BBSE Research Projects

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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.
An analysis of liquidity in stock markets
(Strathmore University, 2016) Muindi, Brenda Wanja
The following is a study on liquidity of the va rious stocks listed on the NSE. It has defined liquidity as the ability to trade large quantities of a stock without moving the price. The study seeks to determine the most liquid/ illiquid stocks listed on the NSE and the possible determinants of a given stock's liquidity/illiquidity. To determine the most liquid/illiquid stocks, the paper employs liquidity ratio as a measure of the stocks liquidity. The paper utilizes panel data regression and multiple regression to answer its research questions. The regressions were run using GRETL. The results suggest that Liquidity Ratio is an appropriate measure of liquidity in the NSE. The results also suggest that companies with high presence on social media as well as a high number of issued stocks tend to be more liquid. Keywords: Liquidity, Nairobi Securities Exchange
An Analysis of regional integration in a developing economy.
(Strathmore University, 2018) Oketch, Bruce Otieno
The purpose of this study is to find the effect of regional integration in the Kenyan economy with a particular emphasis of dete1mining whether the regional integration has resulted to trade creation or trade diversion. The study adopts an augmented gravity model to determine the effects of the regional integration and the resulting effects either being trade creation or trade diversion. Time series data was used for the period 1980-2015. Using a panel data analysis the results show that there was some trade creation within EAC and COMESA.
An analysis of the absorption capacity of Official Development Assistance in Kenya from 1981 - 2010 and its relationship with economic development
(Strathmore University, 2015-11) Kipchirchir, Lang'at Douglas
One of the key components of development funds for Kenya is Official Development Assistance (ODA). However, given ODA's general underwhelming nature and overall ineffectiveness in fostering economic development, it would be useful to consider absorption capacity as the best measure of how well aid to Kenya is working, and not just the gross amount of ODA flows to Kenya. That is the basis of this research. The research utilized time series data obtained from the World Bank aggregator, using a time period of 30 years i.e. 1981 to 2010. The dependent variable in this research is GDP growth rate, which indexes economic development. The absorptive capacity was found to display a mean reverting trend, with an average of 87% over the past 30 years. Thereafter, an Auto regressive Distributed Lag model was used to determine the long run relationship between ODA absorption and economic development. The results of the model showed that the absorptive capacity of ODA negatively influences economic development in the current time period, but it has a positive and significant influence on economic development in the next time period. However, in the long run, the relationship between the two variables is statistically insignificant, meaning that the relationship between the two cannot be determined to be a result of anything but mere chance.
Analysis of the interest rate pass through from the central bank rate to mortgage lending rates in Kenya
(Strathmore University, 2015) Amatta, Beryl Abuor
Monetary policy is deemed to be effective when the transmission process is complete; in this case , if it moves from the Central Bank Rate to the long term mortgage rate. However, the Central Bank of Kenya has often been criticized for its inability to force banks to reduce their lending rates. To test this effectiveness, using monthly time series data from June 2002 to December 2013 , the paper analyzed the speed of adjustment of mortgage rates in Kenya to changes in the Central Bank Rate (CBR) using mortgage rates from the 15 commercial banks that offer mortgage finance. The study focused on a twostep process: transmission from the CBR to the short term rate and from the short term rate to the mortgage lending rate . An Error Correction Model was used to determine the speed of adjustment. The results revealed that the interbank rate adjusted to a change in the CBR at a speed of 39.25 per cent per month, which is slow given that it is below the 50 per cent half mark. Mortgage rates in turn adjusted to a change in the interbank rate at a speed of 13.6 per cent, which is very slow. This shows that the transmission process is sluggish and incomplete, especially as regards adjustment of the mortgage lending rates to changes in the CBR. This could possibly be as a result of collusive behavior among banks, the need to recover sunk costs and the habit of banks following non-profit maximizing behavior. Further research should be done to find out solid reasons why the mortgage rates are sticky so as to enhance the understanding of the dynamics of interest rates in Kenya.
