BBSE Research Projects (2014)
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- ItemApplying the black litterman model to the NSE(Strathmore University, 2015) Mbabu, Willis MwendaThis 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.
- ItemAssessing the pricing of currency risk in the Kenyan stock market(Strathmore University, 2014-03-23) Mukuna, Mururu MercyThe 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.
- ItemCapital structure and stock returns - evidence from the Nairobi Securities Exchange(Strathmore University, 2014-03-24) Nyabicha, Edith MaseretiCapital 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.
- ItemCorporate governance and dividend payout - analysis of firms listed at the Nairobi Securities Exchange(Strathmore University, 2014-03) Njugi, Mwangi KevinThe study aims to examine the effect of corporate governance on dividend payout of firms listed at the Nairobi Securities Exchange. Based on agency theory, the study considers the effect of two conflicting hypotheses, the outcome and substitution hypothesis, where dividends can be an outcome of corporate governance or a substitute of corporate governance. Using a sample of 37 listed firms covering the period 2003-2012 the paper employs a fixed effects and random effects method of estimation. Corporate governance measured used were the size of the board, proportion of independent directors to the board size, institutional shareholding and women representation. The results show that the size of the board, proportion of independent nonexecutive directors and institutional ownership are not statistically different from zero in explaining dividend payout. Women representation in corporate boards represented, as a dummy variable is statistically significant in explaining dividend payouts as women are seen as more risk averse and will disgorge more cash in form of dividends to minimize agency costs. The results are consistent with the outcome hypothesis. This present study contributes to the corporate governance literature by looking at the importance of corporate governance in influencing fi1ms' dividend behaviour in Kenya.
- ItemCredit scoring for group lending - an analysis of the Kenyan Microfinance Institutions(Strathmore University, 2014-03-31) Otieno, Antony OmondiMicrofinance Institutions play a major role in expanding the reach of microcredit programs in the Kenyan economy through providing group lending. This initiative has been hampered by lack of a risk-based pricing and mitigation system, which motivated this study. Even though there are credit scoring models currently in use, my findings shows clearly that there is need to develop a universal credit scoring model to help reduce reliance on collateral resulting in a lower cost of borrowing for the lowest-risk customers and potentially greater credit availability for higher-risk customers, groups which have lower delinquency rate. The study also show that for universal scores to become available for both small and large lenders, more bureaus must be licensed, and sufficient data must be collected to build a score that consistently rank-orders risk, repm1ing of positive information should be become mandatory and groups must deal with the specific factors affecting their ability to acquire loans. Given these findings, policy makers should gazzete the credit bureau regulations, license more credit bureaus and make reporting of both positive and negative information from all banks mandatory. Similarly, MFis should develop a mode of data collection and sharing for sufficient volumes to make scoring cost-effective and promote training and capacity building programs in risk-management analytic for groups before issuing loans. These initiatives also extends to the groups themselves who should eliminate the challenges that affect their lending ratings, such as keeping proper lending records, engaging in large scale and secure businesses, regular meetings, regular saving patterns and reduce internal conflicts among members.
- ItemDeterminants of savings among the urban poor in Mukuru's informal settlements of Nairobi, Kenya(Strathmore University, 2014-04) Makena, KimathiThis study sought to probe savings among the dwellers in Mukuru's informal settlements, otherwise known as 'slums' in urban Nairobi. The choice of savings was influenced by literature that is informative of development for the urban poor through collective savings schemes. The research gap was brought about by insufficient literature into urban poverty within Nairobi and thus primary data was used to obtain a first-hand feel of the situation on the ground. The study covered two informal settlements, Mukuru kwa Njenga and Mukuru kwa Reuben. Financial behaviour can be explained and linked to the ability to save and thus the motives to save which would lead us to the dete1minants of savings. Collected data was run statistically to obtain general descriptive statistics and then tested under various metrics such as binary logistic regressions and higher order chi-square tests. A probit model was also used to derive the determinants of savings from household and income characteristics. It was concluded that education levels, household size and additional occupation were strong determinants of savings while low funds and high cost of living were the main disincentives. Policy issues have also been informed from the research with recommendations as to how inhabitants from these areas can enhance better financial management and the role of the state in reducing the level of poverty.
