BBSA Research Projects (2017)

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Relationship between volatility of stock prices and the level of stock prices; a case study on Kenya bourse.
(Strathmore University, 2017) Kipkemboi, Moses
The study investigates the relationship between stock price level and the deviation of the stock prices of selected listed companies at the Nairobi Securities Exchange (NSE), Kenya. It seeks to understand given the stock level prices let say Kes. 5 and Kes. 100 which stock will an investor with ability willingly invest in. Does the two stocks provide a similar deviations? The study therefore answer the following questions; is their relationship between the level of stock prices and variability of stock prices, how does low-priced and high-priced stocks deviate and finally given some stake which stock level will an able investor commit his funds that is, the study sought to identify the role of level of stock prices in making investment decisions whether it is better to invest in low stock prices or high priced stocks. The literature showed that researchers have conflicting conclusions, in that some claimed there exists. Some relationship between the level of stock price and the volatility, of the stock prices, while others concluded that there is no role of stock price level on stock prices deviations.
The impact of delinquent loans on the performance of microfinance banks in east Africa
(Strathmore University, 2017) Kavili, Janet Kali
Financial institutions all over the world are faced with the challenge of loan delinquency which has necessitated the need for reviewing lending policies to mitigate the delinquency risk as well as putting in place mechanisms that monitor the behavior of borrowers. Irena (2014) notes that loan default was one of the major causes of the financial crises of 2008 and consequently, after the Global Financial Crisis, credit management increased, especially with the purpose of improving the resiliency of the banking sector by requiring more and higher quality capital and more balanced liquidity. Per a study by Alawiye (2013) credit administration and the incidence of bad loans, increase in the loses ofNigerian Banks result from problem loans and the effects of such loans in the form of bad debt provisions can be minimized through effective monitoring and evaluation to avoid the diversion of facilities for unapproved purposes. Similarly, Arko, (2012), in a study on the causes and impact ofnonperforming loans on the operations of microfinance institutions in Ghana, states that some of the loans advanced to beneficiaries underperform and do not earn the projected returns resulting into the reduced quality of the loan portfolio which constitutes a considerable percentage of the assets of the MFIs. In regards to these studies, the importance of credit risk management cannot be taken for granted and this explains why the practice has increased for both borrowers and lenders.
Growing Role of Bancassurance in the Banking Sector: A Case of Kenya Tier 1 Local Banks
(Strathmore University, 2017) Ng'etich, Sheila Chepkorir
The Kenyan market need to mitigate their risks as the levels of insurance penetration is low. Bancassurance which is the integration of banking and insurance has been adopted as a distribution channel of insurance products. This paper analyses the contribution of bancassurance to the insurance sector and the recent trends of bancassurance on the performance of banks. The target population was all commercial banks in Kenya. A sample was done for tier 1 local banks in Kenya. The study uses a descriptive research design. Data is represented in tables and charts. The methodology used was an analysis using the CAMEL parameters. The findings are: Capital adequacy analysis shows that the banks' level of solvency is good. Asset Quality analysis shows that the financial position of the banks is strong. Earnings and profitability analysis tend to be contradicting the hypothesis since the investment in the insurance agency was still quite low. The banks however managed to balance their liquidity and profitability. The insurance agency can introduce services such as pricing and reserving in order to maximize their profitability.
Impact of bank deposit interest rates on consumer expenditure in the East African community
(Strathmore University, 2017) Tony, Kiprotich Koskei
Bank deposit rates are a critical factor in determining consumer expenditure. This study tries to understand the effect that changes of bank deposit rates have over different periods of time in the East African Community countries that is Kenya, Uganda, Rwanda and Tanzania. This study will be effective in informing policy making by various governments as they keep in mind the welfare of the citizens while setting the benchmark of Bank Deposit rates.
Introducing a new coffee futures pricing model for the Nairobi Securities Exchange
(Strathmore University, 2017) Githinji, Rosebell
This study intends to apply a different pricing model for pricing coffee futures at the Nairobi Securities Exchange and suggest an improvement of the existing pricing model currently used at the NSE. This will be done by using Schwartz’s model 1 to generate coffee Futures prices, and compare the prices generated by the model with the model currently used to price coffee futures at the NSE. The difference between the series of prices generated by the two models will be tested for significance, and thus guide on whether introducing a new pricing model for the coffee Exchange will have an impact on the current pricing model.
