Developments in the Financial Market

Financial Institutions in Kenya:

(Source: http://www.intokenya.com/pages/Banks_in_Kenya.vrt retrieved on
August 14, 2010)

• Kenya Commercial Bank

• Barclays Bank of Kenya
• Equity Bank
• CFC Stanbic Bank
• National Bank of Kenya
• Citi Bank
• Imperial Bank of Kenya
• Equitorial Commercial Bank
• Cooperative Bank of Kenya
• Bank of India
• Commercial Bank of Africa
• Consolidated Bank
• Central Bank of Kenya

Bank Assets Pre-Tax-Profit:

(Source: http://bankelele.blogspot.com/2010/08/kenyas-top-banks.html retrieved
on August 21, 2010)

• KCB assets of Kshs 207 billion ($2.59 billion), profits of Kshs

• Barclays Kshs 173 billion ($2.16 billion), profit of Kshs 4.75 billion ($59.3
million)
• Equity Bank 117,578 4,282
• Standard Chartered 131,348 4,037
• Cooperative Bank 133,322 2,848
• Diamond Trust 54,109 1,508
• Citibank Kenya 63,812 1,499
• Commercial Bank of Africa 60,229 1,465
• Investment & Mortgages 56,630 1,239
• National Bank of Kenya assets of 59,390 million ($742 million) and profits
of Kshs 1,200 ($15 million) - then CFCStanbic (falling out of the top 10),
NIC, Baroda, Imperial, and Bank of India.

Notes- KCB is the largest bank (and group) but is less profitable than Barclays
which is the most profitable bank
- Equity may be the most profitable bank by next year: Five years ago (2006)
they had 1/6 (Kshs 500m) of Barclays profits (Kshs 3 billion), now mid-way into
2010, they are the country's 5th largest in assets, and 3rd in profits - and are
about 7X large by both measures compared to five years ago, while KCB is 1.5X
larger and Barclays is 0.5X larger than it was in 2006.
- Equity is perceived better in market terms than KCB though its half its size and
has the same profits this year.

Changes since last year

- Credit sharing between banks is now being enforced
- Anti-money laundering law now in effect
- The Government of Kenya has set out to raise Kshs 31 billion ($388 million for
infrastructure projects; Kenyan banks currently have almost half as much money
invested in government securities as they do with loans to customers
- The new constitution passed this month means we will have currency without
the face of a president (virtually all existing currency bear the portraits of Kenya's
past presidents)
- Equity and several other Kenyan banks have decided to embrace and work with
M-Pesa and other mobile money channels instead of fighting them
- Micro-finance institutions (MFI's) are stepping up into the commercial banking
sphere

Incoming banks
- Faulu Kenya
- Jamii Bora (formerly City Finance)

Gone banks
- Southern Credit (bought by Equatorial)
- S&L (absorbed into KCB)

Monetary Authority in Kenya: Central Bank of Kenya

History:
(Sources: http://www.centralbank.go.ke/Currency/CurrencyHistory.aspx retrieved
on August 14, 2010 and http://www.centralbank.go.ke/ retrieved on August 14,
2010)

The Central Bank of Kenya was established in 1966 through an Act of

Parliament - the Central Bank of Kenya Act of 1966. The establishment of the
Bank was a direct result of the desire among the three East African states to
have independent monetary and financial policies.

The initial issue of Kenya shilling notes were in the denominations of 5, 10, 20,
50 and 100 shillings, all bearing the portrait of the First President of Kenya, H.E.
Mzee Jomo Kenyatta in the front, and diverse scenes of economic activities in
Kenya at the back. Denominations have progressively changed since then.
Current denominations of banknotes and coins in circulation are as follows:
Coins – 5cent, 10 cent, 50 cent, 1 shilling, 5 shilling, 10 shilling, 20 shilling and
40 shilling Notes – 50 shilling, 100 shilling, 200 shilling, 500 shilling and 1,000
shilling.
Role and functions:
(Sources http://finance.mapsofworld.com/banks/central-bank-kenya.html
retrieved on August 14, 2010 and http://www.centralbank.go.ke/ retrieved on
August 14, 2010)

The Central Bank of Kenya Act of 1966 set out objectives and functions
and gave the Central Bank limited autonomy. Since the amendment of the
Central Bank of Kenya Act in April 1997, the Central Bank operations have been
restructured to conform with ongoing economic reforms. There is now greater
monetary autonomy.

Its role is to maintain price stability, foster liquidity, and create a stable financial
system in the country. Its major functions are to issue notes and currency, to act
as a banker to banks and the government, to hold and maintain foreign exchange
rates, and to maintain public debt.

Leadership:
(Source: http://finance.mapsofworld.com/banks/central-bank-kenya.html retrieved
on August 14, 2010)

There is an eight-member board of directors for governing the bank. It

consists of a governor--who is also the chairman, the deputy governor--who is
also the deputy chairman, a permanent secretary to the treasury, and five other
non-executive directors.

Monetary Policy:
(Source: http://www.centralbank.go.ke/monetary/default.aspx retrieved on August
14, 2010)

The Central Bank’s principal object is formulation and implementation of

monetary policy directed to achieving and maintaining stability in the general
level of prices. The aim is to achieve stable prices – that is low inflation - and to
sustain the value of the Kenya shilling. Following amendments to the law,
Section 4 paragraph (4) provides that the Minister for Finance may by notice in
writing to the Bank set the price stability targets of the Government.

Thee major tools the Bank uses to implement monetary policy:

1. Open Market Operations: Through open market operations, the Bank

buys or sells securities in the secondary market in order to achieve a
desired level of Bank reserves. Alternatively, the Bank injects money into
the economy through buying securities in exchange for money stock. As
 the law of supply and demand takes effect to determine the cost of credit
(interest rates) in the money market, money stock adjusts itself to the
desired level. This process influences availability of money in the
economy.
2. Discount window operations: The Bank, as lender of last resort, may
provide secured short-term loans to commercial banks on overnight basis
at punitive rates, thus restricting banks to seek funding in the market
resorting to Central Bank funds only as a last solution. The discount rate is
set by the Central Bank to reflect the monetary policy objectives.
3. Reserve Requirements: The Central Bank is empowered by the law to
retain a certain proportion of commercial banks' deposits to be held as
non-interest bearing reserves at the Central Bank. An increase in reserve
requirements restricts commercial banks ability to expand bank credit and
the reverse is regarded as credit easing.

Performance of Banking Community:

(Source: Čihák, M. & Podpiera, R.. Bank Behavior in Developing Countries:
Evidence from East Africa. IMF Working Paper (2005))

Kenya enjoyed the benefits of a reasonably developed financial system for

a number of years and—despite recent decline—its system remains considerably
more developed, both in absolute terms and relative to the economy. Also, in
Kenya, the openness of the system to foreign banks was never a substantial
issue, as these accounted for the majority of the banking system since
independence.

In Kenya, international banks lend less than domestic banks; at the same
time, though, they are more efficient and careful in lending than other banks.

Its banking system remains inefficient and performs only a limited

intermediation role, despite recent reform efforts and even with the presence of
international banks. This is due to the existence of various impediments to
banking sector lending, competition, and development in general. In the Kenyan
case, for instance, the presence of foreign banks is not sufficient to improve
efficiency in the banking system as a whole, since many weak domestic banks
are allowed to operate. The international banks are thus effectively insulated
from more vigorous competition, because of their size, reputation for deposit
safety, and international links.