BSSF Research Projects (2018)

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An Analysis on the long term performance of Initial Public Offerings in the Nairobi Stock Exchange
(Strathmore University, 2018) Ladha, Jay Kaushik
There have been a number of studies carried out that have tried to determine the long term performance of IPOs. The three key issues these studies try and dwell on is the long run under-performance, short term underpricing and the hot issue market phenomena. The effects of the financial crisis of 2007-2008 was felt strongly in America. However there were small ripple effects that spilled over in to countries like Kenya. The studies carried out with regard to the above three phenomena in relation to IPOs and post financial crisis period have been scanty and not entirely conclusive. This project will help the IPO literature, by providing proof on two of the three above mentioned anomalies. The study documented evidence supporting the undisputed underpricing of IPOs at the NSE as compared to the closing first day trading price of the IPOs. With respect to the first phenomena, which was the long run under performance, the results are mixed in the sense that the study concludes that there is no visible regularity when computed against the market benchmarks. The study also proves through the use of wealth relatives that the IPOs are performing similarly to the market on their 5th anniversary to the market.
Analyzing the effectiveness of microfinance as a means of poverty alleviation in selected areas of Nairobi County; a case study of Kenya Women Micro-finance Bank
(Strathmore University, 2018) Sembi, Singh Karan
Poverty is a major concern for most developing nations. Economic development and poverty reduction have been elusive throughout sub-Saharan Africa since independence (Younger, 2004), with Kenya being no exception. Moreover, entrepreneurship and financial inclusion among women in Kenya is lower than among men (CBK, 2016). Gender equality is the fifth Sustainable Development Goal (SDG) and its pursuit is key to the economic development of Kenya. Micro finance is built around the concept of alleviating poverty, the creation of wealth for the poor and women empowerment. Empirical evidence, however, indicates that this may not always be the case and in some instances, micro-finance initiatives leave their intended beneficiaries worse off than they were before undertaking the micro-finance initiative.
Bitcoin as an alternative asset in emerging markets: portfolio optimization via conditional value-at-risk
(Strathmore University, 2018) Mukuria, Mary Wanjiru
In a bid to diversify their portfolios, investors are venturing into various alternative assets. This study analyses the inclusion of bitcoin, as an alternative asset, in a well-diversified portfolio in South Africa. Recognizing that bitcoin is a relatively new asset, this study has provided detailed information on the features of bitcoin, both as a currency and as an investable asset. The study utilizes a well-diversified portfolio that consists of stocks, bonds, commodities, cash, real estate and international assets. The asset classes in the portfolio are picked from the South-African market as it is a very lucrative emerging market. The study utilizes time series data as the historical data of the asset returns is collected from July 28, 20 I 0 to December 29, 2017. The Mean-CVaR Portfolio Optimization approach is utilized so as to accommodate the highly non-normal return distribution of bitcoin instead of the Mean Variance Optimization approach which assumes that returns are normally distributed. Two different portfolio frameworks are utilized namely; The Minimum CVaR Concentration Portfolio and the Minimum CVaR portfolio under an upper 30% CVaR allocation constraint are used to assess the objectives of the study. Dynamic rebalancing is utilized so as to achieve robust results. The results show that the inclusion of bitcoin increases the risk-return ratios of the different portfolios. The results also show that bitcoin's weight allocation is relatively low, however, even with the low weighting in the portfolios, the risk contribution of bitcoin to the portfolio CVaR is relatively high. The study concludes that bitcoin appears to be an attractive investment that can substantially increase the return of an efficient portfolio as the portfolios with bitcoin outperform their non-bitcoin counterparts. The recommendations of this study are that sophisticated forecasting techniques such as Bayesian methods or Neural Network should be utilized for scenario generation instead of the use of historical data and that the impact of the inclusion of bitcoin to a well-diversified portfolio should be conducted when the asset is at its mature stage.
The Effect of demographic transition on the equity risk premium in Kenya
(Strathmore University, 2018) Nanua, Kendi Gloria
While a multitude of research has focused on the effects of demographics on asset prices and returns in developed countries, the same lacks in frontier and emerging countries. The findings and conclusions of such results however cannot be replicated across developing countries since their demographic characteristics are different. In developed countries, the fertility rates are lower than in their counterparts leading therefore to a lower middle-old ratio. Such demographic characteristics affect asset prices and returns differently. Where researchers have considered demographics in developing countries, only output and the impact of macroeconomic variables is considered (see for instance Thuku, Gachanja, & Obere, 201 3). Additionally, over time the only demographic variable under consideration, on its effect on the economy, has been population growth. While population growth is a key variable in analyzing the effect of demographics, there are other variables pertaining to demographics that are occasionally overlooked. Such variables include life expectancy, age structure, dependency ratios and fertility rates. There therefore exists a gap in that, the investigation of the effect of demographics on financial markets in emerging and frontier markets is scarce. This study is an attempt to fill this gap by particularly looking at the effect of demographic variables on the equity risk premium in an emerging market.