A comparative event study on mergers and acquisitions vs corporate bond issuance on the value of banks in Kenya
(Strathmore University, 2017) Odawa, Janet Consolata Akinyi
Banks play a crucial role in propelling the entire economy of a nation. African bond markets have been steadily growing in recent years as the numbers of mergers and acquisitions also rise. This study takes on an event study methodology with the use of the market model to determine the impact of events such as M & A’s and corporate bonds issued by listed banks in Kenya. It was found that in comparison mergers and acquisitions have a greater impact on firm value than bond issuance. However both bear the same results in terms of how they impact firm value. They can impact firm value, positively, negatively or not at all.
Modeling heat-related mortality based on greenhouse emissions in OECD countries
(Strathmore University, 2017) Chembe, Anderson Ngowa
Greenhouse emissions by human activities are known to irreversibly increase global temperatures through the greenhouse effect. This study sought to propose a mortality model with sensitivity to heat-change effects as one of the underlying parameters in the model. As such, the study sought to establish the relationship between greenhouse gas emissions and mortality indices in five OECD1 countries (USA, UK, Japan, Canada & Germany). Upon the establishment of the relationship using correlation analysis, an additional parameter that accounts for the sensitivity of heat-changes on mortality rates was incorporated in the Lee-Carter model. Based on the proposed model, new parameter estimates were calculated using iterative algorithms for optimization. Finally, goodness of fit for the original Lee-Carter model and the proposed model were compared using deviance comparison. The proposed model provides a better fit to mortality rates especially in USA, UK and Germany where the mortality indices have a strong positive correlation with the level of greenhouse emissions. The results of this study are of particular concern to actuaries and demographers and climate-risk experts who seek to use better mortality-modeling techniques in the wake of heat-effects caused by increased greenhouse emissions.
Retirement income adequacy in Kenya
(Strathmore University, 2017) Waswa, Faustine Nangila
Retirement income adequacy con be measured indifferent ways. One is by conducting a qualitative research where the researcher collects data in the form of opinions from retirees on the adequacy of the income they receive. Another is a qualitative research where adequacy of retirement income is measured by comparing a retirees’ income before and after retirement. The first goal of the resent United Nations Sustainable Development Goals is to eradicate poverty. This is a very important goal and this study conducted below tries to measure retirement income adequacy which is a way of reducing poverty in retirement in Kenya. This study works towards measuring retirement income adequacy using quantitative methods and quantitative data and it concentrates on the middle income earners. The data collected has 462 data points which shows an individuals’ income before retirement, income after retirement and any other retirement savings an individual made. Adequacy is measured by calculating the income replacement rates. Using the data from two main pension administrators in Kenya, the study found out that the average replacement rate for Kenyan middle income earners is 43%. This means that after retirement, an individual will receive 40% of what they were receiving as income before they retired.
Perception of microinsurance as a risk management tool for small holder farmers in Limuru, Kenya
(Strathmore University, 2017) Bansri, Mukeshkumar Patel
The aim of this study was to determine the perception of small holder farmers in Limuru towards microinsurance as a risk management tool for the risks they face. The purpose is to identify the gap that exists between what is offered in the market and what the small holder farmers actually want. The scope of this study was limited to the Limuru region in Kenya through questionnaires distributed to collect the data. The questionnaire consisted of questions that determine the risks the small holder farmers face, the strategies they use to manage the risks they currently face and if they have any insurance covers for their crops. It was discovered that the small holder farmers in Limuru face many risks but have not purchased any form of crop insurance to mitigate their risks which led to the conclusion that the small holder farmers in Limuru do not perceive microinsurance as a risk management tool. Small holder farmers can benefit from microinsurance in comparison to the risk management strategies currently used, which have drawbacks in the long-term. The government, reinsurance companies and insurance companies can offer microinsurance products at a cheaper rate to farmers which will prevent them from incurring the losses they face due to adverse events.
Viability of home equity conversion mortgage in Kenya
(Strathmore University, 2017) Okoth, Mollette Achieng
Housing wealth as a source of retiree income is normally neglected. This form of wealth could have an incremental value on the homeowner's retirement income if they could be able to leverage this ownership as collateral for capital. Releasing home equity may result in a marked increase in consumption, a drop in public pension liability and access to long-term care facilities. This may also ease the tax burden imposed by the increasing population ageing on the traditional state-funded retirement provisions.
