Premium Essay

Financial Liberalisation and Price Stability in Kenya

In: Other Topics

Submitted By elmacknz
Words 6159
Pages 25
Financial Liberalisation and Price Stability in Kenya[1]
Anders Isaksson
Department of Economics, Göteborg University Box 640 S-405 30, Göteborg, Sweden.

Abstract
It has been postulated in the literature that attempts to liberalise the financial sector when inflation is high can lead to high interest rates and even higher inflation. Thereafter. when inflation is fought, a period of low inflation and high real interest rates follow. Since Kenya experienced this sequence, it appears that prices were unstable before and during the financial liberalisation. This paper argues that this was not the case as evidenced by cointegration between the involved variables and the abliltv to estimate a stable inflation model over the period 1970-91. When the cointegrating relationship breaks down, which it does in Kenya after the financial liberalisation, economic agents can no longer forecast inflation with confidence using Historical data. This breakdown of the cointegratina vector implies that agents switch to forward-looking behaviour, perhaps an indication of lack of credibility, in the financial liberalisation process.
JEL Classification numbers: E31, E44 and O11
Kevwords: Kenya, Price stability, Financial liberalisation, Cointegration, VAR.

1. Introduction
As part of its financial-sector reform, Kenya liberalised interest rates between January 1988 and July 1991[2]. Subsequently, market interest rates skyrocketed, while inflation rose even further. When undertaking financial liberalisation under conditions of high and unpredictable inflation, interest rates might rise in order to offset anticipated inflation and to balance supply and demand for loanable funds (McKinnon, 1988, 1991). Rising domestic interest rates may lead to large capital inflows that in turn cause inflation if not sterilised. High real interest rates also reduce borrower net worth, which has a…...

Similar Documents

Premium Essay

Stability of Islamic and Conventional Banks During the Financial Crisis

...Stability of Islamic and Conventional Banks During the Financial Crisis 1. Ratio Analysis The performance and the stability of banks can be quantified and measured through the analysis of their financial ratios. We can have several hundreds of ratios at our disposal. However, we will use only those that are common, and of some meaning for the analysis of the banks. Also, it is important to note that we should use only major and comparable ratios in order to fully understand the financial position of these banks as compared to all those ratios that may include some vagueness in the research. Mainly five categories of these financial ratios are used to eliminate the vagueness created by redundant use of the financial heads and items from the financial statements. Hence, the five categories are: (CFA 2009, p498): - Profitability Ratios - Activity Ratios - Liquidity Ratios - Solvency Ratios - Valuation Ratios However, for the banking industry, which is our main concern, we will use only the first four categories, making an exception of the Valuation category. The financial stability department of the State Bank of Pakistan, which is the central bank of this major economy in the Muslim world, and actively involved in the promotion of Islamic Banking, suggests that the financial ratios fairly reflect the stability, health and the performance of the banks. Hence, these ratios can be used for our purpose. 2. Z-score Instead of just doing the Financial Ratios......

Words: 753 - Pages: 4

Free Essay

Kenya Report

...An Evaluation of Micro-Finance Programmes in Kenya as Supported through the Dutch Co-Financing Programme With a focus on KWFT Otto Hospes Muli Musinga Milcah Ong’ayo November 2002 Study commissioned by: Steering Committee for the Evaluation of the Netherlands’ Co-financing Programme 3 Contents List of contributors List of abbreviations Acknowledgements 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 2 Introduction Background and objectives Legitimization and overall objective of Dutch CFAs to support micro-finance programmes Partners of Dutch CFAs operating in the micro-finance market of Kenya Central questions Organization and methodology Process implementation and limitations of the study Structure of the report A brief description of micro-finance in Kenya and agencies as supported by Dutch CFAs Micro-finance in Kenya 2.1.1 The emergence of micro-finance as an industry 2.1.2 Types of micro-finance agencies in Kenya 2.1.3 Service delivery approaches 2.1.3.1 Savings services 2.1.3.2 Loan products 2.1.4 Outreach 2.1.4.1 Banks 2.1.4.2 NGO-MFAs 2.1.4.3 Savings and Credit Co-operatives (SACCOs) 2.1.4.4 ROSCAs and ASCRAs A profile of micro-finance agencies and schemes as supported by Dutch CFAs 2.2.1 General profile 2.2.2 Specific profiles 2.2.2.1 K-REP Development Agency (KDA) 2.2.2.2 Kenya Women Finance Trust (KWFT) 2.2.2.3 Jitegemea Credit Scheme (JCS) 2.2.2.4 PRIDE Africa – Sunlink Some conclusions 7 9 11 13 13 15 16 17 17 18 19 21 21 21 23 25 26 28 28 31 33 35 35 36......

