BBSE Research projects (2015)

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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.
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.
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.
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.
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.
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.
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.
Competition and microfinance interest rates in Sub Saharan Africa
(Strathmore University, 2015) Njenga, Meredith Muthoni
This paper examines the competition effects on microfinance lending interest rates while also considering firm profitability and social outreach. The study, which covers microfinance institutions in 32 countries in Sub-Saharan Africa, is conducted across two cases. The first case clusters the microfinance institutions into three types: non- profit microfinance institutions, for-profit microfinance institutions and both types combined while the second involves clustering the microfinance institutions based on where their home countries rank on the global competitiveness index (Gel) by the World Bank. The Herfindal Hirschman index to measure the market concentration and panel data regression analysis is used in studying relationships. The findings show that the region is characterized by high market concentration with an inverse relationship between market concentration and lending interest rates only for profit microfinance institutions. Similar results are found in the less competitive / low productivity countries. In addition, for the profit microfinance institutions a positive relationship exists between interest rates with firm profitability and social outreach, which indicates that higher interest rates improves firms' profitability and attracts a larger number of risky borrowers. However, the borrowers are put at risk of over-indebtness. With these findings it is concluded that there is a need for improvement of institutional frameworks and higher penetration of nonprofit microfinance institutions specifically in low productivity regions for a more effective and efficient use of microfinance to achieve poverty alleviation.
The contemporaneous relationship between stock prices and monetary policy in Kenya
(Strathmore University, 2016) Wambul, Reuben Muhindi
Movements in the stock market can have a significant impact on the macroeconomy and stock prices are therefore likely to be an important factor in monetary policy decisions. In view of the raging debate on whether central banks should react directly to asset price movements, this paper attempts to measure the contemporaneous response relationship between stock prices and monetary policy in Kenya applying the procedure of Rigobon and Sack (2003) to identify and estimate a VAR in the presence of heteroskedasticity of stock returns. The study finds a significant positive policy response with a 1% percent rise (fall) in the NSE-20 share index, a proxy for stock prices, increasing the likelihood of a 1.97% tightening (easing) of the short-term interest rate which captures monetary policy actions by the CBK.
Customer protection in mortgage financing industry in Kenya
(Strathmore University, 2014-03) Ndungu, Muhindi Wanjugu
Consumer protection is an especially important instrument in creating long-term banking relationships. These relationships influence uptake of banking products such as mortgages especially if they are built on trust and confidence. The real estate industry in Kenya has been growing over the past few years and since mortgage financing is the primary way of financing real estate in developing countries such as Kenya, uptake of mortgages should be increasing as well. Despite this fact, uptake of mortgages is very low in Kenya compared to other banking products. This study sought to evaluate consumer protection within the mortgage financing industry and establish whether consumer protection practices are being applied in the Kenyan context or not. The study tested various opinions of different bank customers derived through the use of questionnaires. The opinions of the customers on different factors affecting mortgage uptake were subjected to Wilcoxon Signed Test to test how much significant each of the factor was. A conclusion was reached that high interest rates leading to unaffordable mortgage prices was the fundamental factor affecting low uptake of mortgages. It was also established that there was information asymmetry in the mortgage financing industry since potential customers did not feel confident in the information being provided to them by mortgage financing industries.
The day-of-the-week effect in the Nairobi securities exchange: an adaptive market hypothesis perspective
(Strathmore University, 2015) Maonga, Solomon Atura
This paper examines the day-of-the-week effect , an anomaly that contravenes the Efficient Market Hypothesis (EMH), in the Nairobi Securities Exchange (NSE) . The paper attempts to identify and explain the presence of the day-of-the-week effect in the segments of the NSE with an Adaptive Markets Hypothesis (AMH) approach. Other objectives are to identify the best time to invest and whether AMH adequately explains the effect. The paper applies an Analysis of Variance (ANOVA) model using the returns of NSE segment indices for a ten-year period. Previous studies identified the presence of the effect for the established NSE indices but not for individual stocks . The approach applied is to incorporate individual stocks in indices of the NSE segments in order to give an indication of the manifestation of this effect.This paper identifies the anomaly in three out of nine segments. The findings show that the anomaly is not stable and that the significant returns of Monday are positive, in contrast to the conclusion by the previous studies. Monday and Friday are identified as the best days to sell. A conclusion drawn from this study is that the AMH does adequately explain the day-of-the-week effect.