The Effects of technology adoption on millennial entrepreneurship
(Strathmore University, 2018) Githinji, Magdaline Wangari
Information Technology has made considerable inroads in organizations and enterprises. This diffusion of technology has been credited with significant cost reductions, gains in productivity, organizational effectiveness and in some cases a definite competitive advantage (Earl, 1989). This study sought to bring out the various aspects of technology adopted in an enterprise and their impact on the growth and profitability on the firm. The aspects considered were Managing accounts/bookkeeping, managing inventory, online banking, online sale of business products, The results of the study obtained that there exists a linear relationship between the adoption of technology and the returns of the company. This relationship exists positively for all variables used in this study. This finding offers a valuable insight to entrepreneurs and provides a strategic direction of adopting technology to optimize the performance of the firm
Empirical analysis of the value and growth investment styles in an African frontier market.
(Strathmore University, 2018) Mumbo, James Dennis
The choice of a stock is a headache for all equity investors worldwide ranging from well developed markets to developing markets. This study embarks on testing the Growth and Value investment styles in an African frontier market namely the Nairobi securities exchange and discovers is that the Value investment style does overall outperform the Growth investment style on the basis of portfolio return and Sharpe however there are instances when the Growth investment style does outperform the Growth investment style in the case of this study the results of 2007 are evidence.
Empirical corporate probability of defaults in Kenya: Merton and modified KMV framework
(Strathmore University, 2018) Mukesh, Bharadva, Darsha
A firm's capital structure gives it an endogenous cause to default. Be that as it may, prior to default there is no way to precisely single out the firms that will default from those that will not. At best, we can only make a probabilistic assessment of the likelihood of default. Not to mention, depending on a firm 's choice of capital structure, the probability of default varies from a firm with a low financial leverage to one with a high financial leverage. This paper used the Merton Model to determine the probabilities of default in various sectors of Kenya and their relationship with varying debt tenors. The model generated high default probabilities for firms with a high leverage indicating that firms with a high leverage bear high financial risks. Furthermore, the default probabilities increased as the debt maturity increased signaling an increase in future uncertainty. Nonetheless, caution must be taken when interpreting the results since the Merton model carries assumptions that are at odds with reality. These assumptions can be relaxed and alternative modeling techniques can be employed in order to match real world situations. This can be a possible future research agenda.
Fraud detection using machine leaning: a comparative analysis of neural networks & support vector machines
(Strathmore University, 2018) Gitonga, Joseph Theuri
Fraud detection and prevention tools have been evolving over the past decade with the ever growing combination of resources, tools, and applications in big data analytics. The rapid adoption of a new breed of models is offering much deeper insights into data. There are numerous machine learning techniques in use today but irrespective of the method employed the objective remains to demonstrate comparable or better recognition performance in terms of the precision and recall metrics. This study evaluates two advanced Machine Learning approaches: Support Vector Machines and Neural Networks while taking a look at Deep Learning. The aim is to identify the approach that best identifies fraud cases and discuss challenges in their implementation. The approaches were evaluated on real-life credit card transaction data. Support Vector Machines demonstrated overall better performance across the various evaluation measures although Deep Neural Networks showed impressive results with better computational efficiency.
