Effects Of The Crisis On Kenya Finance Essay

It has been argued that African Bankss are insulated from foreign finance, as they rely on domestic sedimentations and loaning and do non hold derived functions or asset-based securities among their portfolios. Harmonizing to Shanta Devarajan, Chief Economist of the Africa part at the World Bank ( 2008 ) , ‘African Bankss retain loans they originate on their balance sheets, the interbank market is little, and the market for securitized or derivative instruments is either little or nonexistent ‘ . Even though some Bankss have important foreign ownership, their parent Bankss are typically non in the US and the foreign ownership portion is less than 5 % , compared with an norm of 40 % in other developing states.

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Massa ( 2009 ) proposes a figure of indexs to place the different strengths and failings of the domestic fiscal system in the context of the current crisis and to measure the possible magnitude of the impact of the planetary fiscal convulsion on the domestic fiscal sector. The followers are some of the suggested fiscal exposure indexs applied to the Kenyan instance:

Capital adequateness ratios

Adequate capital demand aid decrease the opportunity that Bankss will go insolvent if sudden dazes occur. Therefore, the higher are risk-weighted capital adequateness ratios ; the lower is the chance that Bankss will be exposed to the hazard of insolvency.

In Kenya, capital adequateness is catered for in Section 7 ( 1 ) of the Banking Act 2000. The demands are:

aˆ? Minimum nucleus capital. The current lower limit nucleus capital demands are KSh250 million for Bankss and mortgage finance companies and KSh225 million for non-bank fiscal establishments.

aˆ? Gearing ratio, given by nucleus capital/total sedimentation liabilities ( minimal 8 % ) .

aˆ? Core capital/total risk-weighted assets ( TRWA ) ( minimal 8 % ) .

aˆ? Total capital/TRWA ( minimal 12 % ) .

These demands are continuously monitored and reviewed from clip to clip by the Central Bank of Kenya ( CBK ) . A fiscal establishment that fails to run into the minimal demands may be urged to unify with other Bankss, lose its licence or be put under settlement.

In 2008, for illustration, the mean nucleus capital was KSh3.4 billion, against a minimal demand of KSh250 million ; the mean geartrain ratio stood at 15.8 % , above the statutory demand of 8 % ; the norm nucleus capital/TRWA ratio stood at 29.5 % against 8 % ; and the mean entire capital/ TRWA ratio stood at 33.1 % against 12 % . The values increased in 2006-2008 as the Bankss geared up for new demands to be achieved by 2012. ( The Finance Act 2008 increased the lower limit nucleus capital for Bankss to KSh1 billion, to be attained by 2012 ) .

Rate of Return on Assetss

ROA rate is an of import fiscal soundness index, and is in peculiar a step of bank efficiency and profitableness. The ROA rate in Kenya by and large declined in the late ninetiess but has shown a general upward tendency since 2000. In 2008, the ROA shows some diminution ( 4.03 % ) from 2007 ( 4.11 % ) .

Table 1: ROA rate, 1998-2008 ( % )

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

ROA rate

0.95

1.04

2.09

1.31

2.83

2.62

3.02

2.62

3.02

4.11

4.03

Beginnings: Oloo ( 2007 ; 2008 ; 2009 ) .

Non-performing loans

The ratio of NPLs to assets is an index of Bankss ‘ deficiency of plus quality and fiscal soundness. In the instance of the current fiscal convulsion, a high ratio may bespeak that Bankss are non healthy, since they have important exposure to the beginnings of the job.

In Kenya, the NPL/assets ratio decreased from a high of 23.27 % in 2000 to a depression of 4.02 % in 2008, an indicant that the banking system ‘s plus quality had improved. This may be attributed to the demands for bad loans commissariats and increased nucleus capital mandated by CBK. Harmonizing to CBK, net NPLs as a portion of entire loans declined from 2.9 % in March 2008 to 2.2 % in November 2008. This was accompanied by increased commissariats for bad loans in 2005 and 2006, with a diminution thenceforth in 2007 and 2008.

However, there is some grounds that the ratio increased somewhat in 2009. Harmonizing to CBK ‘s September 2009 Monthly Economic Review, the ratio of net NPL to gross loans increased from 3.4 % in August 2008 to 3.7 % in August 2009. CBK has accused commercial Bankss of fuelling loans defaults by bear downing borrowers high involvement rates ( Kang’aru, 2009b ) .