Words: 76935 - Pages: 308

Premium Essay

Effect of Oil Prices on Inflation in Kenya

...country like Kenya? Because so many other problem are putting multiplier times negative impact on GDP and other macro economic variables such as inflation. Oil and other petroleum products are scarce commodities in the world. Like prices of other commodities the price of crude oil experiences wide price swings in times of shortage or oversupply. The crude oil price cycle may extend over several years responding to changes in demand as well as OPEC and non-OPEC supply. Throughout much of the twentieth century, the price of U.S. petroleum was heavily regulated through production or price controls. In the post World War II era, U.S. oil prices at the wellhead averaged $28.52 per barrel adjusted for inflation to 2010 dollars. In the absence of price controls, the U.S. price would have tracked the world price averaging near $30.54. Over the same post war period, the median for the domestic and the adjusted world price of crude oil was $20.53 in 2010 prices. Adjusted for inflation, from 1947 to 2010 oil prices only exceeded $20.53 per barrel 50 percent of the time. (See note in the box on right.) Until March 28, 2000 when OPEC adopted the $22-$28 price band for the OPEC basket of crude, real oil prices only exceeded $30.00 per barrel in response to war or conflict in the Middle East. With limited spare production capacity, OPEC abandoned its price band in 2005 and was powerless to stem a surge in oil prices, which was reminiscent of the late 1970s. Crude Oil Prices 1947 -......

Words: 11224 - Pages: 45

Premium Essay

The Impact of Pension Sector Reforms on the Financial Viability of Pension Plans in Kenya

...THE IMPACT OF PENSION SECTOR REFORMS ON THE FINANCIAL VIABILITY OF PENSION PLANS IN KENYA   By Akwimbi Ambaka William March 12, 2011 Department of Business Administration, School of Business, University of Nairobi, Kenya Electronic copy available at: http://ssrn.com/abstract=1784297 TABLE OF CONTENTS Declaration List of Tables List of Figures Appendices Abbreviation CHAPTER ONE: INTRODUCTION 1.0. 1.1. 1.2. 1.3. 1.4. 1.5. 1.6. Background of the Study The Conceptual Basis of Social Security Schemes The Kenyan Contextual Basis of Social Security Problem Statement Research Questions and Objectives Research Hypotheses Importance of the study 1 3 10 19 22 22 23 CHAPTER TWO: LITERATURE REVIEW 2.0. Introduction 2.1. Review of Theoretical Literature on Financial Viability of Pension Schemes 2.2. Review of Empirical Literature of Studies on the Solvency of Pension Schemes 2.3. Models for Evaluating the Financial Viability of Pension Schemes 2.4. A Summary of the Knowledge and Research Gaps 25 25 46 60 68 REFERENCES APPENDICES i Electronic copy available at: http://ssrn.com/abstract=1784297 GLOSSARY CAC CALPERS CAPSA CBS C-D CEO CGE CSR DB DC E.T.I EME ERISA FMA GASB GDP GSP INPFRS INSS IPD IRA IRBS KNAO KNBS LUPFUND NSE NSSF NYSCRF OECD OSFI PBGC PLC PPF PPR PROST PRPOPS PSPS PSSS RBA SAM SIPO SOX SSNIT SSS Commonwealth Authorities and Companies Act CEO California Public Employees Retirement System The Canadian Association of Pension Supervisory Authorities Central......

Words: 37595 - Pages: 151

Premium Essay

Financial Stability and Health in Determining Relationship Commitment

...Financial Stability and Health in Determining Relationship Commitment Ariel Luna Western Washington University Abstract This study is interesting in determining which characteristics in a male potential partner a female values more when looking at financial stability and health when considering that partner as a contender in a committed romantic relationship. With a sample of 56 single heterosexual females and 4 single bisexual females all with a mean age of 20, a 2x2 factorial design study was conducted on relationship commitment with financial stability and health in mind. The study found that females looked at health more in the consideration of a male as a life-long partner and that financial stability was not a factor when considering a committed romantic relationship. Financial Stability and Health in Determining Relationship Commitment The years of Late Adolescence, what Arnett (2000) terms Emerging Adulthood, can be characterized as people between the ages of 18-24 who are past high school, possibly in college, but not quite into adulthood. This time in a person’s life is typically when young adults start looking towards their future and everything that may be involved in it. This may include future careers, traveling endeavors, or selecting future mates. For those who may be currently thinking about who their future mate is going to be and for those who are assessing what characteristics they would like......