Analysis of the macroeconomic determinants of a firm's capital structure
(Strathmore University, 2015-11) Waweru, Wangechi
This study analyses the relationship between macroeconomic factors and the capital structure of 55 listed companies in Kenya. The questions answered are what is the effect of macroeconomic conditions on capital structure and is there a difference in effects across segments? Panel data analysis is applied and a random effects model is used for the sample period 2004-2014. Fisher type unit root test is used to test for panel data stationarity. The segments analyzed in the research include; agricultural sector, manufacturing & allied, investment, banking, insurance, construction & allied, energy & petroleum, automobiles & accessories and commercial & services. The leverage ratios tested were debt to equity and total debt ratio. The independent variables tested were GDP, inflation, interest rates, exchange rates, asset tangibility and size. The findings of the study indicate that the macroeconomic determinants do not have an effect on the capital structure decisions of the listed firms as a whole. Results of the analysis of the different segments concluded that interest rate and inflation had an effect on the agricultural companies' capital structure decisions while interest rate, inflation and exchange rate had an effect on the energy and petroleum industries capital structure decisions. In conclusion none of the macroeconomic determinants affect the industry as a whole but interest rate, inflation and exchange rate are the macroeconomic determinants that are significant across the segments.
An Analysis of the quantitative impact of climate change on national level economic growth: a Kenyan case study
(Strathmore University, 2018) Mbotela, Immanuel Malombe
The issue of climate change has been a growing interest in recent times for a number of reasons. Chief among them is because the economic landscape of most if not all African countries is dependent on the dynamics of climate change. Key sectors of the economy such as agriculture, forestry, energy, coastal and water resources are highly susceptible to climate change. That being the case, this paper seeks to analyze the empirical linkage between economic growth and climate change in Kenya from a quantitative point of view. Using data from two climate variables, temperature and precipitation, and employing time series analysis techniques, the paper tries to estimate both the short-run and long-run effects of climate change on growth. The paper establishes that an increase in temperature significantly reduces economic performance in Kenya. This takes the form of reducing agricultural output, industrial output, and aggregate investment, and increasing political instability. Some policy options have arisen from this study all in all. First and most importantly, mainstreaming climate change adaptation into National Development Strategy and budgets could promote proactive engagement on the formulation and implementation of climate change adaptation strategy. Second, the potential of regional or multiple countries approach to climate change adaptation is high due to possibility of economies of scale.
An analysis on the impact of the asset price .channel of monetary policy transmission mechanism on stock prices in Kenya
(Strathmore University, 2015) Mahat, Mohammed Abdullahi
The purpose of this paper was to find out the effectiveness of the asset price channel in Kenya. The methodology involved using a Vector Autoregression (VAR) where the study used contemporaneous shocks to short term interest rates to get the effect on the asset prices .The variables used in this study were the real GDP, inflation as derived from the . Consumer Price Index (CPI), the NSE return, repo rate, interbank rate and T-Bill rate . . The study established that the asset price channel of monetary transmission mechanism in Kenya is not effective. This was shown by the effects of the proxies of the asset price by ,.' shocks to the short term interest rates. Second, instability in the stock market prices , creates instability in GDP and inflation. The results indicate that most of the variation in stock prices is explained by changes in the interbank rate. Interbank rate explains 'over 25 percent of the variance in the stock prices in the initial periods progressing to over 32 percent after four quarters. The money supply and inflation also explain some insignificant variation in stock prices and their proportionate explanations increase as the quarter progresses. GDP explain very little of the variations in stock prices. However, the, substantial part of the total variance of the stock prices comes on stock prices itself. These results imply that in , designing monetary policy, the central bank cannot completely ignore information coming from the stock market since this information can ' 'be used to predict the direction of the business cycle.