Table 2: Ratio of NPLs to assets, 1999-2008 ( % )

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

NPLs/total assets ( % )

19.98

23.27

20.67

16.14

13.92

12.07

10.56

8.49

4.29

4.02

Commissariats and involvement in suspense/NPLs ( % )

52.98

59.90

58.06

52.85

67.97

62.33

111.65

117.57

91.49

55.84

Beginnings: Oloo ( 2007 ; 2008 ; 2009 ) .

Banks ‘ ownership construction

Foreign Bankss are an of import beginning of fiscal exposure as they may get down to retreat financess in order to countervail losingss in place states, increasing the opportunities of prostration of their domestic-based subordinates, although there is no grounds of this in Kenya. On the other manus, cross-country comparings show that foreign Bankss may hold better capitalisation, while conveying with them improved know-how and proficient capacity, which so spills over to the remainder of the banking system ( Claessens and Jansen, 2000 ) .

Fiscal reforms in Kenya have encouraged foreign Bankss to come in and spread out banking operations in the state. Kamau ( 2009 ) finds them more efficient than local Bankss. She attributes this to the fact that foreign Bankss concentrate in major towns and aim corporate clients, whereas big local Bankss spread their activities more widely across the state. Foreign Bankss hence refrain from retail banking to specialise in corporate merchandises, whereas big domestic Bankss are less prejudiced in their concern scheme. These different operational modes affect efficiency and profitableness.

Harmonizing to CBK, foreign Bankss comprise about a one-fourth of all Bankss in the state, with 11 foreign Bankss out of 43 commercial Bankss in 2007. They account for approximately 40 % of commercial Bankss ‘ nucleus capital. There are five foreign Bankss that are to the full foreign incorporated. These are Bank of Africa ( K ) Ltd, Bank of India, Citibank N.A. Kenya ( US ) , Habib Bank A. G. Zurich ( Switzerland ) and Habib Bank Ltd ( Pakistan ) . These accounted for 9.2 % of the nucleus capital of the banking system in 2007 ( 10.2 % in 2006 ) . These Bankss had a higher pitching ratio of 17.2 % in 2007 compared with 15.6 % for the banking system as a whole ; a higher nucleus capital/TRWA ratio of 30.1 % compared with 18.1 % ; and a higher entire capital/TRWA ratio of 30.1 % compared with 19.1 % .

In add-on, there are six foreign but locally integrated Bankss, so that they are partly owned by the locals. These are Bank of Baroda ( K ) Ltd ( India ) , Barclays Bank of Kenya Ltd ( UK ) , Diamond Trust Bank of Kenya Ltd ( Kenya ) , K-Rep Bank ( Kenya ) , Stanbic Bank of Kenya Ltd ( South Africa ) and Standard Chartered Bank ( K ) Ltd ( UK ) . These accounted for 31.7 % of the nucleus capital of the banking system in 2007 ( 34.0 % in 2006 ) . These Bankss had a lower pitching ratio of 14.7 % in 2007 compared with 15.6 % for the banking system as a whole ; a lower nucleus capital/TRWA ratio of 16.4 % compared with 18.1 % ; and a lower entire capital/TRWA ratio of 16.7 % compared with 19.1 % . It is hence this group of foreign Bankss that policymakers should be concerned about in the context of the planetary fiscal crisis.

There is no grounds that the portion of foreign Bankss ( 40 % of nucleus capital ) changed basically in 2008 and 2009. International adoption by the banking system has been comparatively little, amounting to $ 183 million by June 2009 ( about 6 % of commercial Bankss ‘ sedimentation liabilities ) . These cross-border claims declined with the oncoming of crisis, from 14.6 % of entire cross-border claims to 10.2 % in June 2009 ( Table 3 ) . Since mid-2008, hazard antipathy has contributed to decrease in the exposure of Bankss to foreign currency loans and sedimentations ( IMF, 2009b ) . The banking system remains comparatively unfastened, nevertheless, with foreign currency sedimentations accounting for 13 % of entire sedimentations and foreign currency loans about 9.7 % of entire loans.

