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SURVVAL TECHNQUES EMPLOYED BY COMMERCIAL BANKS IN KENYA DURING FINANCIAL CRISIS: A CASE STUDY OF EQUITY BANK.

CHRIS HUMPHERY RUMENDA C12/60013/08 JOASH SIMIYU WAKOLI C12/60054/08

WINNIE WANJIRU NYANTIKA C12/60051/08

A Management Research Paper submitted in partial fulfilment of the requirements of the award of Bachelor of Commerce (Finance Option), Department of Accounting Finance and Management science.

EGERTON UNIVERSITY

© FEBRUARY 2012

DECLARATION We declare that this is our original work and has not been presented anywhere else for a degree award. CHRIS HUMEPHERY RUMENDA Date..............................

Signature.......................................... JOASH SIMIYU WAKOLI Signature......................................... WINNIE WANJIRU NYANTIKA Signature.........................................

Date..............................

Date.................................

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DEDICATION We dedicate this to all those interested in finance especially in the banking sector. 2 .

ACKNOWLEDGEMENT We would like to acknowledge God for giving us the strength and life to carry out this research. 3 .

Commercial Banks in Kenya have engaged in financial innovation. competitiveness and market discipline to survive the harsh economic conditions. 4 . management strengthening e.g. off-balance sheet activities. Hence policy makers are shifting towards openness.ABSTRACT The banking sector in Kenya is dynamic to adapt to the ever-changing economic conditions. mergers and acquisitions and listing at the Nairobi Stock Exchange in order to survive during financial crisis.

........................................... 9 1........ 9 1.............................................................................6 Scope and Justification of Study ..............................2 Statement of the Problem ....................... 3 ABSTRACT ..............................................................................................................TABLE OF CONTENTS DECLARATION ..................3 Objectives of the Study ................................................................................... 8 1...........7 Definitions of Terms and Variables ..................................................................................................................................................................................................................................................... 1 DEDICATION................................................... 10 1.................................... 4 CHAPTER ONE .............................4 Importance of the Study.................................................................................................... ............................. 10 5 ...................................................................................... 6 1.......................................7 Limitations of the Study ............. 2 ACKNOWLEDGEMENT .............................................5 Research Questions ........................................................................................................................... 9 1........................................................................................ 6 INTRODUCTION .......................... 6 1...........1 Background to the Study............................................. 9 1................................................

The banks had more pressure for providing basic banking services e.The banking industry in Kenya is governed by the companies act. Currently three are forty three licensed commercial banks and one mortgage finance in Kenya (Central Bank of Kenya 2012).1 Background to the Study. the banking act and the central bank of Kenya act. deposits and withdrawals. The Central Bank of Kenya under the docket of Ministry of Finance is responsible for formulating and implementing monetary policy . The KBA serves a forum to address issues affecting members (Banking Act 2009).g. The automation of a large number of services and the move towards emphasis on the complex customer needs rather than traditional banking products (Nyangosi 2007). In the recent past the banking sector in Kenya has continued to grow in assets.It also formulates and implements foreign exchange policies. Finally the sector has experienced 6 . This came about after the banking sector was liberalised in 1995 and exchange control lifted in the Banking Act. The Kenyan economy is faced with national and global economic challenges and as such. The banking sector in the third world economies is underutilised due to ignorance. deposits. Key among the functions of the central bank is to license and supervise players in the money market. In the recent years Kenyan banks have engaged in financial innovations and corporate restructuring to keep up with their global counterparts in developed countries. poor infrastructure and inferior technology as compared with their counterparts in the developed countries of the world (Okatch 2009). Banks have come together under the Kenya¶s Bankers Association which serves as a lobby for the banking sectors interests. profitability and product offering.CHAPTER ONE INTRODUCTION 1. commercial banks engage in restructuring their operational processes in order to survive during financial crisis. In the past the banking sector was characterised by few banks which had monopolised their financial services leading to poor service delivery. The growth can be attributed to an industry wide branch network expansion strategy both in Kenya and East African community. The need for financial innovation and corporate restructuring arose with the increase of banks in the recent past leading to increased competition to survive the dynamic economy (Gower 2004).