Determinants of bank profitability
(Strathmore University, 2015) Samoei, Raymond
Banks play a crucial role in economic development. For the local community, banks provide access to funding and financial services to both local business and citizens, as well as the money banks invest back into the community through employee payroll, business investments, and taxes. On a larger scale, national banks offer similar access to credit and financial services to larger businesses, local governments, and in some cases international customers. Investments made by national banks are spread widely across the nation, therefore influencing economic development across an entire country or geographic region.
Determinants of economic growth In Kenya
(Strathmore University, 2015) Kaara, Hellen Njeri
Economic growth has been a major issue in the world today especially in developing countries. This study examines the determinants of economic growth in Kenya the period 1971-20 II with a particular focus on interest rates, savings and inflation rates . The aim of the study is to determine the causality between interest rates, inflation, savings and economic growth, and the extent to which each of the determinants affect economic growth. Johansen co-integration shall be used test to check for long term relationship between the identified variables, granger causality test to determine granger causality among the different variables and impulse response test to determine how shocks in the one variable affect the other variables. The results show a unidirectional causality from interest rates, inflation and savings to GOP per capita. The impulse response test revealed that shocks in inflation have a negative effect on GOP per capital in the short run while shocks in savings have a positive effect in the sholi run. Shocks in interest rates were found to have a constant effect in the short run. However, shock effects take long to die off in in the three instances. From the findings, it is recommended that relevant policies should be formulated to ensure that each of this factors move in a direction such that they enhance economic growth.
Determinants of interest rate spreads in Kenya
(Strathmore University, 2015) Omukoko, Daisy Etemesi
Numerous variables exogenous to the operations of commercial banks have been touted in academic literature to be impmtant factors causing the typically high interest rate spreads in developing countries. Using data for Kenyan banking sector, this paper uses Generalized Method of Moments (GMM) teclmique to detetmine the macroeconomic and market detenninants of banking sector interest rate spreads in Kenya. The empirical results suggest that the impact of macroeconomic factors such as exchange rates are not significant. The effect of macro-policy captured by public debt and the treasury rate was found to be negative and not significant, which could arguably imply a weak response by banks to the policy signals. Bank development, inflation and total deposits, which is a proxy for market size and inflation rates are the significant variables. Bank development and inflation rates are negatively conelated with the interest rate spread while total deposits are positively conelated with interest rate spreads. On the other hand, exchange rates, public debt, T -bill rates and loan to deposit ratio, which is a proxy for bank intermediation, are insignificant.
Determinants of non-performing loans in commercial banks in Kenya
(Strathmore University, 2015) Maina, Esther-Irene Wanjiku
The purpose of this study was to determine the macroeconomic and bank specific factors affecting nonperforming loans in commercial banks in Kenya. It aimed at determining the relationship between these factors and nonperfonning loans. A panel data analysis for all 43 commercial banks in Kenya was carried out for the period from 2003-2912 using a fixed effects model. The results revealed that Loan loss reserves and government deficit are the significant variables in the study. It showed that a negative relationship exists between Loan loss reserves and nonperforming loans and a positive relationship between government deficit and non perfonning loans which is in line with studies conducted by other researchers. Generally, this study reveals macroeconomic determinants as being the major cause of non perfonning loans.