- ItemDeterminants of stock price - a case study on the Nairobi Stock Exchange(Strathmore University, 2014-03) Gichinga, Hilda NyokabiVarious studies have been conducted to identify variables that influence share price movements such as that done by Karanathassis and Philapaas (1988) which indicated that the share price in Greece was affected by dividends, retained earnings and company size.Another similar research that was conducted recently in Bangladesh stock market revealed that share price and net asset value (Uddin, 2009). Other empirical investigation have been increasing over the years especially in developed financial markets around the world. just recently, developing countries such as Nigeria whose stock markets yield attractive returns have captured the interest of researchers who want to determine the variables that have an impact on the market prices of the shares (Olowoniyi A.O, 2012)
- ItemThe effect of inflation risk on the equity risk premium - evidence from Kenya(Strathmore University, 2014-03-23) Gitonga, Allan MutumaThis research is an analysis of the relationship between inflation volatility and Equity Risk Premium (ERP) volatility in Kenya. The study uses the Generalized Autoregressive Conditional Heteroscedasticity-in-Mean (GARCH-M) framework to model the evolution of the ERP and inflation volatility postulating that there is a relationship between the two variables. The 91-day Treasury Bill Rate from January 2000 to December 2010 is used as the proxy of the risk free rate, while the Nairobi 20-Share Index from the same period is used as the proxy of well-diversified equity returns. From these data monthly returns were used to compute the ERP. There is no relationship found between the ERP and inflation, meaning that investors do not price inflation risk in their investment decisions. Consequently, an autoregressive conditional mean equation of the ERP is used in this particular GARCH framework which shows high levels of persistence in the ERP due to economic shocks.
- ItemEffect of market concetration and competition on the technical efficiency of Commercial Banks in Kenya(Strathmore University, 2014-03) Nyandia, Ndiho HazelMarket structure as represented by market concentration and competition affects the technical efficiency of the banking industry. However, the direction of the relationship between market structure and technical efficiency is mixed given the existence of two opposing schools of thought, specifically the structure-conduct-performance paradigm and the efficient market hypothesis. The purpose of this research study is to determine which of these schools of thought holds in the Kenyan banking industry by studying the impact of bank competition and concentration on the technical efficiency of commercial banks in the country. The study uses interest revenue as a measure of technical efficiency while considering other factors such as bank specific risk and the macroeconomic factors. It seeks to answer the question whether a high market concentration and low market competition leads to excessively high interest revenue. The study is based on a panel dataset of the entire banking population in Kenya ranging from the years 2007-2012. It incorporates the Panzar-Rosse model to obtain the determinants of the interest revenue earned by banks and includes the Herfindahl index as one of the possible determinants. A fixed effects estimation method is employed to determine the significance of market concentration on bank interest revenue. The estimation method also gives rise to the H statistic- a key variable in the Panzar-Rosse model that serves as a measure of market competition. The results reveal that market concentration is not significant in determining the interest revenue earned by banks possibly as a result of the smaller focus that the Panzar-Rosse model directs to the effects of market concentration as represented by the Herfindahl index. They also reveal that the Kenyan banking industry faces a mildly oligopolistic structure with an H statistic of 0.23 which is statistically insignificant from zero. The low level of competition is attributed to market fragmentation as observed by the varying levels of competition from one segment to another. This market fragmentation may be based on size or on the ownership structure of the commercial banks.
- ItemThe effect of money supply on stock market volatility in Kenya(Strathmore University, 2014-03-14) Nyaribo, Meshack MogambiThis paper considers the effect of money supply on stock market volatility, using M2 as a measure of money supply since it is a measure of broad money in the economy. This relationship is important because the level of money supply determines the amount of disposable income available to individuals to consume and invest, with the stock market being one of the avenues to invest. The study finds that the money supply has an impact on stock market volatility and the impact is persistent.
- ItemEffects of demographic changes on equity returns - the Kenyan contex(Strathmore University, 2014-03-23) Gakii, Gituma JoanModigliani's Life Cycle Hypothesis (LCH) predicts that demographic variables should play a significant role in affecting asset prices through consumption patterns. Understanding this relationship is particularly important given the demographic changes expected in the next few decades. The asset under study is the Nairobi Securities Exchange 20-Share Index (NSE-20) with the assumption that it is well diversified. The Johansen cointegration approach and Vector error correction model are employed to determine if there is a long run and short term relationship between the stock market returns and the demographic variables. The study covers a period of 50 years from 1964 to 2013 to capture the movements in the low frequency demographic variables. The analysis shows that there is a significant long and short run relationship between demographic changes and equity returns. This will be a useful insight in influencing investors to factor in long run relationships in their decision making.