Table 3: Amalgamate cross-border claims on Kenya, Mar 2006-Jun 2009

Banking system ( US $ m )

Entire claims ( US $ m )

Share ( % )

Mar-06

82

1261

6.5

Jun-06

257

1501

17.1

Sep-06

90

1327

6.8

Dec-06

97

1318

7.4

Mar-07

100

1347

7.4

Jun-07

100

1297

7.7

Sep-07

1534

2761

55.6

Dec-07

145

1614

9.0

Mar-08

206

1651

12.5

Jun-08

192

1767

10.9

Sep-08

257

1757

14.6

Dec-08

222

1624

13.7

Jun-09

179

1657

10.8

Sep-09

183

1795

10.2

Beginning: BIS database.

Growth and composing of bank recognition to private sector

The planetary fiscal crisis may impact the ability of borrowers to refund their loans, hence increasing non-performing assets, taking to solvency jobs for many Bankss. In Kenya, recognition to the private sector dominates the plus portfolio of the commercial Bankss in Kenya. As seen in the information below, private sector recognition in nominal footings by and large increased in 2000-2008, except for a little diminution in 2001 attributable to uncertainness environing the 2002 elections and a big addition in 2004, after a decrease in the hard currency ratio in 2003 followed by a diminution in 2005. Private sector recognition in existent footings besides decreased in 2003 and 2008. This form besides obtains for sum recognition so that the public sector did non herd out the private sector. Credit demand in 2008 was stifled by rigorous benchmarks adopted by the commercial Bankss over fright of contagious disease from the planetary fiscal crisis.

Table 4: Growth of bank recognition to the private sector, 2001-2008 ( % )

2001

2002

2003

2004

2005

2006

2007

2008

Normal growing in entire recognition ( % )

-3.4

6.8

5.2

24.2

27.9

14.0

14.3

25.6

Nominal growing in private sector recognition ( % )

-3.9

4.7

5.9

25.7

10.3

16.3

21.4

24.8

Average rising prices ( % )

5.9

2.0

9.8

11.6

10.3

14.5

9.8

26.2

Real growing in entire recognition ( % )

-9.3

4.8

-4.6

12.6

17.6

-0.5

4.5

-0.6

Real growing in private sector recognition ( % )

-9.8

207

-3.9

14.1

0.0

1.9

11.6

-1.4

Beginnings: CBK Statistical Bulletin ( assorted issues ) ; Oloo ( 2009 ) .

After the election of a new authorities in 2002, the growing of the economic system picked up, as did recognition to the private sector every bit good as investings in exchequer measures. The decrease of the hard currency ratio from 10 % to 6 % in 2003 increased the liquidness of the banking system, bring oning a decrease in loaning involvement rates. Low loaning rates doubtless led to increased economic activity, with economic growing speed uping from 2.9 % in 2003 to 5.1 % in 2004, to 5.8 % in 2005 and so to 6.1 % and 7.0 % in 2006 and 2007, severally.

In order to increase their profitableness, some Bankss have moved into lodging and consumer loaning, therefore exposing themselves to the explosion of the bubble in existent estate markets or to the hazard of a possible addition in the degree of family liability as a effect of the current convulsion. In Kenya, nevertheless, merely approximately 5 % of banking system ‘s recognition went to existent estate ( RE ) over 1997-2008, with a worsening tendency, approximately 6 % to private families ( PH ) , with an increasing tendency, and 2 % to consumer durable goodss ( Cadmium ) , both with an increasing tendency.

Building and lodging ( B & A ; H ) took an mean 5 % ; conveyance and communications ( T & A ; C ) 4 % ; finance and insurance ( F & A ; I ) 4 % ; excavation and quarrying ( M & A ; Q ) 1 % ; concern services ( BS ) 6 % and other activities ( OA ) 10 % . Overall, the private sector took about three-fourthss and the public sector about a one-fourth of the banking system ‘s recognition.