Analyzing the influence of twitter hashtags on the movement of the stock market
(Strathmore University, 2015-11) Muthoni, Warimah Joy
This paper evaluates the existence of a relationship between a well-known micro-blogging platform, Twitter and the financial market. We particularly consider in a period of six months the daily collection of trending twitter hash tags and the daily movement of the NSE 20 share index Granger causality, Correlation tests and logistic regression tests were used to examine the relationship. We find low Pearson correlation between the corresponding time series over the time period. We also found that none of the variables granger causes the other. We found no relationship between the sentiment as expressed from twitter and the movement of the stock market. As a series of other papers have already shown, there is a signal worth investigating which connects social media and market behavior. This opens the way, if not to forecasting, then at least to "now-casting" financial markets. This study is open to further and more advanced research using a longer time period as well and to employ sentiment classification techniques.
Applicability of non-financial defined contribution scheme compared to financial schemes in Kenya
(Strathmore University, 2015) Murgor, Vanessa Cherotich
Over the years, there has been an advancement in the technology used in various procedures that aid in early detection of certain conditions and informed prevention of others . Improved sanitation and food supply to various regions as well as better nutrition has led to improved mortality and thus more individuals are living longer than expected. This, therefore, means that the government makes pension payments for even longer periods of time. Having a stable scheme funding is paramount to.ensure that members of the scheme are catered for after retirement. This paper looks into the conventional schemes used for the public service pension schemes while assessing the financial status of the scheme previously applied and study if the NDC scheme would provide a flexible and stable scheme. Using publicly available data, possible assessments are made using the NDC framework and a sample of the population to establish the sustainability of the scheme over the long run.
Applying the black litterman model to the NSE
(Strathmore University, 2015) Mbabu, Willis Mwenda
This study applies the Black-Litterman model to portfolio allocation on the Nairobi Securities Exchange and questions its economic importance. It begins by explaining how the model works the proceeds to implement it. This is done by creating portfo lios generated using analyst view from two Research Houses in the Kenyan market, namely Standard Investment Bank (SIB) and African Alliance Investment Bank (AA). Using past return data on the eight stocks selected, the views are translated into expected returns which are then optimized into weights to create the two portfolios. The two portfolios are then tracked over a period of four months against the created market portfolio. The SIB portfolio performs best earning a daily average log return of 053%, followed by the market at -0.0 I% and the AA portfolio at 0.12%. We fail to reject the null that the returns between SIB and the market, and the market and AA are the same. The nu ll that the returns between SIB and AA are similar is, however, rejected. We find that an economic gain is derived from using the Black-Litterman model where the views are correctly specified.
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.
Assessing the impact of oil prices on exchange rate dynamics in the Kenyan economy
(Strathmore University, 2016) Chelimo, Winnie
This paper aims to investigate the role of murban adnoc oil import prices in explaining the dynamics of exchange rates in the Kenyan economy. The study uses monthly data covering the period 2005 to 2014. The Johansen Co-integration technique will be used to determine long run relationships of variables in the study.The vector autoregressive model is then used to analyse the regression by allowing the value of exchange rates to depend on more than just its own lags but also lags of lending interest rates and extemal reserves. The findings from this study show that in the Kenyan economy, murban adnoc oil import prices do not have a significant impact on exchange rates. Therefore, exchange rate stability could still be achieved even with fluctuating murban adnoc oil import prices in Kenya.
Assessing the optimal inflation rate for the Kenyan economy
(Strathmore University, 2) Auma, Laura
This study seeks to estimate the optimal level of inflation for the Kenyan economy that is favorable for its economic growth by using time-series dataset for the period 1981 to 2014. The study adopts a model proposed by Ademola & Aiwo (2006) to examine the existence of threshold level effects in the inflation-growth relationship. The estimated model suggests a 4 percent optimal level of inflation above which inflation retards economic growth.