- ItemEffects of excise tax on government revenue contribution and consumption patterns - evidence from the alcohol sector in Kenya(Strathmore University, 2014-03-28) Wachuka, Mathenge JacquelineThis study sought to find out the effect that excise tax on alcoholic drinks has with respect to government revenue contribution and consumption of alcoholic products. The product of choice used as a proxy for the alcohol sector was Tusker due to its data availability and large legalized market share. The gap warranting this research is the lack of information on how effective excise tax has been over the years that has kept the government a firm user of it. From the analysis, it is evident that there is no relationship between alcohol consumption and excise tax but there is a positive linear relationship between excise tax and contribution to government revenue From the finding it is evident that the government as well as policy makers need to focus on other alternatives to lower alcohol consumption's that directly target access to the alcohol. The in-elasticity of demand for alcohol products is a contributing factor and so excise tax has little to no effect on consumption. But excise tax on alcohol is a sustainable source of long term revenue for the government. Thus the conclusion is that excise tax is more of an economic tool for the government than the social tool it is intended to be.
- ItemEffects of government expenditure on economic growth in Kenya - (1990 - 2012)(Strathmore University, 2014) Abwoga, TimothyGiven the recent fiscal scenario of the Kenyan government, an explanation of this required studying the impact of government expenditure on economic growth. The specific objectives of the study were to: investigate the existence of a long term relationship between the components of government expenditure and economic growth; and examine the effects of components of government expenditure on GOP growth rate. The data used were government expenditure components that included expenditure on government investment, and government consumption. Sources of data were Kenya government documents and international financial publications. The study applied Vector Auto Regression estimation technique using annual time series data for the period 1960 to 2012 to evaluate the impact of government expenditure on economic growth. The Johansen cointegration tests revealed a long-run relationship between GOP growth rate and the selected components of government expenditure. Further, the Granger- Causality test indicated bi-directional causality between GOP growth rate and components of government expenditure. The results of impulse response functions and variance decomposition revealed that government expenditure on investment, and total government expenditure had a positive effect on economic growth while government consumption had mixed effects. The study concludes by giving policy recommendations based on findings and suggests areas such as optimal level of government expenditure for future studies.
- ItemAn evaluation of pension fund views of investments in infrastructure assets in Kenya(Strathmore University, 2014-03) Oile, Kenneth OgolaWith the increasing infrastructure gap and budgetary deficits, we have had an increase in the need for investment from the private sector. More so by pension funds because they are attracted to protect with low correlation aspects and long term growth because of their long duration hedging and liability driven investments. Infrastructure is divided into economic infrastructure such as transport and social infrastructure such as hospitals and schools. This paper however focuses on economic infrastructure as compared to social infrastructure because of the desirable characteristics of the former to pension fund investments. Despite increased interest from investors in in infrastructure. There is little evidence on actual investment ultimately flowing to the sector and the different treatment of infrastructure assets in the varying portfolios of these investors. This paper is based on a recent survey on some of the largest pension funds in Kenya with a significant amount of asset under management. We look at the different views these investors have to infrastructure assets: how much these investors have allocated to infrastructure. What is considered as infrastructure? Where does it tit in the total portfolio allocation, what are the approaches and forms of investment taken, what are recent trends in relation to infrastructure and asset allocation.
- ItemAn evaluation of the preparedness of banks in Kenya for Basel III implementation(Strathmore University, 2014-03-27) Mbora, Campbell EvansThis qualitative study sought to establish the preparedness of banks to implement Basel III standards; the latest instalment of the Basel accords. A study of literature determined that implementation of Basel IL the predecessor to Basel III, has been problematic for banks in developing nations. To determine if this is the case for banks in Kenya, this study used personal interviews with experts in risk and compliance to determine the challenges of Basel II implementation, if these challenges affect preparedness for Basel III and the perceptions of experts about preparedness of banks in Kenya for Basel III. This study found out that while the views on preparedness from experts are varied, the challenges faced in implementing Basel II will affect adoption of Basel III standards.
- ItemEvolving roles of SACCOs - the case of 14-seat transport SACCOs in Kenya(Strathmore University, 2014-03) Bii, Collins KiprotichParatransit is a mode of transport that operates parallel to an organized, usually large-scale government or government subsidized transport system. Paratransit is the main public transport in Kenya and it is estimated that it controls 80 per cent of the public transport. The number of ' matatus' is estimated at eighty thousand; twenty and sixty thousand, in Nairobi and upcountry, respectively. Seventy per cent of the "matatus" commonly referred to as "Nissans" and valued at ksh.50 billion IUSD 625millions, are 14-seater vehicles. The intention of the Legal Notices No. 161 of2003, No. 83 of2004 and No. 65 of2005 was to regulate the public transport sector as part of the Integrated National Transport Policy (INTP). The National Road Safety Action Plan (NRSAP) was meant to restore order, reduce accidents, increase passenger safety, reduce conflicts and safeguard private investment in the public transport sector. Other objectives were, to facilitate the transition of the paratransit business from the informal to the formal economy, increase employment opportunities and inculcate a culture of respect for the motor sector regulations. The Government's preferred strategy to tame this sector and reap the expected benefits was to direct all current and potential paratransit operators to upgrade their 14-seater vehicles to high capacity of more than 25 seats and to establish matatu SACCOs, as a condition for licensing of their vehicles to operate as public service vehicles. The formulation and implementation of this policy was top down, rather than bottom up. However, inadequate stakeholder consultation and consensus building during policy formulation and implementation resulted in low understanding of the policy, low ownership and low implementation. Individual paratransit operators and existing matatu SACCOs that were operating predominantly 14-seater matatus started fiercely resisting these preconditions terming them, insensitive, draconian, too expensive to implement and likely to force them out of business. The purpose of this study therefore, was to analyze the socio economic impact of the 14-seat transport SACCOs in Kenya.
