre-condition for formation of a successful Monetary Union. The study sought to assess the level of capital market integration and establish if there is long run equilibrium among the returns for the EAC debt markets for the period 2005 to 2012. The study employed Beta and Sigma convergence to analyze financial integration meaning assets having identical risks and returns should be priced identically. The findings suggest low financial integration in the region is due to number of reasons including laxity by the countries and lack of government commitment.
Impact of exchange rate and interest rate volatility on share price returns
(Strathmore University, 2014-12) Kimani, Stephanie Angela Wanjiku
An efficient financial system promotes economic growth though the proper allocation of resources to all market participants. The stock market plays an important role in achieving economic growth. The proper functioning of the stock market depends on investors' buying and selling decisions which are affected by economic factors.
Determinants of non-performing loans in commercial banks in Kenya
(Strathmore University, 2015) Maina, Esther-Irene Wanjiku
The purpose of this study was to determine the macroeconomic and bank specific factors affecting nonperforming loans in commercial banks in Kenya. It aimed at determining the relationship between these factors and nonperfonning loans. A panel data analysis for all 43 commercial banks in Kenya was carried out for the period from 2003-2912 using a fixed effects model. The results revealed that Loan loss reserves and government deficit are the significant variables in the study. It showed that a negative relationship exists between Loan loss reserves and nonperforming loans and a positive relationship between government deficit and non perfonning loans which is in line with studies conducted by other researchers. Generally, this study reveals macroeconomic determinants as being the major cause of non perfonning loans.
Impact of monetary policy on stock prices: looking at the banking sector and the manufacturing sector of the Nairobi securities exchange.
(Strathmore University, 2015) Radina, Dennis Radina
This paper analyses the impact of monetary policy on asset prices and further goes on to check whether the impact is of similar magnitude in both sectors. The sectors that have been chosen are the banking sector and the manufacturing sector which are present in the Nairobi securities exchange. These sectors were chosen with the intuition that they are the quickest to show effect of monetary policy. Monetary policy therefore affects its returns on these sectors and finally asset prices. The paper uses panel data to carry out the analysis as the interbank rate which is the proxy for monetary policy is constant on all assets but changes with time while share prices across the sectors are different and also vary with time.
Mortgage finance: determinants of the inputs to mortgage finance in Kenya
(Strathmore University, 2015) Kikunze, Sharleen Mbete
A mortgage loan, also referred to as a mortgage, is used by purchasers of real property to raise money to buy the property to be purchased or by existing property owners to raise funds for any purpose. Mortgage borrowers can be individuals mortgaging their home or they can be businesses mortgaging commercial property. My project will focus on the inputs to these types of mortgages. The mortgage market in Kenya is the third largest in sub-Saharan Africa after South Africa and Namibia and is also the largest in Kenya. The major type of lending at present is the overall lending by commercial banks for the real estate purposes. This includes lending for commercial properties and other real estate linked activities such as private housing . Mortgage lending in Kenya is predominantly done by banks . Of the 45 banks and one Mortgage Finance Company in the Kenyan banking system, 25 of them have mortgage portfolios of differing sizes.
Competition and microfinance interest rates in Sub Saharan Africa
(Strathmore University, 2015) Njenga, Meredith Muthoni
This paper examines the competition effects on microfinance lending interest rates while also considering firm profitability and social outreach. The study, which covers microfinance institutions in 32 countries in Sub-Saharan Africa, is conducted across two cases. The first case clusters the microfinance institutions into three types: non- profit microfinance institutions, for-profit microfinance institutions and both types combined while the second involves clustering the microfinance institutions based on where their home countries rank on the global competitiveness index (Gel) by the World Bank. The Herfindal Hirschman index to measure the market concentration and panel data regression analysis is used in studying relationships. The findings show that the region is characterized by high market concentration with an inverse relationship between market concentration and lending interest rates only for profit microfinance institutions. Similar results are found in the less competitive / low productivity countries. In addition, for the profit microfinance institutions a positive relationship exists between interest rates with firm profitability and social outreach, which indicates that higher interest rates improves firms' profitability and attracts a larger number of risky borrowers. However, the borrowers are put at risk of over-indebtness. With these findings it is concluded that there is a need for improvement of institutional frameworks and higher penetration of nonprofit microfinance institutions specifically in low productivity regions for a more effective and efficient use of microfinance to achieve poverty alleviation.