a world bank report in the United States of America shows that for the year 1992-¶96. In acknowledging the strategies and its impacts in the banking sector. However.increased competition over the last few years resulting from increased innovation among the players and new entrants into the market (PWC 2011). Under this law banks will have access to better credit information form loan applicants and borrowers will benefit from a legal cap on interest charges. acquisitions. Growth in the sector was only 1. acquisitions and other strategies by number of institutions and 12% by dollar amount and ranked first among other industries¶ survival through corporate restructuring (Rogers 2004). This has resulted into arrangements like mergers. The new banking act that came in place in January 2007 is expected to have a strong impact on its growth. Tighter supervision of banks including the introduction of more stringent rules has also played a major role (Okatcha 2009). The introduction of the Real Time Gross the Settlement (RTGS) has speeded settlement of online and cheque based payment. The recent advancement in information technology and increased competition in financial service delivery have also contributed to the upward trend in formulation of survival techniques (Arora 2007). The dismantling of regulatory barriers and regional economic groupings which jerked up the pace of globalization is key to the invention of the techniques. take-overs and financial reengineering. In the face of problems and uncertainties.Due to this growth the government introduced changes in the oversight structure by signing the insurance amendment act 2006 to enable insurance have its own regulator. The law restricts charging interests on loan to no more than double the principle amount. certain global factors have been identified as having contributed to the result in an upward trend in survival strategies during financial crisis.5% in 2003 but has surged to 8% in 2005 and 13. the banking industry accounted for 13% of mergers.5 in 2006 (Ndung¶u and Ngugi 2009). Steady modernization of the financial sector has played key role in its growth. 7 . by improving the lending environment.The survival strategies banks have resulted in emergence of strong new local banks fully 100% owned foreign banks or both local and foreign participation in owners such as Citibank a. the option available for the system to have a better control of these factors is to develop strategies for survival. The Kenyan financial system is among the largest and more developed in sub Saharan Africa with a large banking sector. Stanbic.

banks should be proactive and more efficient in product/service delivery. and at the same time ensuring market discipline. hence.Mike Hunder (1997) in his crusade for re-engineering. In this generation of customers¶ satisfaction and advancement in information technology. This is in tandem with the trend in the banking sector globally. sanitizing and survival.2 Statement of the Problem Evidence has shown that the banking business is undergoing several transformations. 1. Banks that are unable to restructure in line with the global revolution in the industry should be ready to go down the drain in the process and be liquidated. he contended that growth in the banking sector should be transmitted easily into growth of the real sector. ³as competition among banks become keener in the face of declining market margins. Basing on the above challenges. In his view. But as banks continued to record impressive growth in all economics. The study also determines whether the methods achieve the desired results or not.´ As the banks are devising ways of improving efficiency and ensuring the optimization of the available resources. They should continually review their operational strategy in readiness for the on-going global challenges since customers are becoming more aware of their environment and ready to move their funds to where their demands would be satisfied adequately. It is on this argument that this work lies to assess the survival techniques of commercial banks in financial crisis with special reference to Equity Bank paying attention to its performance. banks¶ management have to manage the hard way of re-engineering. 8 . the current wave of restructuring in the sector is to respond adequately to the fast changing and increasingly competitive business in order to survive (Roldos 2006). indices show a declining margin of economic growth. their structural changes are unavoidable. policy makers and regulatory authorities are moving towards openness. competiveness. With the increased deregulation and liberalization of the business. Ahmed (2003) described this development as a magic one which caused quite a substantial number of Kenyan banks to be sick while some became healthier. Between 2002 and 2005 there were twenty four banks under liquidation out of which four were wound up. restructuring. pointed out that. the study aims at determining the various strategic techniques used by commercial banks to survive during financial crisis. growth and stability. .

ii. iii.4 Importance of the Study Many scholars have written about banks¶ survival in economic recession. it will detail various strategies used. total assets. In the view of the above reasons.3 Objectives of the Study The study seeks to achieve the following objectives. 9 . this study will not limit itself to the failure of banks in economic recessions but on how the banks survive during financial crisis .6 Scope and Justification of Study This study attempts to study techniques that are applied in enhancing the performance of commercial banks and how the banks cope during financial crisis. i. How effective are the various survival strategies techniques adopted by banks? Do techniques lead to an improved bank performance? What are the best suited survival techniques during financial crisis? 1. To identify the survival techniques used by banks during financial crisis. ii.. shareholders¶ funds and customers confidence. To identify and recommend the best survival techniques.5 Research Questions The research will strive to answer the following questions i.1. iii. 1. corporate bodies and management that want to embark on banks¶ survival strategies and corporate refocusing to achieve better results. To examine the impact of the survival techniques on the banks performance in terms of profit after tax. It will also recommend the approach that is best suited during financial crisis and finally establish if the strategies implemented will restore confidence in the customers and increase the banks performances.This will make the research important to bank directors. 1. It will also arouse genuine interest on the matter for academicians for further research. The study covers the activities and impacts of these techniques to the balance sheets of the banks and aspects like profit and customer satisfaction. On completion of this research. Most of the writers have dealt majorly on why banks fail during economic recession and competition.

