Research Proposal

Topics: Bank, Central bank, Foreign exchange market Pages: 28 (8387 words) Published: April 25, 2011
Kenya falls among the countries regarded as third world countries whose economies are still under progress. Our worry is; when will Kenya attain full employment level as well as being free from macro-economic problems such as inflation, poverty, unemployment, unbalanced regional development, huge foreign debts, unpredictable foreign exchange rates, and alarming interest rates among other problems?

As per the CBK annual report (2009), banking sector comprised the Central Bank of Kenya, as the regulatory authority, Commercial Banks, Non-Bank Financial Institutions, Forex Bureaus and Deposit Taking Microfinance Institutions as the regulated entities. As at 31st December 2009, the banking sector was composed of 46 institutions, 44 of which were commercial banks and 2 mortgage finance companies. In addition, there was 1 licensed deposit taking microfinance institution and 130 foreign exchange bureaus. Commercial Banks and Mortgage Finance Companies are licensed and regulated under the Banking Act, Cap 488 and Prudential Guidelines issued thereunder. Deposit Taking Microfinance Institutions on the other hand are licensed and regulated under the Microfinance Act and Regulations issued thereunder. Foreign Exchange Bureaus are licensed and regulated under the Central Bank of Kenya Act, Cap 491 and Foreign Exchange Bureau Guidelines issued thereunder. Out of the 46 institutions, 33 were locally owned and 13 were foreign owned. The locally owned financial institutions comprised 3 banks with public shareholding, 28 privately owned commercial banks and 2 mortgage finance companies. The foreign owned financial institutions comprised 9 locally incorporated foreign banks and 4 branches of foreign incorporated banks. (See appendix I: structure of banking industry in Kenya)

The growth of banking industry in Kenya is contributed by the industry’s wide branch strategy both in Kenya and EAC. The banks have come together under the KBA which server as a lobby for the banking sectors interests. The KBA sever a forum to address issues affecting members. One the last few years, the banking sector in Kenya has continued to growth in terms of deposits, profitability and production affairs. The growth has mainly as a result of wide branch network expansion both in Kenya and in the East African community together with more emphasis on the complex customers need rather than traditional agencies. 1.1 STATEMENT OF THE PROBLEM

Kenya’s banking sector is underutilized thus leading to low contributions towards economic growth at large as compared to its potential capacity. World Bank estimates 2010 reveals that the formal banking sector is accessible to only 10% of the Kenyan population; penetration levels remain low suggesting that despite the larger number of banks, there is still plenty of room for growth. The sector accounts only 40% of GDP in Kenya. Moreover, much of the Kenyan banking sector’s activity is concentrated among the richest 20% of the population. The population is massively under-banked largely because more than half of the people in Kenya lives in rural areas and earn meager wages.

A critical analysis of the banking sector in Kenya today indicates the following factors as the most influencing elements on the sector’s growth and sustainability, namely: competitive environment, ICT, government policies, central bank rate, foreign exchange rates, global economic conditions, individual income level and political climate. In 2008, the finance minister Amos Kimunya proposed to raise the minimum core capital for the banks to Ksh. 1 billion in 2012 from current Ksh. 250 million. Lenders in Kenya have already met the set threshold under the new Basel III rules, but a scramble for opportunities in a more competitive landscape may prompt the regulator to keep a more watchful eye over the institutions since this may lead to unethical practices in the industry....
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