Effectiveness of commodity futures as opposed to crop insurance in curbing spot price volatility risk
(Strathmore University, 2015) Chepchirchir, Rancy
This study examines the impact of introduction of futures trading on the spot price volatility in the commodity market. The paper considers the United States of America, South Africa and Ethiopian economies . Three commodities i.e. coffee, maize and wheat from New York Merchantile Exchange, South African Futures Exchange and Ethiopian Commodity Exchange are analyzed. ARCHLM test is used to check for heteroskedasticity and GARCH and EGARCH are used to check for the behavior of volatility between the pre-and post-futures periods. For all the three economies, the results indicate presence of the ARCH effect in the log returns. For conditional and unconditional variances; spot price volatility for coffee has decreased after futures trading in all the economies and the EGARCH has also shown reduction in persistence of volatility in the post- futures period In the three economies; while that of maize has reduced for the Ethiopian economy while there has been an increase in both the US and South African economies . For wheat, the cond itional variance has been found to rise in the post-futures period in all the three economies .
Supply model estimation of the equity risk premium in selected African equity markets
(Strathmore University, 2015) Kayaviri, Ivy S.
The supply model of (Grinold & Kroner, 2002)is used to estimate the Equity Risk Premium (ERP) in Kenya and South Africa for the period 2009 to 2013. Total return consists of capital appreciation from inflation, per capita GDP and population growth and income return from dividend yields. The average for Kenya is estimated at 8.3% with a minimum of 5.11% and maximum of 9.8% and that for South Africa is estimates as 6.6% with a minimum of3.15% and a maximum of9.6% over the 5 year period. Fernadez et al (2013) obtain a survey premium for Africa of 8.62%. In (Fernandez, Linares, & Acin, 2014), the market risk premium for Kenya and South Africa were estimated at 11.6% and 6.3% respectively. Capital gains contribute more to ERP as such economic variable contribute a more substantial part of the ERP in comparison to financial variables. Dividend yield exhibit a positive relationship with the ERP hence unequivocally matter in determining the ERP levels. Estimation using priced inflation, including share repurchases in the income return and including the impact of changes in the PE ratio on return will provide more insights on the ERP characteristics in the markets.
A stochastic analysis of medical misdiagnosis in children
(Strathmore University, 2015) Mugwe, Teresia Wanjiku
Medical misdiagnosis has been an issue on the rise in the past decade with an observed increase in medical malpractice cases. In Africa, most malpractice cases are due to negligence and misdiagnosis, with the cases of misdiagnosis rising. Children are seen to suffer more from medical misdiagnosis as compared to adults, especially those under five. A stochastic analysis of the transition of children from different states confirms that there is a high transition to a state of misdiagnosis. Cases in Africa are much higher than the rest of the world as pediatric technology is not as advanced. Analysis of data confirms the problem is dire in Africa as compared to the rest of the world, a factor which can be attributed to the lack of pediatric expertise and modem technology in the medical field . The study is to enhance the economic development in Africa with focus in medical sector. This will curb the high infant mortality rate problem and decrease the cases of medical misdiagnosis.
A comparative analysis of the level of risk in investment financing between Islamic and conventional banks in Kenya
(Strathmore University, 2015) Abdi, Ali Sadam
This study investigates whether Islamic banks are more risky in terms of their business model than Conventional banks in Kenya and the impact of these risks in the business model on both banking systems. A sample offour Conventional banks and two fullyfledged Islamic banks were selected. The study employed secondary data that cover a period 0.(four years, i.e. 20JJ-20J4. Three models were used each representing different risk. Credit, liquidity and operational risk were regressed against five explanatory variables i.e. bank size, NPL ratios, capital adequacy ratios, debt-to-equity ratios and asset management. The studyfound that Islamic banks in Kenya face greater credit and operational risk in their business model activities than their conventional counterparts. The Islamic banking model's credit and operational risk had a stronger and positive relationship with most explanatory variables than the Conventional banking model; as a result, the credit and operational risks were found to have a greater impact on the overall performance 0.( Islamic banks than Conventional banks. The liquidity risk in the business model was found to be greater in the Conventional banking model than the Islamic banking model as a result of the stronger relationship between liquidity risk and the explanatory variables of the Conventional banking model.