Words: 3022 - Pages: 13

Free Essay

Financial Stability Board

...Titel: Das Financial Stability Board und seine Bedeutung für die Reform der Finanzmarktregulierung Gliederung: 1. Einleitung S. 3 2. Struktur und Zielsetzung des FSB S. 4,5 3. Eigenkapitalausstattung der Banken S. 6-8 3.1 Lehre aus der Krise S. 6,7 3.2Forderungen des FSB S. 7 3.3 Antizyklischer Kapitalpuffer S. 8 3.4 Einschätzung des Lösungsansatzes S. 8 4. Vergütungssysteme S. 9-14 4.1 Erkenntnisse aus der Krise S. 9,10 4.2 Rahmenwerk der Managementvergütung S. 10 4.2.1 Vorschläge zur wirkungsvollen Umsetzung S. 10,11 4.2.2 Nachhaltige Vergütung S. 11,12 4.2.3 Beteiligung nationaler Behörden und S. 12 Interessengruppen S. 11,12 4.3 Fortschritte S. 13 4.4 Bewertung der Reformansätze S. 14 5. Stellung systemrelevanter Banken S. 15-18 5.1 Abgrenzung der Systemrelevanz S. 15 5.2 Erkenntnisse aus der Krise S. 15,16 5.3 Vorteile systemrelevanter Finanzinstitute S. 16 5.4 Lösungsansätze des FSB S. 16 5.4.1Verfahren für einen geordneten Marktaustritt S. 17 5.4.2 Krisensichere Finanzunternehmen S. 18 5.4.3 Internationale Aufsicht S. 18 5.5 Bewertung S. 18 6. Fazit S. 19 Abkürzungsverzeichnis BaFin Bundesanstalt für Finanzdienstleistungsaufsicht FSF Financial Stability Forum FSB Financial Stability Board G-SIFIs Global Systemically Important Financial Institutions IWF Internationaler......

Words: 5552 - Pages: 23

Free Essay

Kenya

...KENYA GENERAL INFORMATION Kenya, officially the Republic of Kenya, is a sovereign state in Africa.  Its capital and largest city is Nairobi.  Kenya lies on the equator with the Indian Ocean to the south-east, Tanzania to the south, Uganda to the west, South Sudan to the north-west, Ethiopia to the north and Somalia to the north-east. Kenya covers 581,309 km2 (224,445 sq mi) and has a population of about 44 million in July 2012. The country named after Mount Kenya, the second highest mountain in Africa. The country has a warm and humid climate along its Indian Ocean coastline, with wildlife-rich savannah grasslands inland towards the capital. Nairobi has a cool climate that gets colder approaching Mount Kenya, which has three permanently snow-capped peaks. Further inland there is a warm and humid climate around Lake Victoria, and temperate forested and hilly areas in the western region. The northeastern regions along the border with Somalia and Ethiopia are arid and semi-arid areas with near-desert landscapes. Lake Victoria, the world's second largest fresh-water lake and the world's largest tropical lake, is situated to the southwest and is shared with Uganda and Tanzania. Kenya is famous for its safaris and diverse wildlife reserves and national parks such as the East and West Tsavo National Park, the Maasai Mara, Lake Nakuru National Park, and Aberdares National Park. There are several world heritage sites such as Lamu, and world renowned beaches such as Kilifi where......

Words: 12708 - Pages: 51

Premium Essay

Liberalisation

...the market. Besides that, consumers will be able to enjoy price reduction in cars and increased safety quality, whereas for the government, the new NAP will enable them to ensure sustainable employment growth in the automotive industry. Currently, there are 6 main objectives of NAP 2014 ; 1. Promote a competitive and sustainable domestic automotive industry including the national car companies; 2. Make Malaysia as regional automotive hub in energy efficient vehicles (EEV). 3. Promote increase in value-added activities in a sustainable manner. 4. Promote increase in exports of vehicles and automotive components. 5. Promote participation of Bumiputera companies in the total value chain of the domestic automotive industry. 6. Safeguard consumer’s interest by offering safer and better quality products at competitive prices. Source: The Star Online (http://www.thestar.com.my/Business/Business-News/2014/01/21/RM2bil-boost-for-NAP-2014-Govt-allocates-soft-loans-grants-to-turn-Malaysia-into-regional-EEV-hub/) In this research paper, we will first study the effect of liberalization of foreign automotive sectors in terms of investment and production. This can be done through research on past documented records and statistics given by the government and their relations to current automotive market. We will go through all the details on how liberalization affects competition and consequently results in reduction of car prices in Malaysia. Secondly, we will analyze the issues......