Modelling healthcare financing in Kenya [the green path model - gpm]
(Strathmore University, 2017) Odero, Livingstone Sichonjo
This study involves modelling healthcare financing in Kenya. The 2001 Abuja Declaration that requires governments to allocate at least fifteen percent (15%) of their total budgets to health and the universal $60 health per capita target are used as benchmarks in this study.The proposed model that is used for modelling healthcare financing in Kenya is the Green Path Model (GPM). GPM consists of a six-staged path that involves identification of health financing gaps at both National and County level, issuing of a Social Impact Bond, SIB, a conceptual shift to the Circular Economy, CE framework and refocusing on repayment of the social investors. At the final stage, the surplus amount generated from the Circular Economy’s green initiatives is channelled to the Green Fund – pool of funds in a Green Bank thus filling up the health financing deficits. This study found out that as at now, Kenya has neither allocated at least 15% of its total budget to health nor met the universal $60 health per capita target both at National and County Level.
Board composition and enterprise risk management in the banking industry in Kenya
(Strathmore University, 2017) Kahenya, Nancy Njeri
The Kenyan banking sector has experienced a myriad of changes, both negative and positive. Being a developing economy, the sector’s efficiency and sustenance is vital to the country’s economy. Enterprise Risk Management and Board of Directors’ composition are both significant issues ensuring stable economies and avoiding corporate mishaps such as those witnessed in the Eron and Worldcom cases. ERM is measured in terms of financial performance. It is in this light that this study seeks to find the relationship between ERM and board composition in terms of gender, education, and board size. Based on the Shannon’s diversity test, the study establishes that the boards of Kenyan listed banks are not diversified in terms of gender and educational backgrounds in boards is quite minimal. The study also finds out that there exists a relationship between board composition and ERM.
Factors affecting the low demand and the penetration of life insurance in Burundi
(2017) Bettina, Nina Uwiteka
There are different factors that affect the demand and the penetration of life insurance. The Republic of Burundi is the Country with the lowest penetration of insurance, both life and nonlife. The study aims at identifying the factors that cause this low penetration by assessing the demand for life insurance which is done by asking random Burundians who are working and live in Bujumbura about their income and knowledge about life insurance to be able to identify their needs so that insurance companies are able to satisfy their needs. The main findings about the research are that a big part of the population of Burundi agrees to the need of life insurance for security and also for the future and is willing to buy a policy if they can afford it. Therefore the need for micro insurance is imminent as well as the need for attractive products like ones which combine death and survival benefits.
Why Trustees Shy Away From Investing in Riskier Asset Classes: The Kenyan Case
(Strathmore University, 2017) Kireru, Petronillah Wangechi
This paper seeks to examine the influence of trustees on the choice of investment classes, for the Kenyan case. We ask how trustees make decisions in investing in two classes allowed by the Retirement Benefits Act (2014) of Kenya which are considered relatively riskier: Private equity and Real Estate: and control for personal investment behavioral biases. We perform a logit regression against factors which include: How long one has been a trustee, size of the fund, level of knowledge on what private equity is, their perception on the riskiness of private equity and demographic factors. We find that trustees mainly are hesitant to invest in these risky assets mainly due to the pension fund characteristics, which do not allow them to invest in the risky assets. Moreover, trustees carry their personal risk characteristics while investing the pension fund assets, and thus influence decisions made on the board. We found that most trustees are risk averse, and consequently avoid investing the funds ' assets in ventures that the return is not certain.
Empirical analysis on the impact of monetary policy on the growth of Kenya’s manufacturing sector
(Strathmore University, 2017) Mburu, Byron Gichuhi
The purpose of this study was to find out the impact of monetary policy in boosting manufacturing sector growth in Kenya. This paper uses the Vector Autoregression (VAR) Model to measure the impact of monetary policy on the growth of Kenya's manufacturing sector through analysis of four variables; interest rates which are used as the proxy for monetary policy, exchange rates, real GDP and manufacturing sector GDP. Quarterly time series data was used was for the period 1980-2015. The study finds a significant positive relationship between monetary policy and growth of Kenya's manufacturing sector in the short-run and long-run. Analysis shows that Kenyan exchange rates and lending rates are insignificant as they do not cause a major difference in the manufacturing sector mainly due to fiscal dominance and also due to deregulation in Kenya's financial sector and this is evidenced by figures obtained after running the VAR model. On the other hand, real GDP has significant and positive effect on the growth of Kenya's manufacturing sector. However, when an impulse response function is carried out on the variables, exchange rates are observed to have a positive impact on the growth of the manufacturing sector while interest rates have a negative effect on the growth of the manufacturing sector. In conclusion, stringent policies and information asymmetry need to be put in place when accessing credit facility in favour of firms in the manufacturing sector.