stock market crashes. 1. legal or moral restrictions TECHNIQUE: A plan designed for a particular purpose. This is to enable the researcher study the effects during the period of economic prosperity or growth i. The escalating cost of transport due to fuel prices increase and financial impediments which made the cost of carrying out the research to be expensive. FINANCIAL CRISIS: It is broadly applied to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value e.7 Definitions of Terms and Variables ECONOMY: The relationship between production.g. 1. It is the system of trade and industry by which the wealth of a country is made and used LIBERALIZATION: This is a way to free somebody or something from political. The research area is wide as we have to cover most banks to achieve a relevant sample that is representative of most banks in Kenya. and currency crisis 10 .e. This is the duration of increased competition as many banks emerged during this period. The duration is up to 2012 to ensure that the information is relevant and up to date. trade and the supply of money in a particular country or region.The study covers the period between 2003-2012. In overall the above limitations do not compromise the validity and accuracy of the research. religious. The process of planning something or carrying out a plan in a skilful way.7 Limitations of the Study Some of the banks classify most of their information that is necessary for the completion of this work as private and confidential due to certain management policies. Time factor also added to the problems since the duration for the research is limited and a lot of data has to be collected and analysed before the dead line. between 2002 and 2007 and the period of economic recession thereafter.

better policy formulation and implementation. which means faster growth and therefore. Loan sales. corporate social responsibility and risk management activities have taken centre stage in the banking industry. shows the need to maintain good macroeconomic policies as measured by low inflation. 2. This study reviews operating environment for banks from three perspectives.CHAPTER TWO LITERATURE REVIEW 2. The continual profitability and the survival of banks is therefore dependent to a large extent on management¶s ingenuity in making decision that will enhance the earnings of a bank. must be taken into consideration in management decision making. stress testing. An environment can be defined as those factors that are largely or totally outside the management¶s control.1 INTRODUCTION In different economic periods. It refers to certain uncontrollable variables that impact on an organization and therefore. 2.1 Overview of the banking environment in Kenya. financial innovation trading activities.1 MACRO-ECONOMIC ENVIRONMENT The existence of a stable macro economic environment is the key strategy for economic growth. because the environment creates opportunities and imposes constraints on their activities. securitization. Kenyan banks operate in a dynamic environment and must therefore adapt to survive. The nature. quality and type of decision in a business organization are directed towards adapting to the environment. banks and businesses may see the need to change their operations for survival and growth in response to the uncertain macro-economic environment. prudent fiscal stance and realistic exchange rate.1. macroeconomic environment refers to those domestic policies as well as the outside policies (international macro-economic environment) which affect the performance of domestic economy ( Ajayi 2005) 11 . In its widest sense.

realistic exchange rate and absence of parallel exchange rate. Open trade policy as opposed to inward looking import substitute strategy and tariff regimes and political stability and good governance development Evidence from successful economies shows the need to maintain good macro prudent fiscal stance. balanced budget and a small ratio of government consumption to GDP.7 in 2008 but the economy rebounded in 2009-2010 (Sedghi 2011). realistic exchange rate. The post election violence in early 2008 coupled with the effects of the global financial crisis on remittance and exports reduced GDP growth to 1. After independence . the establishment of the Kenya anticorruption authority and measures to improve transparency. and poor performance of agriculture and manufacturing sector. telecommunications. In 1993 the Government of Kenya began a major economic reform and liberalization with the assistance of the world bank and IMF by eliminating price controls %and import licensing and foreign exchange controls(Gavin 2006). 12 . Kenya promoted rapid economic growth through public investment .4% in 2003 and between 1997-2002 (World Bank 2012).He summarizes a conducive macro-economic environment as.g. crime and insecurity and poor governance. The GDP increased there after due to expansion in tourism. Growth in GDP stagnated and agricultural production shrank at an annual rate of 3. The country¶s picked up to 2.Between 1973 and 1990 Kenya has witnessed a decline in economic growth in the last two decade. Evidence of Middle East ³East Asia Miracle´ is useful where policies to increase the more accessible to non-traditional savers increased the level of financial savings (Lawrekovich 1996).3 in early 2004 and to nearly 6% in 2005 and 2006 compared to the sluggish 1. From 1991 to 1993 Kenya had its worst economic performance since independence. In 1994 to 1996 Kenya GDP averaged just over 4 % a year and later entered a period of stagnant growth in 1997 until 1999 the government took positive steps e.encouragement of smallholder agricultural production and the GDP grew at annual rate of 6. transport and construction and recovery in agriculture.6% from 1963 to 1973. weak institutional framework. Among the factors contributing to the economic decline and the deteriorating business environment are poor infrastructure.9 % and inflation reached a record 100% in August 1993 and budget deficit was over 10% of GDP.

