Consumer protection in the Kenyan financial sector: A case for a Twin Peaks model of financial regulation

Magister Legum - LLMThe dynamic character of the financial services industry necessitates frequent appraisal of the regulation of the sector. The main objectives for regulation of the financial sector include financial stability, promotion of competition and protection of the consumers. In ensuring consumer protection, there is need to balance this with all the other objectives to ensure optimal protection in the entire financial sector. This can be difficult as it is mostly dependent on the regulatory framework in the financial sector for the basic reason that most of the failures are associated with regulation. Key to the challenges is that consumer protection is served by measures that ensure proper conduct on the part of the service providers. Interests of the providers of the financial services may thus not be sufficiently aligned with those of the consumers of the products. There are three common models of financial regulation. They are the sectoral model, unified or integrated model and the Twin Peaks model. The financial sector in Kenya follows a sectoral model. It is a hodgepodge of institutional and functional regulation. There are five (5) government agencies that regulate specific segments of the financial sector with each of the regulators being established to operate independently within the permits of an Act of Parliament. This is without mentioning the many other segments that have no specific regulators

Banking sector stability, efficiency, and outreach in Kenya

Although Kenya's financial system is by far the largest and most developed in East Africa and its stability has improved significantly over the past years, many challenges remain. This paper assesses the stability, efficiency, and outreach of Kenya's banking system, usingaggregate, bank-level, and survey data. Banks'asset quality and liquidity positions have improved, making the system more resistant to shocks, and interest rate spreads have declined, in part due to reduction in the overhead costs of foreign banks. Outreach remains limited, but has improved in recent years, driven by mobile payments services in the domestic remittance market. Fostering a level regulatory playing field for all deposit-taking institutions is a key remaining challenge. Specifically, an effective but not overly burdensome framework for regulation and supervision of microfinance institutions and cooperatives is a priority. Maintaining an openness to new, and non-bank, providers of financial services, which has enabled the success of mobile payments, could also further outreach.Banks&Banking Reform,Access to Finance,Debt Markets,Emerging Markets,Bankruptcy and Resolution of Financial Distress

The role of financial regulators in the Kenyan economy

Financial regulation is a subject that is more often than not regarded as distant and yet another level of bureaucracy that has to be endured by both the public and private sectors. The significance of creating and maintaining an efficient and effective system to regulate financial markets, financial institutions and financial service providers is a salient feature in the development of a country’s economic health. The recent global economic crises of 2007/2008 and the economic hurdles accompanying those events are perhaps the most dramatic instances of how necessary the implementation of efficient and effective financial regulation is. The international financial system has experienced a retinue of changes in the last two decades. One of the main challenges of financial regulators has been to keep abreast of as well as adapt to these changes, which are of an international nature. In a majority of countries, the financial sector is one of the most intensely regulated and supervised industries. Over a period of time, it has become evident that regulatory arrangements have a formidable impact on: i. The size, structure and efficiency of a financial system; ii. The business operations of financial institutions and markets; iii. Competitive conditions both overall and between sub-sectors of the system. The impact of regulation can either be stagnant or progressive; this depends on how the objectives of regulation are defined and how efficiently regulatory arrangements are related to their objectives. The issue at hand is to engage regulatory institutions, structures and mechanisms for supervision and enforcement need to be implemented because they are pertinent to the formal regulatory requirements in the overall regulatory regime. Effective financial regulation would be unable to exert its objectives in the absence of efficient supervision and enforcement. In numerous countries the institutional structure of regulation has experienced change or is in the process of change. Different models of institutional structure are availed such as the single/consolidated model, the twin-peak model and the multiple regulator model. For example, the United Kingdom has embraced the single/consolidated regulator model while Australia has employed the twin-peak regulator model. Kenya operates on the multiple regulator model. This report addresses the role of financial regulators in the Kenyan economy. The objectives of the research are to: Provide comprehensive information about the theory and practice of financial regulation; Identify the financial regulators in Kenya and define their roles; Address the issue of multiple regulators and the duplicity of roles; Discuss international trends in regulation and examine different regulatory regimes; Consider the viability of a single/consolidated regulatory regime in Kenya; Suggest a possible future regulatory regime for Kenya and identify the key issues associated with such a regime; Suggest areas for further investigation and research.The approach of this report will constitute the following: Chapter 1 discusses the rationale for the research, objectives, scope and scale of the research, preliminary literature review and the research methods to be employed. Chapter 2 focuses on financial regulatory systems in general as well as an extensive analysis of financial regulators in Kenya. Chapter 3 combines the research methods employed and also contains a comparative analysis of the regulatory regime. Chapter 4 examines the findings of the research, the lessons learnt and the regulatory responses. Chapter 5 includes recommendations towards improvement of regulatory systems and an executive summary of outstanding policy issues and priorities in Kenyan financial regulation