Table 5: Distribution of recognition by Kenya ‘s banking system, 1997-2008 ( % )

B & A ; C

T & A ; C

F & A ; I

Rhenium

M & A ; Q

Ph

Cadmium

Bachelor of science

OA

Entire private sector

Public sector

Entire

1997

5

4

3

5

1

2

2

5

13

72

28

100

1998

6

3

3

6

1

2

1

6

9

71

29

100

1999

6

3

3

6

1

2

1

6

10

75

25

100

2000

5

3

4

6

1

3

1

7

9

76

24

100

2001

5

3

4

5

1

3

1

7

11

71

29

100

2002

5

4

5

5

1

4

1

6

10

70

30

100

2003

4

4

6

4

0

6

1

5

9

68

36

100

2004

4

4

6

4

0

8

1

5

14

74

26

100

2005

5

5

6

5

0

9

2

7

9

76

24

100

2006

6

7

4

4

0

8

2

8

9

74

26

100

2007

5

7

4

4

1

13

3

7

10

77

23

100

2008

5

6

4

4

1

15

4

8

11

79

21

100

Beginning: CBK Statistical Bulletin ( assorted issues ) .

Securities investing and exposure to new fiscal instruments

In a similar manner, Bankss may besides hold moved into new lines of concern like securities investing, and by making this increased their exposure to new types of market hazard such as a possible sudden autumn in portion monetary values. As good, a turning exposure of Bankss to new fiscal instruments for hazard transportation, like securitization and recognition derived functions, may stand for an extra structural failing of the domestic banking system.

As Table 6 shows, nevertheless, assets of the banking system in Kenya are dominated by loans and progresss, authorities securities and hard currency militias at CBK. Kenya commercial Bankss hold minimum derived functions or asset-based securities in their portfolios. They hold chiefly riskless authorities securities.

Overall, Kenya ‘s banking sector has grown strongly during the past decennary, by about 20 % points, from around 85 % of gross domestic merchandise ( GDP ) in 2001 to 115 % of GDP in 2008 ( IMF, 2009b ) . It has improved enormously in footings of merchandise offerings and service quality, stableness and profitableness. During this period, merely two Bankss have been put under CBK statutory direction ( Prudential Bank and Charterhouse Bank ) , in comparing with the 1980s and early 1990s, when a big figure of Bankss collapsed. The banking system hence seems poised to defy the planetary fiscal and economic crisis, unless overcome by pure contagious disease, as the basicss seem rather sound. This was confirmed by a study carried out by CBK in October 2008 to set up the exposure of the Kenyan banking system to the planetary crisis. All establishments indicated that they are improbable to be affected by the crisis owing to the low degree of their engagement in planetary fiscal markets. However, they agreed that they stand to endure from indirect effects emanating from crisis impacts on the full fiscal sector and the economic system in general.

Table 6: Composition of commercial Bankss assets, 1999-2008 ( % )

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Loans and progresss ( net ) /total assets

68.8

52.0

50.6

48.8

47.7

51.2

52.2

51.5

51.4

53.8

GOK securities/total/assets

16.9

16.9

21.8

22.7

27.6

20.7

19.8

20.5

19.8

15.6

Cash and balances with CBK/total assets

9.7

8.6

8.7

8.4

7.0

7.6

7.5

7.3

8.0

7.7

Others*

7.6

22.5

18.9

21.5

17.7

20.5

20.5

20.7

20.8

22.9

100

100

100

100

100

100

100

100

100

100

Beginnings: Compiled from Oloo ( 2008 ; 2009 ) .

Harmonizing to the IMF ( 2009b ) , the banking sector has weathered the crisis rather good. During the 2nd half of 2008, its net fiscal place declined and so remained level, as Bankss assets fell as a consequence of the slow growing in loans as the recognition place tightened, which allowed Bankss to chair their exposure to impairment in their balance sheets owing to the planetary crisis. Banks reported a lag in net incomes in the first half of 2009, with semiannual consequences increasing by a fringy 2.7 % . Of the large four ( Barclays, Standard Chartered, Kenya Commercial Bank and Equity Bank ) , merely Standard Chartered returned a more robust public presentation than it did in the first half of 2008, entering a 43 % growing in net incomes, attributable to the fact that the bank had been more cautious in its subdivisions enlargement. The grounds for the diminution in profitableness include low foreign exchange net incomes, as the shilling has appreciated after the initial depreciation, and the acceptance of a more risk-averse stance, by cut downing loaning to the private sector and imparting more to authorities, explained by decreased chance for loaning.