Two of the largest four banks Kenya commercial bank and National banks of Kenya are owned partially by the government and the other two are majority foreign owned i. Nwankwo (2008) views the objective of the regulation as to ensure a sound and healthy 13 .It exports goods (World Bank 2011). It stems from its critical role which is crucial to the survival of deposit money banks and other financial institutions in a depressed economy. This role consists of collecting deposits from surplus units. 2. it has to be regulated to safeguard market failure.1.3 LEGAL FRAMEWORK Throughout the world of business.564 billion and GDP per capita $ 1. In doing this. The banking system comprised 53 commercial banks.711 and inflation of 3. Most of the smaller banks are family owned and operated. For the financial sector particularly banks to be effective in doing this. Kenya has the GDP of $29. this will subsequently reduce the number of commercial banks to 49 from 53. two mortgage finance companies and 4 building societies at the end of December 1999.1. safeguarding them and lending them to the deficit segments for investment purposes. As at May 2011 the economic prospects are positive with 4-5% GDP growth expected in 2012 (King¶ori. Barclays bank and standard chartered.2 INDUSTRY ENVIRONMENT Kenya is East and central Africa hub for financial services. the banks must also make such funds available to the true owners on demand. the central bank approved four applications for merger of eight commercial banks. The Nairobi stock exchange is ranked 4th in Africa in terms of market capitalization.Kenya¶s economy is market based with few state owned infrastructure enterprises and maintains a liberalised trade system. 11 non-bank financial institutions. 2. The country is generally perceived as Eastern and central financial hub for financial communication and transportation services. The number of institutions under statutory management stood at 4 while the number of Forex bureaus increased to 48 in December 1999 from 44 in December 1998.e. The Kenyan banking system is supervised by the Central bank of Kenya. The reason for this is not far-fetched. ensure social equity and stability and protect market operators. it is a well known fact that banking sector is the first regulated sector of any economy.2% as at June 2011 with an unemployment 40%. In the meantime. 2003). Z.

The banking Act and the central bank of Kenya act. To manage the large volume of small deposit and credit accounts. its operations management was not. The Central Bank of Kenya under the docket of Ministry of finance is responsible for formulating and implementing monetary policy . Equity was declared insolvent by the Central Bank of Kenya (CBK) providing a one-year window to turn the company around (Ndonga 2010). Having been raised in a poor family. While its sense of purpose was strong. On the strength of those savings deposits. which had led to his initial investment. Mwangi left a secure and lucrative position as Group Financial Controller of Trade Bank to become Chief Financial Officer of Equity¸a position he held until becoming CEO in 2004. This renewal was led by James Mwangi who reaffirmed the company¶s basic mission to the poorer people in Kenya. The banking industry in Kenya is governed by the companies act. neglected market of unbanked people 14 .2 HISTORICAL BACKGROUND OF EQUITY BANK Equity Bank was founded in 1984 as the Equity Building Society to provide financial services for Kenyans with low income. (Aoki 2004). disciplined management alongside his inspirational leadership. protect depositors effectively.The banks have come together under the Kenya¶s Bankers Association which serves as a lobby for the banking sectors interests. The KBA serves a forum to address issues affecting members. Kamau Kabbucho and Andrew Mnjama 2007). Equity developed administrative efficiencies through the extensive use of information technology. but brought creative. appealed to his ³heart and soul´. 2.banking and financial system. Perceiving the needs of unbanked Kenyans more clearly than other banks. Equity Building Society began a renewal. he identified with the poor people of Kenya and found that Equity¶s ³cause´. Equity developed savings products which were easily accessible and attractive to people with little income and few assets. As one of the founding investors. by 1993. and it had accumulated losses of KSh 33million. they built their loan portfolio (Coetzee. The result was that. Gerhard. The combination of innovative products and administrative efficiency directed at the large. In 1994. 54% of its loans were nonperforming. address the indigenous community¶s savings and investment requirements and accelerate the economic development of the country (Sang 2005).