Impact of mobile banking on the bank profitability of Kenyan commercial banks
(Strathmore University, 2018) Remulo, Kristen Ijeoma
This study sought to determine the impact of mobile banking on the financial performance of commercial banks in Kenya during a period of seven years. The need for convenient and out-of-bank banking seems to be the force behind mobile banking. This is the reason for the heavy investment in technological adaptation. This is because, mobile banking offers millions of people with access to a cellphone the ability to carry out banking transactions without having to physically be in the bank. This was a causal study. It analyzes a sample of 7 out of the 43 commercial Banks in Kenya for a period of six years between 2010 through 2016. This was because most banks introduced the mobile banking service by around 2012. The secondary data was drawn from the annual reports of the Central bank of Kenya, the financial statements of the commercial banks and the investor annual reports. Data analysis involved multiple regressions of variables under study. That is, the financial performance represented by return on assets, the number of registered mobile banking customers by the banks, the number of mobile banking transactions by the banks and the loan amounts disbursed through mobile banking. From the regression model of 6years, the study found evidence of a positive relationship between mobile banking and bank performance. It can be concluded that mobile banking does lead to increased revenues based on the summary of findings. The mobile banking transactions as well as total mobile banking loans disbursed measured by the banks have a positive relation to the return on asset (ROA). This means that, a unit increase in each or all would result in an increase in the profitability performance indicator ROA. The results show that mobile banking has a moderate influence on profitability. The study recommends that policy makers, such as the monetary policy committee (MPC), take mobile banking adoption into consideration when drafting policies on the operations of banks in Kenya. This is because of the direct relationship between mobile banking and financial performance as the banking sector moves into a technologically competitive environment. Policy makers should keep a keen eye on the developments of mobile banking as it is a new platform for competition among commercial banks so as to not lose its regulatory role
Modeling Own Source Revenue (OSR) of county governments in Kenya
(Strathmore University, 2018) Mwaura, Cynthia Wanjiru
Revenue forecasting is an essential part of budget making process in the public sector. This study considered the Time Series Modeling of Own Source Revenue of counties in Kenya. Data used was collected from the revenue collection system of one of the counties, in particular, daily revenue from July 2015 to June 2017 with the general objective of exploring the data and further establishing a suitable forecasting model which could be used to predict the amount of revenue to be collected in a certain specified period. Box and Jenkins method of time series analysis was used to analyses the series. From the analysis, INIA (1, 1) model was identified as a suitable model to forecast the own source revenue. The forecast generated holding other factors indicated that the revenue collected would remain within the same range as before and thus, the Commission of Revenue Allocation should continue allocating funds to counties as the cow1ty cannot fully rely on its own revenue for sustainability and economic development.
Modeling temperature dynamics and pricing temperature derivatives: an investigative Kenyan example
(Strathmore University, 2018) Maina, Francis Karanja
The following research project will propose a mean-reverting stochastic process for modelling the daily average temperature in the Kenyan context. The proposed modelling framework will then be used to price a weather derivatives instrument. First, a general description of weather derivatives is provided along with their applicability in the market. Different models postulated in modeling the dynamics of temperature are then outlined. The Alaton model is then highlighted; a model that prescribes an Ornstein – Uhlenbeck process for the modeling of temperature. The methodology is then outlined as well as a description of the calibration of the model. Thereafter, the aforementioned model dynamics are used in pricing a CDD call option.
Multi objective optimization of commercial bank's balance sheet in Kenya : goal programming approach
(Strathmore University, 2018) Rotich, Rolly Kipkemoi
This study applies goal programming approach to optimizing the balance sheet of three commercial banks representing the different tiers in Kenya; Barclays Bank of Kenya (Tier 1 ), Family Bank (Tier 2), Sidian Bank (Tier 3) subject to particular constraints. The constraints used in this study include capital regulatory measures issued by the Central Bank of Kenya under the Prudential Guidelines 2013. Following the Lexicographic Model Approach of allocating priorities to different constraints, the study establishes that optimization of the balance sheet of a commercial bank is possible based on desired goals and constraints. In this optimization study, the core capital ratio was realized to be the most significant constraint when optimizing the balance sheet for a commercial bank. Once an optimum core capital ratio is attained, the other constraint, total capital ratio, can be retained at the regulatory level or slightly above it. With the same results seen across all the three banks, the same procedure can be applied for the other banks. However, caution should be taken for the smaller banks in handling their capital levels.
Price and liquidity effects of stock splits on shares
(Strathmore University, 2018) Barasa, Sandra Akochi
Fama et al. ( 1969) defined a stock split as an exchange of shares in which at least five shares were distributed for every four formerly outstanding, which means that shareholders get additional shares for every share previously held. Nevertheless, given that splitting is not costless and the result is to multiply the number of shares per shareholder without increasing the shareholder's capital, why then do firms split their shares? This project questions the effects of stock splits with a focus on the price and the liquidity effects. The main objectives of the study were to determine the effect of stock splits on the price of the shares after the split announcement is made and to also determine the liquidity effects of stock splits in the stock market. The study used the event study methodology and the student t-statistic to test for price and liquidity effects on a sample of 7 listed companies from the Nairobi Securities Exchange, using historical prices and trading volume respectively. An event window of 81 days, including the day of announcement was used in the study. For price effects, the study concluded that stock splits cause an increase on the prices of shares as was evidenced by the 7 sampled firms. For liquidity, the findings were inclusive given the varying effects from the sampled firms. The main limitation for the study was the small sample size
The Price-concentration relationship in the banking industry in Kenya
(Strathmore University, 2018) Zawadi, Emma Awich
The objective of the study is to examine market structure performance hypothesis in banking industry in Kenya. Specifically, the structure-conduct-performance (SCP) and market efficiency hypotheses were examined to determine how market concentration and efficiency affect bank performance in Kenya. The study used secondary data the Return on assets, return on equity, market share, total bank assets, capital to asset lending ratio, lending to deposit ratio, lending to asset ratio of 43 commercial banks operating from 2012-2016.The proxies used to measure bank performance were Return on Assets and Return on equity while market concentration and market share were used as proxies for market structure. Market concentration was measured using the Herfindahl-Hirschman Index, while market share was used as a proxy for efficiency. The study used the generalized least squares regression method. The findings of the study reveal that there is no strong evidence to support the SCP hypothesis in the Kenyan banking industry as the coefficient for market concentration measured by the HHl index was found to be insufficient to explain market performance. On the other hand, market share was seen to have a significant impact on bank performance indicating that more efficient banks with higher market share, earn more profits.