Abstracts : Policy Research working paper series - numbers3348-3398

This paper contains abstracts of Policy, Research Working paper series Numbers 3348 - 3398.Environmental Economics&Policies,Health Monitoring&Evaluation,Poverty Assessment,Health Economics&Finance,Achieving Shared Growth

Developing a methodology for the qualitative and quantitative credit analysis of banks in Kenya and Nigeria from a South African perspective

Includes abstract.Includes bibliographical references (leaves 105-108).This study presents research on credit risk assessment in emerging market countries with particular emphasis on the Kenyan and Nigerian markets. Using prior emerging market research, information from credit rating agencies and information gained from a country visit, a revised methodology is devised. Using this methodology, the individual banks scores are in line with the expectations of how they would rank relative to each other in terms of qualitative and quantitative factors

Big Data, Small Credit: The Digital Revolution and Its Impact on Emerging Market Consumers

This research report sheds light on a new cadre of technology companies who are disrupting the credit scoring business in emerging markets. Using non-financial data -- such as social media activity and mobile phone usage patterns -- complex algorithms and big data analytics are forever changing the economics of how we identify, score, and underwrite credit to consumers who have been invisible to lenders until now

Banking Concentration and Financial Stability: New Evidence from a Developing Country

The policy debate on the trade-off and synergies between bank concentration and financial stability remains unresolved. Previous studies suggest two hypotheses; ‘concentration-stability’ and ‘concentration-fragility’. This paper investigated the effect of bank concentration on financial stability in Kenya using Structural Equation Modelling (SEM) for the period 1990-2017. Estimation results reveal that high concentration leads to instability of the financial system. Further, increased competition improves stability of the financial system while regulation positively affects financial stability and bank concentration. Therefore, policies that ensures less bank concentration and enhance bank competition may significantly improve financial stability. Keywords: Financial stability, Banking Fragility, Structural Equation Model JEL classification: G21, G28. DOI: 10.7176/EJBM/11-25-08 Publication date:September 30th 2019

The Interbank Market in Kenya: An Event-Based Stress Analysis Based on Treasury Bill Market

This paper seeks to explore nexus between the volatility in the Kenyan interbank market and Treasury bill market in the event of market distress arising from collapses of a lender. Three stress triggering events are defined; -the placement of Dubai Bank, Imperial Bank and Chase Bank placement under receivership. The inclusion of Treasury bill market is aimed to ascertaining whether then Central Bank’s intervention in the market to correct inefficiency in the interbank market upon the collapse of a lender is either proactive or reactive. The EGARCH and TGARCH were used to model the relationship. Key finding of the study is that 91-Day Treasury bill rate positively and significantly affects the interbank market rate with the effect doubling in the wake of bank collapse

Kenya Financial Sector Stability Report, 2013

The report presents trend analysis and in-depth assessment of the global and domestic macro-financial developments affecting and emanating from the macroeconomy and the financial system. It analyses the performance and interactions involving the real economy, financial markets, financial institutions, financial infrastructure, and review of the legal and policy frameworks in 2013

Commercial Bank Diversification and Financial Performance: The Moderating Role of Risk

Commercial banks in Kenya have posted good financial performance as indicated by ROA and ROE. This coincides with a period of enormous diversification occasioned by global financial sector liberalization, allowing banks to venture into a range of businesses while maintaining the traditional intermediation business. Theory and empirical evidence is equivocal on the financial performance impact of diversification. Often, theory provides an isolated analysis of the diversification – performance relationship which limits their generalizations especially in the face of systemic financial risks and crisis. Using an ex post factoexplanatory design we investigate whether bank diversification affects financial performance and whether this effect is moderated by solvency and credit risk based on panel data from 34 commercial banks in Kenya over nine firm years. The authors find that income and asset diversification negatively and significantly affect commercial bank ROA while geographical diversification significantly – positively affect both ROA and ROE. We also find a significant positive moderation effect of credit risk on relationship between income diversification and ROA but a significant negative effect on relationship between asset diversification and geographical diversification with both ROA and ROE. On solvency risk, we find a significant positive moderation effect on relationship between geographical diversification and ROE