Modelling longevity risk using Lee-Carter model
(Strathmore University, 2017) Gitau, James King'ara
Longevity risk is one of the remaining frontiers challenging modern financial markets and financial engineering. It is a major policy issue for governments around the world driven by the increase in the proportion of the aged resulting from improved healthcare and thus improved mortality rates. Increasing and uncertain longevity has emerged as a key risk affecting individuals, pension schemes, insurers and governments in both the developed and emerging world. This paper discusses longevity risk in detail, and its significance to the modern world.
Macroeconomic factors and the predictability of stock returns in Kenya
(Strathmore University, 2017) Mwangi, Ebenezer Gachugu
The stock market is an anchor to the financial l sector, providing a platform for user s and suppliers of financial instruments for investment purposes in the stocks of companies. In a well-functioning market investors prefer the successful companies with high performing stocks more than those with lower margins. The shares of a high performing company have been seen to be related to the other companies listed in the same stock market where the expected dividend growth and the prices of the shares are well reflected in the stock market. (Ross, 1976) In his study Fama (1965) realizes that one of the characteristics of investors in an efficient market is that they are rational and seek to maximize their profits. As a result of this nature, they actively compete to predict future stock prices. However, this prediction is only based on publicly available information.
Insurance banana skins in Kenya
(Strathmore University, 2017) Auko, Lydwine
Risk is an aspect that ca n never be done away with. It is both upside and downside. Upside risks are opportunities. On the other hand, downside risks are a ca use of alarm to change things. This research sought out to look for the risks facing the insurance industry in Kenya as a replica of the insurance banana skins, 20 15 which was an initiative of Pwc in conjunction with CSF I. The risk s were looked at with respect to how they imp act the insurers in terms of profitability, growth, costs and solvency. Paper questionnaires and an online survey were used to get the responses from various s people in the industry. The rese arch revealed that regulation is the major risk affecting the industry following the recent changes made and implementations meant to be complied with by 2018. It has greatly affected the capital base of most insurers cutting down their profits greatly. Further study could be done with regards to including more industry players as well as tightening risk management in the industry.
Determining the most suitable method of IBNR reserve estimation in the event of varying development patterns.
(Strathmore University, 2017) Murimi, Tedd Miano
In general insurance reserving, it is assumed in many cases that the losses in each accident year develop the same way. This makes the chain ladder method in general a good method to estimate general insurance claims liabilities. But what if the runoff patterns in each accident year were different? Which method is best to use to calculate general insurance reserves in such a case? This research paper seeks to answer the question of which method is best suited to estimate general insurance reserves when the runoff pattern in each accident year is different. Claims data was simulated using various constraints that restricted the claims to various distributions. Future claims development was also simulated. The claims reserve estimates using various methods of reserve estimation were then calculated. The results were then obtained as to which method is best suited to calculate claims reserves for a general insurer in different scenarios of varying development pattems. The results of this paper will hopefully provide a new insight of how to calculate claims reserves for a general insurer in the event that development pattems differ in each accident year.
Finding appropriate loss distributions to insurance data Case study of Kenya (2010-2014)
(Strathmore University, 2017) Nduwayezu, Florent
Obtaining the total amount of claims for a specific period is a vital part of the daily work of insurance companies. This will help in various ways the management in running the company (Jouravlev, 2009). For instance, the insurance company will be able to calculate the premium for a type of policy by the use of the claim experience. Moreover, it will be able to reserve a certain amount of money to cover the cost of future claims. Premium computation and Reserving are not the only reasons for which loss distributions are needed. Loss distributions are also utilised in reviewing reinsurance arrangements and also in testing for solvency. This explicitly highlights the importance of loss distribution in the insurance industry. This paper therefore aims to determine the most suitable loss distributions for various sort of insurance contracts being general or life insurance in the Kenyan market industry. The following distributions will be compared: the exponential distribution, the Pareto distribution, the Generalised Pareto distribution, the lognormal distribution, the Weibull distribution & the Burr distribution. We will see how these distributions can be tailored in order to suit the observed data. Afterwards, a test of goodness-of-fit will be used to determine the level of robustness of the distribution in fitting the given data. The loss distributions will also be used in order the probabilities of future events happening.

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