Kenya, which is less resource dependant, has non faced a dramatic impact on its banking sector as states in West and Southern Africa have. Liquidity in the state has been kept alive by leting Bankss to borrow from other Bankss utilizing authorities securities as collateral ( horizontal repos ) . This is the first clip such trades have occurred in the state and this has provided liquidness that would otherwise non hold been available. High involvement rates and high rising prices have reduced disposable income, forcing bad debts in Bankss and doing policy oversights in the instance of insurance companies.

The crisis on Foreign Direct Investment ( FDI )

FDI includes equity capital, reinvested net incomes and intra-company loans, with the first two ruling net FDI to Kenya. FDI brings investable fiscal resources to host states, provides new engineerings and may heighten the efficiency of bing engineerings. FDI may ease entree into export markets, thereby playing an of import function in beef uping the export capablenesss of domestic economic systems ; may heighten accomplishments and direction techniques ; and may supply cleaner engineerings and modern environment direction systems.

FDI has besides the potency of heightening growing of domestic houses through complementarities in production and productiveness spillovers ( Borensztein et al. , 1995 ) . Phillips et Al. ( 2001 ) have found that FDI stimulates domestic investing. A 1 % addition in the FDI/GDP ratio is followed by every bit much as a 0.80 % addition in future domestic investment/GDP in Africa. Phillips et Al. conclude that FDI provides positive outwardnesss and spillovers, peculiarly to developing states, that make private domestic investing more profitable. In a study, they found that about all the interviewed concern leaders in Kenya favored foreign investing, and recognized that it offered them economic chances. The awaited diminution in FDI as a consequence of the fiscal crisis would therefore adversely affect the state ‘s public presentation.

However, FDI has played a little ( though increasing of import ) function in the Kenyan economic system. Net FDI flows ( inward subtraction outward flows ) to Kenya have been extremely volatile and by and large declined in the 1980s and 1990s, despite the economic reforms that took topographic point and the advancement made in bettering the concern environment ( Mwega and Ngugi, 2004 ) . The investing moving ridge of the 1980s dwindled in the 1990s as the establishments that had protected both the economic system and the organic structure politic from arbitrary intercessions were eroded ( Phillips et al. , 2001 ) .

In absolute footings, net FDI influxs declined from an mean $ 30.67 million in the 1980s to $ 17.7 million in the 1990s. The net FDI/GDP ratio declined from an norm of 0.42 % in the 1980s to 0.20 % in 1990s. The information besides show that the portion of net FDI in gross capital formation declined from 2.02 % in the 1980s to 1.13 % in the 1990s. FDI was hence minuscular when compared with domestic investing ( which is by and large true across parts, both developing and developed ) . Consequently, there was much concern among Kenyan policymakers over the falling off of FDI, which they attributed to low investor assurance, ensuing from insecurity, corruptness, hapless substructure, high public-service corporation costs and piece service, high existent involvement rates and limited legal resort ( GOK, 2003 ) .

The public presentation of FDI improved lightly and averaged $ 123.6 million in 2000-2007, although this reflects the consequences for 2000 and 2007. FDI increased to an norm of 0.70 % of GDP and to an norm of 3.2 % of gross investing in 2000-2007 ( Table 7 ) . The information shows, nevertheless, that the good public presentation was driven by a large leap of net FDI flows to the state in 2000 and 2007. The 2000 leap owed to new investings by nomadic phone companies ( affecting amalgamations and acquisition of $ 3 million ) and accelerated offshore adoption by private companies to finance electricity coevals activities, which became necessary because of the drouth that prevailed that twelvemonth. The 2007 rush in FDI owed to the coming in of a new nomadic telephone operator and the denationalization of Telkom Kenya. Net FDI was estimated at $ 52 million in 2008, a measure back to its normal value ( CBK, 2009a ) . Harmonizing to UNCTAD ‘s cross- boundary line amalgamation and acquisitions overview, net gross revenues averaged $ 7 million over 1990-2000 and were $ 2 million in 2006, this jumping to $ 396 million in 2007 before worsening to a net purchase of $ 18 million in 2008.

Harmonizing to UNCTAD, Kenya has approximately 114 foreign-affiliated houses located in the economic system. Many of the large transnational houses are in the third sector ( composed chiefly of trade, conveyance and telecommunications ) . Most of these are from developed states, with a bulk from the UK and US, and therefore likely to be affected by the crisis.