Words: 3710 - Pages: 15

Premium Essay

Effect of Technological Change on the Profitability of Financial Institutions in Kenya

...that embarked on change management is National Bank of Kenya. This is an institution that defied predictions of collapse and shifted towards profitability. With accumulated losses running into billions of shillings due to non-performing loans and the run on the bank by customer, analysts were of view that NBK was going towards liquidation. However is it the change management that led to profitability? To what extend did change led to profitability. This paper therefore focused on the impact of change management on the profitability of the National Bank of Kenya. Profitability measures were determined based on their hypothesized relationship to the identifiable change management practices over a five year period (between the year 2002 and 2006). Given the intent of this study , changes in the banks total income, expenses before provisions, profits before provisions, provisions for loans and advances and profit before tax relating to each of the years (over the five year period) were used to assess the impact of each identifiable change management practice on the overall profitability of the National Bank of Kenya. These profitability measures were adopted as they fall in line with the profitability measures utilized by CBK in reporting the banking industry profits. 1.2.1 overview of the Kenyan banking industry The banking industry in Kenya is governed by the companies Act, the Banking Act, the Central Bank of Kenya (CBK). The Banking Act (2004) defines a bank as......

Words: 11835 - Pages: 48

Free Essay

Analysis of Competition Law in Kenya

...COMPETITION LAW ASSIGNMENT: Critically examine and analyze the provisions relating to competition law enforcement authorities under the completion act 2010. Look at the weaknesses strengths of the competition law enforcement authorities and make suggestions. HISTORY Before the introduction of the new Competition Act, the Kenyan investment market was unfavorable for competition, as new investors needed financial and political muscle to gain commercial mileage hence companies had to align themselves with political strong men or merge with them, against perceived competitors inorder to carve themselves a niche. This was especially the case for new businesses wishing to operate in sectors with large consumer bases such as telecommunications, information systems, financial services and energy. The objective of the Act is to modernize competition regulation inorder to support the local market economy and consequently deepen consumers’ benefits. The Competition Authority is mandated to promote and safeguard competition in the national economy and to protect consumers from unfair market conduct. The Act applies to all persons including the Government, State Corporation and devolved government in so far as they engage in trade. The mandate is comprehensive and clear as Section 9 defines the tasks as follows: To promote and enforce compliance with the Act; To receive and investigate complaints from legal or natural persons and consumer bodies; To promote public knowledge,......

Words: 2032 - Pages: 9

Premium Essay

Financial Stability Is the Most Important Factor in Ensuring a Happy Marriage

...Financial stability has always been regarded as the most important factor in ensuring a happy marriage. It is the pillar that holds a family together just like how pillars (the foundation) are imperative in preventing buildings from collapsing (good analogy). Without financial stability, marriages often end in divorce. A recent poll by the Jiayuan match-making website has shown that sixty percent of 1000 women are not in for ‘naked marriages’ this means that more women will only decide to tie the knot if their spouse owns a house. This just further proves (word choice - emphasizes) the importance of financial stability in marriages and that it plays a big role in ensuring happy marriages. So, what exactly is financial stability? In my opinion, being financially stable does not necessary mean that one needs to be rich and can afford a very extravagant lifestyle. Instead, it should simply be when one is debt-free, is able to afford and pay for the expenditure of their family and have the monetary means, savings, income to meet the needs for today and the future. (good definition of key terms) “Money can't buy you happiness.” (Dialogue) I believe most of us are very familiar with this quote and are now wondering, if money can’t buy us happiness, how or why does financial stability ensures a happy marriage? Couples get married not only to justify (word choice - as a testament of) their love for each other but also in view to start a family. (explanation) In today’s......