A study of banking efficiency in Kenya using DEA
(Strathmore University, 2015) Gharib, Adam ldha
The objective of the study was to investigate efficiency in the Kenyan banking sector, this was undertaken by identifying the mean efficiency levels of commercial banks as well as identifying the key determinants of efficiency. A sample of 19 commercial banks to which DEA was applied to determine the efficiency levels. The results show that though the banks were not fully efficient in all respects, they performed fairly well during the period under study. Small size banks performed better than medium and large banks during the period of study this implies that banks still have reason and scope to improve performance by improving their technology, skills and enlarging their scale of operations so as to be fully efficient.
Effect of information sharing on lending to small and medium sized businesses in Kenya
(Strathmore University, 2015) Wakasa, Yvet Sambu
Small and medium sized businesses in Kenya have long been unable to access financing from formal institutions. This is because lending to small businesses has been considered risky, especially in the absence of credit information, leading formal lenders to charge high rates of interest. The licensing of private credit bureaus to facilitate the exchange of credit performance reports between lenders should provide more accurate methods of credit analysis and increase lending to small businesses at more competitive rates. The study aims to establish whether since their operationalization there has been a significant effect of credit bureaus on lending to small and medium sized businesses. Participants in the research include commercial banks and owners of small businesses. Questionnaires and structured interviews were used to collect data. The study finds that though there has been an increase in lending to SMEs since 20 I0, the effect of credit bureaus in propagating this increase is minimal.
Monetary policy and financial markets: an econometric analysis on the impact of monetary policy on the stock market performance
(Strathmore University, 2015) Ongwae, Dennis Kembero
The study attempted to investigate the effect of monetary policy on the stock market performance in Kenya using quarterly data over the period of March, 2000 to December 2012. The objective of the study was to estimate the impact of monetary policy on the stock market performance. The study employed the GARCH (1, 2) volatility model in the estimation of this effect. The dependent variable, the real unrealised yield of the NSE-20 index was chosen as a proxy for the stock market performance with the CBR rate, change in Reserve Money, Real GDP, Foreign Exchange rate and the 91-day T-Bill rate as the explanatory variables. Our model effectively showed that at a 5% significance level, the mean equation showed that changes in Reserve Money as our monetary policy variable and the volatility term are positively statistically significant in its impact on the performance on the stock market. The 91-day T-Bill rate and the Foreign Exchange rate were found to be negatively statistically significant in their impact on the stock market performance. As for the variance equation of the model, the ARCH (1) term is not statistically significant at a 5% level while the GARCH (2) is statistically significant at 10% level. Moreover, employing the co integration technique it was observed that in the long run a 1% increase in CBR, change in Reserve Money, Real GDP, 91-day T-Bill Rate and Foreign Exchange Rate contributes to a 65.18% decrease, 19.155 increase, 26.48% decrease, 54.27% decrease and 52.56% increase in the NSE-20 index yield respectively. The ECM model indicated that a 5.801% deviation of the NSE-20 index from its long run equilibrium level is corrected each period in the short run.