Table 7: Net FDI flows to Kenya, 2000-2008

Net FDI ( US $ m )

FDI stock ( US $ m )

Net FDI/GDP ( % )

Net FDI/gross fixed Investment ( % )

FDI stock/GDP ( % )

2000

111

931

1.05

6.84

8.82

2001

5

937

0.04

0.31

8.34

2002

21

964

0.17

1.03

7.66

2003

80

1046

0.58

3.27

7.54

2004

42

1092

0.29

1.50

7.61

2005

11

1113

0.07

0.33

6.86

2006

27

1164

0.15

0.64

6.47

2007

692

1892

2.34

12.70

6.4

2008

52

1988

0.17

0.80

6.8

Beginning: UNCTAD FDI database

Figure 1: Monthly cyberspace FDI flow to Kenya, 2007 and 2008 ( US $ 1000000s )

% Z ) % ) 9YQ ) M ] A~QZ $ 4L } DFJ6Source: CBK unpublished informations.

In a cross-country empirical survey ( the Kenyan silent person was undistinguished, proposing that Kenya is on the arrested development line ) , Mwega and Ngugi ( 2004 ) found the undermentioned variables to significantly act upon the FDI/GDP ratio. First, the trading spouses ‘ economic growing rate ( DYNT ) increases the ratio. Second, the footings of trade dazes ( TOTS ) cut down the ratio. Third, the external debt income ratio, ( DEBTY ) increases the ratio. However, its squared opposite number ( DEBTY2 ) reduces the ratio, therefore the current debt stock stimulates FDI but at a diminishing rate. The optimum debt degree above which the FDI ratio diminutions is 250 % to 280 % , outside Kenya ‘s scope. Last, the quality of establishments ( ICRGE ) improves the ratio.

The crisis is hence likely to adversely impact the Kenya FDI ratio by cut downing the growing of the state ‘s chief trading spouses ( a 1 % decrease in growing reduces the FDI ratio by 0.45 % ) , every bit good as by a deterioration of Kenya ‘s footings of trade ( a 1 % deterioration of the state ‘s TOT reduces the ratio by 0.057 % ) . However, given the FDI/GDP ratio ( except in 2000 and 2007 ) , these effects are likely to be little. They would besides be offset by the handiness of loans and grants to finance the crisis, and if the state improved on its administration, which would necessitate actions such as cut downing corruptness, reconstructing establishments and heightening the regulation of jurisprudence and order, with clear and crystalline ordinances, uniformly enforced ( Phillips et al. , 2001 ) .

Table 7 shows, nevertheless that the stock of net FDI influxs increased from $ 931 million ( or 8.8 % of GDP ) in 2000 to $ 1988 million ( or 6.8 % of GDP ) in 2008, so that a major divestment as a consequence of the planetary fiscal crisis would adversely impact the economic system. Such a major divestment seems improbable, given the irreversible nature of fixed investing, even though a few companies, such as the pay-TV house GTV, have all of a sudden quit the state mentioning the recognition crunch.

The Effect of the crisis on the Kenyan capital market

Over the past decennary, foreign investors have increased their investings in the Nairobi Stock Exchange ( NSE ) attracted by high returns ( see Table 8 ) . As a effect, the crisis has adversely affected the stock market, with foreign gross revenues transcending foreign bargains in many counters, as foreign investors diversify off from the market ( Kibaara, 2008 ) . Tables 8 and 9 shows a diminution in net portfolio flows in 2005-2008 from a extremum of $ 15 million in 2005, and significant escapes since June 2008. The NSE 20-Share Index has hence taken a hit since the mid-2008 on the dorsum of the post-election force and the crisis. This has significantly reduced market capitalisation.

Table 8: Net portfolio equity flows, 2000-2007 ( US $ 1000000s )

2000

2001

2002

2003

2004

2005

2006

2007

4

5

5

1

5

15

3

1

Beginning: CBK ( 2008 ) .