Determining optimal contribution levels of defined contribution pension plan in Kenya
(Strathmore University, 2015-12) Ndereba, Maureen Ngugi
This study seeks to determine optimal contribution level required in a Defined Contribution Pension Plan so as to be adequate for the life of the retiree on retirement. The objective is to determine the contribution of the working adult through his working years, as a factor of inflation over the working years, salary increment, investment of the fund and number of working years, so as to achieve the optimal contribution to be adequate for the life of the retiree. The life expectancy of the retiree is derived using the Curtate Life Expectancy. Assets of the fund are invested in stocks. Salary is increasing half times that of the inflation rate. The optimization is done under a budget constraint that guarantees the actuarial equilibrium between the current asset and future contributions and benefits
Determining the pricing strategy for a continuing care retirement Community in Kenya &evaluating its demand
(Strathmore University, 2015) Kiyimba, Anthony Serwadda
Continuing care retirement communities (CCRCs) are a form of long term care insurance that offer retirees with housing and nursing care facilities, along with other desired amenities. Potential entrants into the facility pay an initial entrance fee that is refundable once the individual exits the CCRC and a periodic non-refundable fee for their continued stay. Using established CCRCs in the US and UK as a basis, this paper seeks to determine whether there is sufficient demand for CCRCs in Kenya, and if so how the membership fees can be calculated.
Dividend policy and firm performance: A sectoral analysis of Nairobi securities exchange listed firms
(Strathmore University, 2015) Kibe, Rose Waithera
The relationship between dividend payout and firm profitability has attracted a lot of attention fi·om finance scholars with no universal agreement. Benartzi eta! (1997) found no evidence that dividends contain information about changes in earnings. They stated that "while there is a strong past and concurrent link between earnings and dividend changes, the predictive value of changes in dividends seems minimal." Amidu (2007) found that dividend policy affects finn performance especially the profitability measured by the return on assets. The results showed a positive and significant relationship between return on assets, return on equity, growth in sales and dividend policy. This study aims at determining the relationship between dividend payout and firm performance across the NSE 20 listed firms fi·om the period 1994 to 2013. The return on equity was the proxy for performance and was regressed against dividend payout, firm size, leverage and growth. Panel data models, that is, fixed and random effects models were employed in order to capture the differences in the industries. The results indicated that a positive and significant relationship existed in the conunercial and service sector, and a significant relationship was observed in the teleconununications and agricultural sectors. All other sectors had no significant relationships between dividend payout and firm performance.
The effect of capital structure on profitability of nonfinancial firms listed on the Nairobi securities exchange
(Strathmore University, 2015) Ligeve, Caleb Lubanga
Financing businesses presents a number of challenges both to the management and the potential investors. One of the key issues is the choice between debt and equity as financing strategies. Past studies show that firms will try to balance the two financing sources with a view of obtaining an optimal capital structure which will satisfy both the management and the firm's shareholders. This study measured the effect of capital structure on profitability of 30 non-financial firms listed on the Nairobi Securities Exchange over a period of four years (2010-2013). Debt-Equity ratio was used as a proxy for the capital structure of the individual firms while profitability was indicated by three measures including Return on Asset, Return on Equity and Earnings per Share. Data was collected from the published books of accounts of the sample companies. The results while consistent with a number of previous studies which indicate that capital structure does affect profitability negatively, raises the question as to what firm specific factors make for the non-uniformity of capital structure on listed firms . A SIMPLE OLS regression was conducted on a panel using EVIEWS 5 software.
The effect of exchange rate volatility on Kenyan exports to the USA
(Strathmore University, 2015) Kimani, Steven Klnyua
This paper empirically investigates the impact of exchange rate volatility on aggregate Kenyan exportsto the USA. To investigate this relationship the model used is a traditional export demand function where the proxy for exchange rate volatility is moving sample standard deviation of the growth of exchange rates. The regression will be done by Ordinary Least Squares. The paper uses data from 1977 to 2012. The paper finds that there is no significant relationship between exchange rate volatility and aggregate exports to the USA.

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