Words: 1112 - Pages: 5

Premium Essay

Factors Influencing Access to Financial Credit by the Rural People in Kenya

...AN INVESTIGATION ON FACTORS INFLUENCING ACCESS TO FINANCIAL CREDIT BY THE RURAL PEOPLE IN KENYA (A Case study of Othaya in Nyeri South District) KIBICHO NAHASHON KAIRO BUS-1-6564-1/2011 A research proposal submitted to Kenya Methodist University in partial fulfillment of the requirement for the award of Bachelor of Business Administration in Finance. MARCH 2012 DECLARATION I declare that this proposal is my original work and has not been presented in any University for award of degree. Signature______________________________________ Date_____________________________ Kibicho Nahashon kairo This research proposal has been submitted to Kenya Methodist University with my approval as the University Supervisor. Signature_____________________________________ Date________________________________ DEDICATION I dedicate this work to my family, mum and sisters whose support, encouragement, understanding and believing in my fervent ambitions to pursue this course is awesome. ACKNOWLEDGEMENT I wish to acknowledge the efforts of all the people who played a key role in the success in compiling this proposal. I acknowledge my colleagues at work, David and Patricia who encouraged me to achieve the best. I wish to thank the library staff at Kenya Methodist University, Nyeri campus for their support in accessing vital research books that were of great assistance in this research proposal. Lastly I acknowledge all......

Words: 639 - Pages: 3

Free Essay

Financial Stability

...Darlene Davila March 22, 2015 English 90 Essay #2 Prof. Nicole Brown Getting Started "The single most important factor to getting rich is getting started, not being the smartest person in the room." - Ramit Sethi Most of us want to live a financially stable life, but become too afraid to get started because we have all these negative views on money, credit cards, or anything that has to do with the financial world. I have come across many negative thoughts that have paralyzed me into starting a simple bank plan for my funds to grow. My ultimate goal is to let go of those fears that are holding me back from making my bank account become stabilized. This paper will refer to Mo Tzu's essay "Against Music;" Ramit Sethi in his book "I Will Teach You to Be Rich;" Gandhi’s essay “Economic and Moral Progress;” a Chapter of the New Testament in the Bible, Luke chapter 16; and an online article "Zen Habits" by Leo Babauta. I came to the realization once I started doing research and reading more books on finances that in order for me to come up with a plan to help my money flourish into something more, I need to cut off all the learned negative thoughts about money. A lot of these negative thoughts are created because we lack the knowledge on banks and bank accounts that can help us become more successful in our finances. Once I started my research I learned great ideas and strategies on how to grow financially. Not only will I need to carefully plan out my goals based...

Words: 1909 - Pages: 8

Premium Essay

Evaluating the Effect Financial Risk Management on the Financial Performance of Banks in Kenya

...In a world that is constantly changing and with every change bringing about new ways of doing business with different outcomes, risk and how to manage it has become a critical issue. The recent global financial crisis served as a reminder that risk management and how the same is practiced is fundamental if performance objectives are to be consistentlyachieved. It has emerged that as business owners and managers strive to improve and sustain performance they are now also required to consider what risk management practices their organizations have adopted to avoid falling short of their strategic objectives. This is even more so in the financial services sector which was the most affected during the recent financial crisis. The objectives of this study were to analyze the risk management practices undertaken by Commercial Banks in Kenya and to determine and assess the effect of these risk management practices on their financial performance. The risks facing financial institutions are mainly classified into; strategic, operational, credit and market risks. In managing these risks, the risk management approach adopted by the owners and/or management was influenced by the organizational culture and support, whether or not risk management is integrated in the setting of organizational objectives, whether there is a documented risk management policy or framework, how the risk identification process is conducted, the risk analysis process, evaluation and treatment of risk; risk......

Words: 541 - Pages: 3

Premium Essay

Kenya Economy

...CONTENTS 2 Introduction: Kenya Economy (Sub-Saharan Africa) 3 Objective of the study 4 Macro Economic Indicator Table 5 GDP Trend 6 Trade and Industrial Policy 9 Exchange rate policy 17 Monetary policy & Fiscal Policy 21 References: 26 Introduction: Kenya Economy (Sub-Saharan Africa) Kenya is considered by many today to be the heartland of East Africa. It has a total area of approximately 580,000 km2, making it slightly smaller than the state of Texas. The country's southeastern border is defined by the Indian Ocean, and its southwestern border includes a small portion of Lake Victoria. Kenya's climate changes from tropical along the coast to arid in the interior. Although Kenya is located on the equator, temperatures of many of its cities are moderate because they were built at high altitudes. The terrain consists of low plains, central highlands, which are separated by the Great Rift Valley, and a fertile plateau. However, as little as 3% of the total land area of the country is arable (able to support a crop). It is the 47th largest country in the world in terms of land area; Major agricultural products in the country are tea, coffee, wheat, sugar cane, dairy products and eggs. Important industries of the country are cement, tourisms, oil refining, and consumer goods. Kenya's economy relies heavily on agriculture and tourism Currency: Kenya shilling. National accounts base year: 2001. SNA price Kenya’s economy......

Words: 5761 - Pages: 24