The NSE 20-Share Index slumped by 35 % in 2008, 25 % since July 2008. It so declined from 4696.22 points on 31 July to 3521.18 points on 31 December 2008. By end-February 2009, the index had declined by 23.2 % in the old one month, by 26.8 % in the old three months and by 46 % in the old one twelvemonth, countervailing the additions made in the old three old ages ( one of the largest beginnings in sub-Saharan Africa ) . Data hence show Kenya ‘s Bourse to be one of the worst hit in the part in the old one twelvemonth, after Nigeria and Mauritius, states that for long have liberalized their capital markets. They besides show a high correlativity in the motions of equity monetary values across African states. Kenya has the fifth-largest Bourse by market capitalisation in Africa, after South Africa, Egypt, Nigeria and Morocco.

In March 2009, the index fell farther to about 2000 points, near its seven-year depression of 1983 points. The index so reversed its tendency, picking up an upward flight, raising hopes that the market could be eventually acquiring out of the forests, as the economic system showed some marks of recovery. As seen in Figure 2, the NSE 20-Share Index improved between March and June 2009 by 17.5 % , but slumped in July-September 2009, shaving its value by 8.8 % . The index increased by approximately 5 % between end-September and December 2009 ( 0.8 % in October, 4.1 % in November and -0.1 % in December 2009 ) .

Table 9: NSE tendencies, 2008

2008

Net portfolio capital flow ( US $ m )

Market capitalisation ( US $ m )

Jan

2.0

10.9

Feb

11.3

12.0

Mar

9.9

12.4

Apr

0.7

14.6

May

9.2

14.8

Jun

-47.5

19.0

Jul

-1.8

16.8

Aug

0.0

16.3

Sep

-3.9

13.6

Oct

-11.5

10.0

Beginning: Kilonzo ( 2008 ) .

The autumn in portion monetary values has been blamed on the crisis, which has seen foreign investors offload their portions as they have retreated to their markets to purchase safer investings in authorities bonds ( see Figure 3 ) . It is besides attributed to panic merchandising, triggered by loss of investor assurance following the prostration of stockbrokerage houses as hapless direction and outright larceny took their toll on the houses. Within a span of two old ages in 2007-2008, at least two stockbrokers ( Francis Thuo and Partners, and Nyaga Stockbrokers ) had collapsed and another ( Discount Securities ) was put under a caretaker agreement, finally fall ining, traveling down with significant sums of investor financess. The deficiency of assurance could hold had more permanent impact on the stock market ‘s public presentation than the planetary fiscal crisis, with the NSE dawdling other markets in the part ( Kang’aru, 2009c ) .

By early 2009, some operators in the NSE were foretelling that the worst was over. Hence, harmonizing to Jos Konzolo, Kenya Association of Stock Brokers and Investment ( Wahome 2009a ) ‘the issue of foreign investors has already happened and the lone manner is for them to come back ‘ . Operators have besides claimed that, after flying at the tallness of the crisis, foreign investors are back at the NSE, taking advantage of the low priced portions. Monthly statistics from the NSE showed that, in July 2009 foreign investors ‘ activity at the Bourse accounted for more than 60 % of the entire market turnover, so that, since March 2009, foreign investors had been making a batch of concern ( Kang’aru, 2009d ) .

It is postulated that foreign investors are back uping the stock market after local investors have opted to put in the bond market, where returns are more attractive, as supported by Figure 3. The returns that the fixed income investings are offering are nice, about fiting long-run mean returns on investing. The September 2009 10-year KSh15 billion Kenya Electricity Generating Company ( KenGen ) Infrastructure Bond, for illustration, offered a tax-exempt involvement rate of 12.5 % . It was oversubscribed, and the company took an excess KSh10 billion through the alleged ‘green shoe ‘ option. Similarly, in October 2009 Safaricom ‘s five-year bond offered a 12.25 % return ; earlier, the authorities successfully issued a 12-year KSh18.5 billion bond at a rate of return of 14.5 % to finance undertakings in energy, roads, H2O and sewage. The issue was oversubscribed by 45 % , pulling a sum of KSh27 billion against a mark of KSh18.5 billion.