Assessing the pricing of currency risk in the Kenyan stock market
(Strathmore University, 2014-03-23) Mukuna, Mururu Mercy
The Arbitrage Pricing Theory of Ross ( 1976) provides the theoretical framework for the three factor unconditional asset pricing model used in this study. Using the Generalized Method of Moments procedure the traditional two-step procedure of Fama and Macbeth was implemented. The study used four mean variance efficient p01tfolios created form the returns of 39 companies that were continuously listed on the NSE from 1999-2008 to investigate whether currency risk is priced in the Kenyan equity market. The three factor model fails to reject the hypothesis of a non-priced foreign exchange risk factor in the mid and large cap portfolios: p01tfolio 2, 3 and 4 (companies whose market capitalization ranges from, 1.275 billion to 4.68 billion, 5.245 billion to 26.7 billion and 31.9 billion to 245 billion respectively). On the other hand the model finds foreign exchange risk to be weakly priced in the small cap portfolio (portfolio I, companies whose market capitalization ranges from 7.29 million to 1.13 billion) and is able to reject the hypothesis that currency risk commands a zero premium in the Kenyan equity markets.
An assessment of the interest rate channel on monetary policy transmission in Kenya 2006-2015
(Strathmore University, 2017) Siele, Daisy Chepng'eno
For the government to achieve its desired level of economic growth, appropriate monetary policy needs to be formulated and implemented. Theoretical and empirical literature highlights the importance of the interest rate channel. However in Kenya there have been inconclusive evidence on the effectiveness of this channel. This study attempts to investigate the effectiveness of the interest rate channel of monetary policy transmission in Kenya during the period 1996-2015. The study employed Vector Autoregressive Models. The paper also employs time series techniques namely Unit root tests, cointegration, impulse responses and variance decomposition. Cointegration tests showed the presence of 2 cointegrating equations and the study proceeded to use Vector error correction models (VECM). From the impulse response tests, the interest rate channel of monetary policy is proved to be effective since the Central bank rate (CBR) is able to transmit effects on output and prices but its effectiveness is with the four lags for CPI and three lags for GDP. The forecast error variance decomposition show that in forecasting CPl, all fluctuations were attributed to itself, with decreasing significant contribution from CBR in the long run. Forecasting GDP showed that GDP fluctuations were greatly denominated by itself, however in the long run there was significant contribution in the other variables. The results show that the interest rate channel of monetary policy transmission is effective in Kenya.
Can consumer debt burden adequately explain slowdowns in Kenya’s economic growth?
(Strathmore University, 2021) Otieno, Rickyjesse Daudi Omino
This study set to examine the relationship between consumer debt burden and economic growth. The prior specification was that consumer debt burden causes a slowdown in economic growth. The analysis makes use of Kenyan time series data from 1970 to 2019. Analysis of the data was done by means of a Vector Error Correction Model (VECM) and tested how consumer debt burden explains economic growth through a third variable (consumption & agriculture) which are the main drivers of Kenya's economy and also included a control variable; net exports. The results indicate a negative causal relationship between consumer debt burden and economic growth which means that rises in consumer debt burden cause economic slowdowns.
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.
Capital structure and stock returns - evidence from the Nairobi Securities Exchange
(Strathmore University, 2014-03-24) Nyabicha, Edith Masereti
Capital structure and stock return are important aspects in financial management. This study examines how debt ratios move in relation with movement in stock prices for listed firms in Kenya. The Fama-Macbeth regression analysis and Bayesian V AR integration approach employed indicates that the two variables are correlated implying that for any stable financial activity to exist in Kenya, attention needs to be paid to the two variables simultaneously since evidence suggests that the two variables will not drift away from each other. A balanced cross-sectional analysis of Kenyan firms over the period from 2000-20 I 0 documents that debt ratios in Kenyan firms are "sticky". Even over 1 0-year horizons past debt ratio levels explain about 85% of actual debt ratio levels. Second, a larger portion in the variation of the debt ratio can be explained by stock return effects. Specifically, roughly 60% of the 1-year and 50% of the 5-year variation in leverage is captured by return-induced changes in the capital structure. Third, although we observe inertia in the leverage ratios at 5.3%, which suggests that firms do not adjust immediately, they nevertheless seem to follow constant a target debt ratio in the long run. The slow adjustment is consistent with the hypothesis that other considerations such as market timing or pecking order outweigh the costs of deviating from the optimal leverage.
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.

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