- ItemExamining capital market intergration in Kenya and Uganda(Strathmore University, 2014-03) Litunya, Sharon OkwakoThis study examines the degree of stock market integration between Kenya and Uganda using daily closing equity prices from 14th July, 2009 to 28th March, 2013. Johansen cointegration approach is employed to capture the dynamic nature of stock market integration. Empirical results provide evidence of integration between the two markets as shown by the existence of two cointegrating vectors. The results change to three cointegrating vectors after controlling for USD foreign effects. Impulse response and variance decomposition reveal that shocks in the Nairobi stock market are due to their own i1movation averaging 99 per cent during the entire period. However, variations in Nairobi stock market seem to marginally impact the variation in Uganda stock exchange with around 3.68 per cent of Uganda stock market being influenced by Nairobi stock market. The main implication of our results is that investors cannot benefit from diversification by investing in Uganda and Nairobi stock exchanges.
- ItemExamining the effect of product innovation on financial risk management in SACCOs - evidence from Kenya(Strathmore University, 2014-03) Njoroge, Alice NgonyoThis purpose of this study was to identify the effect of product innovations on risk management in SACCOs. The study relied on data collected from SACCO staff through questionnaires, company websites and publications. 34 SACCOs in Nairobi County were chosen to represent Kenya deposit taking SACCOs. The study was purely qualitative. The main data collected included the types of product innovations adopted, the risks arising from them and the risk mitigation techniques in response. The findings indicated that product innovations had a positive correlation with credit risk and default risk. Risk management techniques had changed and increased in response to this with SACCOs becoming more concerned with their risk management. The main conclusions were that although effort has been made towards improving risk management in SACCOs, a lot of gaps remain. In most SACCOs, risk management is still a new concept and skills are inadequate. The researcher recommends more robust risk management techniques and policies from both the authority and the SACCOs. Additionally, the growth and contribution of SACCOs requires higher accounting standards to be put in place. The researcher recommends for further research in SACCOs specifically in formulating a risk index to provide a robust measurement of various risks.
- ItemExamining the potency of foreign currency as an asset class - evidence from Kenya(Strathmore University, 2014) Mwaniki, Maryanne WairimuIn this study I allocate currency assets namely, the US dollar, the Great Britain Pound, the Japanese Yen and the Tanzanian shilling to a portfolio using mean variance optimization. Similarly, I analyze currency as an asset class within the Kenyan context and given the various attributes pertaining to asset classes, the currency portfolio exhibited all the characteristics. The portfolio had positive returns thus giving investors an opportunity to make profits; the assets are strictly mutually exclusive since they can only be classified under currency assets, homogenous and liquid. The Tanzanian shilling met the criterion that assets should have low correlations relative to other asset classes. However, the pound, the dollar and the Yen exhibited quite high correlations to the equity class. Mean variance analysis has been used to create portfolios that minimize risk for a given level of return and the resulting currency portfolio performed better than the equity class given that it had higher returns and lower risk. The study lead to the conclusion that currency is an asset class and can be allocated to portfolios using mean variance optimization.
- ItemExamining the relationship between market liquidity and equity returns - a case study of firms listed on the Nairobi Securities Exchange(Strathmore University, 2014-03) Mwangi, Ibutiti AllanThis study uses a panel regression of 42 actively traded equities listed on the Nairobi Securities Exchange over 58 days to relate a stock's bid-ask spread and its return. The study results show that in the NSE, there is no significant relationship between a stock's bid-ask spread and its return in both the conventional regression sense and the Granger Causality sense. This result leads us to believe that the state of liquidity, as measured by the bid-ask spread of a stock, has no effect on the returns of a stock. Investors therefore do not include a liquidity premium, as measured by the bid-ask spreads, in their prices. This information is useful for both market regulators and market makers. Regulators require another measure of liquidity in order to properly quantify the effect that market liquidity has on the prices of stocks in the market while market makers may demand large spreads and have no effect on the returns of the stocks.