To promote investing in long-run exchequer bonds and promote the development of the bond market, the authorities in the 2009/10 budget reduced the withholding revenue enhancement charged on involvement income earned from long-run bonds from 15 % to 10 % . CBK was to implement this policy from 12 June 2009, capable to the status that the bonds are non issued for substructure funding ( already relieve from revenue enhancement ) and the tenor of the bonds is 10 old ages and supra. To increase assurance in the stock market, the governments increased the minimal capital demands for stockbrokers from KSh5 million to KSh50 million and for investing Bankss from KSh50 to KSh250 million, effectual from December 2010.

Further reforms at the capital market require stockbrokers and investing Bankss publish their half- and full-year fiscal consequences. The revelation is expected to assist investors estimate how good an establishment is funded and managed before puting their money with it. The new jurisprudence became operational with the passing of the 2009/10 Finance Bill, while the deadline for the first six months fell on 31 August 2009. Bar the format and extra revelation, conformity was about 100 % ( Daily Nation, 2009a ) .

The stock market diminution has made it more hard to borrow from the capital market through initial public offerings ( IPOs ) . The public listing of the Cooperative Bank of Kenya in 2008 managed merely 81 % subscription even after scaling down the mark from KSh10 billion to KSh6.7 billion, the first under-subscription on the NSE in recent times.

Figure 2: NSE-20 Share Index, Sep 2008-Dec 2009

V4 $ A5 ( _C0QW ) BS7 $ `J $ T2LASource: CBK Monthly Reports.

Figure 3: Foreigners ‘ cyberspace purchases of stocks, Jan 2007-Sep 2009 ( % of purchasers ‘ turnover )

XVQQKS6XPQDZ @ XO @ ] @ N $ { LU Source: NSE unpublished informations.

Policy Measures adopted by different economic systems

Macroeconomic policies to pull off the impact of the crisis

States have responded good in footings of short-run macroeconomic direction policies ( including pecuniary and banking policies and financial policies ) . By March 2009, states like Kenya, Bolivia, Cambodia and Bangladesh had already put in topographic point macroeconomic and fiscal policies to pull off the crisis like:

The Central Bank of Kenya lowered the hard currency modesty ratio from 6 % to 5 % and the cardinal bank rate from 9 % to 8.25 % in order to take down involvement rates and heighten recognition supply in the economic system.

In Bolivia, the 2009 national budget included a 20.6 % addition in public investing and a 12 % rise in public retainers ‘ rewards and wages

Cambodia had produced an expansionary budget.

Central Bank of Bangladesh militias were safeguarded through backdown from hazardous investings and reassign to dependable cardinal bank histories, and private sector fiscal establishments were advised to protect their several sedimentations.

Further actions that states undertook were:

Foreign exchange/reserve build-ups in DRC in April 2009

Ethiopia devaluating its currency twice in 2009

Lowering of the hard currency ratio in Kenya and a significantly expansionary budget in 2009 ( 6 % of GDP shortage in FY2009/10 compared with 2 % the twelvemonth before )

A financial relaxation in Mozambique for 2009

A financial stimulation in Tanzania ( authorities shortage at 1.6 % for FY 2009/10 ) and a relaxed pecuniary policy

Zambia increasing its adoption to 3 % of GDP from the planned 1.9 % in 2009.

The grounds suggests that the instance survey states did prosecute in macroeconomic direction after some initial wait-and-see cases. This is good intelligence.

Social Policies to react to the impact of the crisis

While the crisis has non resulted in major societal protection policy alterations, or a large-scale enlargement of societal protection proviso in most states, a figure of preexistent plans have been extended and new plans introduced, albeit on a modest graduated table:

Puting in topographic point or utilizing safety cyberspaces and hard currency transportations for families affected by the planetary fiscal crisis ( or other recent crises ) ;

Puting in topographic point safety cyberspaces for families affected by the planetary fiscal crisis ( or other recent crises ) ;

Changing allotments for societal sectors, such as instruction and wellness.

Previous surveies suggested that the major types of intercessions selected were nutrient subsidies and rationing ( Indonesia and Bangladesh ) ; nutrient distributions for vulnerable groups and school eating plans ( Cambodia, Indonesia, Bangladesh, Ghana, Kenya and Nigeria ) ; in-kind transportations offering fertiliser ( Kenya ) ; hard currency transportations ( Ghana ) ; instruction scholarships and subsidies ( Cambodia and Ghana ) ; and public plants plans ( Cambodia, Indonesia, Bangladesh ) .

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