both locally and internationally. Respect and dedication to customer care. Unity of purpose. By any measure.catapulted Equity into the top ranks of Kenyan banks. the bank became listed on the Nairobi Stock Exchange with an initial valuation of KSh 6. Equity Building Society was legally transformed into a commercial bank with the new name. Equity Bank Limited. for their superior performance (Cook. Equity collectively defined its core values. accounts in the country. At the end of 2009. Teamwork. Integrity. T 2004). In December 2004. Creativity and innovation. Equity bank was placed among Kenya¶s top 15 commercial banks in 2007.3billion. Equity¶s growth was phenomenal. Equity¶s Kenyan operations had more than 4 million bank accounts. In August 2006. That translated into more than 50% of all bank Equity had also received various awards. As part of recent strategic planning process. and Effective corporate governance. CAUSES OF FINANCIAL CRISI 15 . These values are the ³PICTURE´ that Equity wants to present: Professionalism.

It is the target of study for collection of data.CHAPTER THREE RESEARCH METHODOLOGY RESEARCH METHOD This study is an analytical one. According to Bryman & Bell (2007. Some of the data from this group are considered necessary facts which form a good basis for the theoretical concepts and analysis. The various methods of collecting data will vary depending on the approach that the study is using and they range from interviews. For this reason. 3. It is only necessary that research questions be answered on the basis of the data which is the major responsibility of the design that will anchor the solutions to the research questions. DETERMINATION OF POPULATION SIZE OF THE STUDY The population of the study in research statistics can be described as an entire number of people. events and things all of which have one or more characteristics of interest to a study. 16 .5 Data collection methods The method that is selected by the researcher will determine how data is collected in the course of research. opinion of professionals and the public about the subject matter was sought. questionnaires. p. Primary are the methods that collect data for the first time while secondary methods are those where the researcher uses data collected by other people. there are also primary and secondary methods of collecting data. objects. and observation On the other hand. while the scientific method of investigation and reporting of research work is adopted.

while the primary sources will include the review of the findings from the responses from respondents who are from Equity bank. This involves selecting only those members of the population that the researcher deems important and available for the study. (2005. & Chapman. 376). 226) argues that the process of sampling involves selecting elements from the study population so that by carrying a study of the sample and having an understanding of the properties of the characteristics of the subjects of the sample.10). convenience sampling was used to select the sample for the study. p. 3. The use of these sampling techniques allows a researcher to choose the sample population from a subset of a large population rather than the whole population reducing the cost of the study. Despite the difficulties of collecting primary data. 17 . The primary sources of data will come from the questionnaires that will be distributed to several respondents. The primary data that is employed in this study was by the use of questionnaires that were filled by the top management of Equity Bank. 2006. Secondary data is easily available to the researcher as compared to the primary data which is being used mainly because the study uses a case study as Equity Bank (Jain. Out of all the questionnaires that were sent to the respondents. it is the subset of the population. p. A sample is a small section of the population and as other writers put it. This research will use both primary and secondary methods to collect data for the study. it will be possible to generalize the properties to specific elements in the population. 26 were returned and the responses from these questionnaires helped the researcher understand and analyze internationalization process that the company underwent and is still undergoing and the ability of other firms to use the same strategies to survive during financial crisis. The secondary sources will include review of both published and unpublished literature that is related to survival strategies employed commercial banks in surviving financial crisis in the archives of Equity Bank. There were thirty questionnaires that were sent to the respondents with each questionnaire containing twenty questions. Concerning this study. secondary data collection methods refer to the ability of the researcher to carry out an analysis of the data that has already been prepared by other researchers. Sampling techniques that can be used in any research are many and the researcher can choose depending on the goals and objectives of the study.1 Selection of the sample Mcneill. it is more trustworthy as compared to secondary data which come with the questions that regard its reliability and validity and the researcher has to be cautious when dealing with it.5.

The questionnaire that was used in this study contained questions that had the above three structures. closed-ended questions and likert scales. closed ended questions provide answers for the respondent to choose from.The respondents that were chosen for the study were chosen from the top management of equity bank. The development of the questionnaires considered questions that will give rise to information that is relevant to survival techniques used by commercial banks to survive financial crisis. 18 . Likert scale questions requests respondents to respond to the question along a given continuum from the given responses. Design of the questionnaires The questions that are commonly used in surveys and questionnaires are usually open ended. Open ended questions do not always give answers that a respondent can choose from but allow participants to answer freely. On the other hand.

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CHAPTER FOUR: DATA ANALYSIS RESULTS AND FINDINGS 20 .