The effect of capital structure on profitability of nonfinancial firms listed on the Nairobi securities exchange
(Strathmore University, 2015) Ligeve, Caleb Lubanga
Financing businesses presents a number of challenges both to the management and the potential investors. One of the key issues is the choice between debt and equity as financing strategies. Past studies show that firms will try to balance the two financing sources with a view of obtaining an optimal capital structure which will satisfy both the management and the firm's shareholders. This study measured the effect of capital structure on profitability of 30 non-financial firms listed on the Nairobi Securities Exchange over a period of four years (2010-2013). Debt-Equity ratio was used as a proxy for the capital structure of the individual firms while profitability was indicated by three measures including Return on Asset, Return on Equity and Earnings per Share. Data was collected from the published books of accounts of the sample companies. The results while consistent with a number of previous studies which indicate that capital structure does affect profitability negatively, raises the question as to what firm specific factors make for the non-uniformity of capital structure on listed firms . A SIMPLE OLS regression was conducted on a panel using EVIEWS 5 software.
Analysis of asset allocation and the financial performance of individual pension schemes in Kenya
(Strathmore University, 2015) Nzioka, Reza Matheka
Pension funds are a major source of retirement income for many people worldwide. There is an increased need to measure perfonnance of the assets held by the schemes since the growing importance of pension funds has boosted the need for methodologically sound principles for asset allocation (Swietanowski 1999). The legal owners of the scheme, the Trustees, are required to develop Investment Plans which are basically policies on the strategic asset allocation for their schemes.
Test for purchasing power parity in selected African countries
(Strathmore University, 2015) Samira, Mbeyu Saidi
This paper tests for the purchasing power parity condition in selected developing countries in Africa, that is; Kenya, Rwanda and Nigeria . The purchasing power parity condition is widely used as a predictor of future exchange rates of a country and to assess the viability of investment in a foreign country. Though not a robust determinant of the behavior of exchange rates, its wide spread application by policy makers, journalists, the government and international officials makes it difficult to ignore the implication it may have on a country's economy. It is therefore important to know whether the parity condition holds and its subsequent implications. This paper used a period of 63 years therefore overcoming the problem of small datasets employed by previous researchers in the field such as (Kargbo, 2004). It also employs the use of Johansen cointegration to test for this condition. It is a robust model as it takes into account the short-run dynamics of the variables, whilst permitting the system of variables to return to long-run equilibrium according to the purchasing power parity doctrine (Verbeek, 2004). The researcher finds that in the long run purchasing power parity holds in Kenya and Rwanda but not in Nigeria. To further explain this disparity in findings, the researcher tests for trade openness in the three countries to see whether this causes the lack of purchasing power parity to hold Nigeria. Lack of trade openness is seen to affect the purchasing power parity doctrine in Nigeria. This is in line with (Omar Esqueda, 2007) findings.
Effects of equity capital changes on the lending rates of Kenyan banks
(Strathmore University, 2015) Adoli, Emmanuel
This study examines the consequences of imposing higher capital requirements on banks, and more specifically their long-term effects on bank lending rates. The analysis involves econometric estimations of the determinants of lending rates based on a parameterized model of the Kenyan banking industry. It was found that the equity capital ratio has a positive and significant impact on the interest rates charged on bank loans. Raising the equity capital ratio by one percentage point leads to an increase in bank lending rates by about 5 basis points. These results suggest that higher equity capital requirements increase the average cost of funds for Kenyan banks, and this cost is passed on to bank customers through increased lending rates .
Assessing the impact of mobile money transfer services on private credit and money transfer by commercial banks in Kenya.
(Strathmore University, 2015) Wamuthiani, Lynda Ndinda
This study explored whether mobile money transfer services as a technological advancement had any impact on private credit as measured by loans to the private sector and on commercial bank money transfer figures as measured by Real Time Gross Settlement (RTGS). The study adopts a time series analysis of the aggregate of loans to the private sector and RTGS for all commercial banks in Kenya between 2000 and 2013. The proxy for Mobile Money Transfer is MPESA transaction values captured since the inception of the service in Kenya in 2007. The magnitude and persistence of the impact of MPESA on private sector credit and RTGS is analyzed using a Vector Autoregressive (VAR) framework. The study revealed that the introduction and use of mobile money transfer services did not have any impact on private credit by commercial banks rather the positive correlation between the growth of the commercial bank assets and the growing use of mobile money was an indication of their fulfilling different roles in the financial services sector.

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