Prospect theory: evidence of over-reaction in investor decision making at the Nairobi stock exchange
(Strathmore University, 2018) Kimani, Mark Christian
Overreaction is a common investor problem that heavily occurs due to irrationality on the part of the investor. According to Kahneman and Tversky, investors tend to be risk seeking in losses and risk averse in gains, a realization that led to the genesis of the Prospect Theory. Moreover, studies have identified that the Efficient Market Hypothesis is not a perfect tool in determining investor reaction. Therefore this study purposed to analyze the existence of overreaction in the Nairobi Securities Exchange through use of a model Swallow {1998) that analyzes stock abnormal returns, checks for their persistency and also examines if they are driven by overreaction. According to the findings, the market was deemed to be in the weak form of efficiency hence abnormal returns being experienced were persistent. Further, overreaction was observed in losses and not in gains, hence affirming the findings of the Prospect Theory. Overall, in comparison to the Portuguese market, similar findings were obtained hence leading to the conclusion that behavioral biases do play a role in investor decision making and it is imperative for investors to be well educated before investing and to take up effective hedging strategies to mitigate against the negative effects of stock losses
Role of agency banking in facilitating financial inclusion in Kenya
(Strathmore University, 2018) Mutua, Eugene Nzioka
The research project set forth to evaluate the role played by agency banking in facilitating financial inclusion. The sole objectives of the study were to study and evaluate the effects of the number of agents employed and the effects of bill payments on financial inclusion in Kenya. Secondary data in the CBK annual reports was used in the analysis stage. The sample size was 17 out of 42 commercial banks that constitute banking sector as at December, 2015. Data analysis was done using Stata. The study used correlation analysis, homoscedasticity test, normality test, unit root test and regression analysis to determine the relationship between correspondent banking and financial inclusion. The results revealed that agency banking had a significant positive relationship with financial inclusion. It was concluded that agency banking had no effect on financial inclusion. It was therefore recommended that commercial banks should equip agents with the necessary expertise to conduct due diligence on potential customers who wish to open bank accounts
A Study on the effect of capital adequacy on financial performance of commercial banks in Kenya
(Strathmore University, 2018) Kamaita, Sheila Nkirote
Prudential soundness in the financial system is ensured through better self -regulation of factors such as capital adequacy, management quality and asset quality. Capital adequacy as a bank specific factor revitalizes the functioning of the banking system by acting as a buffer for losses during an economic downturn yet at the same time its use in projects leads to substantial returns. This study seeks to assess the extent to which capital adequacy affects the Return on Equity and Return on Assets for commercial banks in Kenya. A regression analysis using STAT A software was performed for the panel data collected from 6 commercial banks in the NSE from 2007- 2016. The results from the analysis show that a. unit increase in CAR increases ROE by 0.0558141 and increases ROA by 0.2033251. Based on the findings, capital adequacy plays a vital role in the financial performance of commercial banks. This implies that banks should hold more capital to buffer them against economic downturns and for better financial performance
Underpricing of initial public offerings at the Nairobi Securities Exchange between 1994 and 2014
(Strathmore University, 2015-11) Mumbo, Jane Valary
Under pricing of initial Public Offerings is characterized by the closing price being higher than the offer price on the first day of trading. Research carried out in different financial markets has generated varied results with regard to the degree of under pricing present in the markets and its determinants. This study examines the extent of under pricing for listings on the Nairobi Securities Exchange between 1994 and 2014.The study establishes that IPOs on the Nairobi Securities Exchange are significantly under priced by approximately 46.28%firm specific and offer specific factors such the size of the offer, size of the firm, age of firm and the subscription rate of the offer are significant explanatory factors for the observed under pricing, with subscription rate being the most significant. The results are robust for varied binary regression model specifications.

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