Académique Documents
Professionnel Documents
Culture Documents
By
Mbugua, David Waruingi
Admin No: BUSS - 1 - 587 - 06
August, 2007
1
DECLARATION
I hereby declare that this is my original work and it has not been presented for
examination purposes in any other university or institution of higher learning.
This research project proposal has been submitted for examination with my approval as
the supervisor.
2
DEDICATION
This project is dedicated to my parents and my fiancée for all their support and
encouragement towards making this research project a success.
3
ACKNOWLEDGEMENT
First and foremost, I acknowledge God for giving me this opportunity to live to see the
completion of my project.
Last but not least, my family and friends who gave me moral support not to mention my
fiancée; Damaris who kept me focused, my little sister and mother who continuously
offered their input by typing and editing the whole project.
4
ABSTRACT
The researcher has been a keen observer of the whistling voice in his environs with particular
reference to the Nairobi Stock Exchange (NSE). During the last decade of the previous
government rule, the media houses as well as the general public were of the opinion that
“Kenya had a poor investment climate and environment that were not attracting investors”.
The fall of the country’s economic growth, drastically affecting the investment opportunities
are an issue in the mind of Kenyan. It was a subject of discussion in every corridor. These
facilitated the research of the determinants of investment opportunities in the stock exchange
market. To investigate on this problem the Nairobi Stock Exchange (NSE), which is a key
statutory organization formed by an act of parliament within the Ministry of Trade and
Industry, was selected as a case study unit. There were several factors that the researcher
believed were key determinants to investment opportunities at the NSE such as Formalities
for Listing at the Stock Market, Sources of Finance Prices of Securities, government policy,
politicized climate, innovation, entrepreneurs, investment culture, skills, attitudes and climate
among others. These were established or investigated as the conceptual framework of the
study.
The respondent groups were selected from key compositions of the Kenyan street whispers in
commenting about the investment. These included the opinion from the common man, NSE
employees, potential investors, entrepreneurs, professionals, among others. Findings of the
study revealed that there is a co-relation or significant relationship between the practice and
themes held by the public regarding the determinants of investment opportunities in an
economy. However, 70% of the respondents expressed that “whatever theory that exists in
text books regarding investments were applicable in western markets but not in other
developing countries. Hence, a generalization of investment determinant factors in a
universal floor is null and void. The entire study has been summarized into five chapters as
follows: -
Chapter One addresses the general introduction to the study, background information,
problem statement, study questions, research objectives, and importance of study, scope and
definations of key terms found in the study. Chapter Two addresses the literature review and
5
expounds on the theoretical orientation, past studies carried out by other scholars in the topic,
their critical review, research gaps and justification of carrying out the study. Chapter Three
addresses the study design and methodology adopted which gives the target population,
sampling design, investments for data collection procedure and analysis.
Chapter Four addresses the data analysis representation; the collected data has been
analyzed and presented both qualitatively and quantitatively. Chapter Five has been
followed by a discussion of the study findings, their relationship with research questions, the
study recommendations of areas suggested for further research.
In general, the study no doubt has left no stone unturned and as such it is an instrumental
study in ensuring that the key determinants to investment opportunities at the Nairobi Stock
Exchange are adhered to.
6
TABLE OF CONTENTS
Page
TITLE PAGE i
DECLARATION ii
DEDICATION iii
ACKNOWLEDGEMENT iv
ABSTRACT v
TABLE OF CONTENT vii
LIST OF TABLES ix
CHAPTER ONE
INTRODUCTION
1.1 Research Background 1
1.2 Research Problem Statement 2
1.3 Research Questions 2
1.4 Research Objectives 3
1.5 Importance of Study 3
1.6 Research Scope 3
1.7 Definition of Key Terms 4
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction 5
2.2 Theoretical Orientation 5
2.2.1 Theoretical Framework 8
2.3 Empirical Review 8
2.3.1 Research Gaps 10
2.4 Conceptualization 10
2.4.1 Conceptual Framework 11
2.5 Operationalization 11
2.5.1 Operational Framework 12
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction 13
3.2 Research Design 13
3.3 Study Population 13
3.4 Sampling Design 14
7
3.4.1 Sampling Method and Technique 14
3.4.2 Sampling Procedure 14
3.5 Data Collection 15
3.5.1 Data Collection Method and Technique 15
3.5.2 Data Collection Procedure 15
3.6 Analysis and Reporting 15
3.7 Limitation of the Study 16
3.8 Ethical Issue 16
CHAPTER FOUR
DATA INTERPRETATION, PRESENTATION AND
ANALYSIS
4.1 Introduction 17
4.2 Quantitative Analysis 17
4.3 Qualitative Analysis 23
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSIONS &
RECOMMENDATIONS
5.1 Introduction 28
5.2 Summary of Findings 28
5.3 Conclusion 29
5.4 Recommendations 29
5.5 Suggestions for further research 30
Appendix
Appendix 1 Budget 31
Appendix 2 Time Schedule 31
Appendix 2 Questionnaires 32
Bibliography 37
8
LIST OF TABLES
9
CHAPTER ONE
INTRODUCTION
Braudel suggests that in Cairo in the 11th century Islamic and Jewish merchants had already
set up every form of trade association and had knowledge of every method of credit and
payment, disproving the belief that these were invented later by Italians.
In 12th century France the courratiers de change were concerned with managing and
regulating the debts of agricultural communities on behalf of the banks. Because these men
also traded with debts, they could be called the first brokers.
In late 13th century Bruges commodity traders gathered inside the house of a man called Van
der Beurse, and in 1309 they became the "Brugse Beurse", institutionalizing what had been,
until then, an informal meeting. The idea quickly spread around Flanders and neighboring
counties and "Beurzen" soon opened in Ghent and Amsterdam.
In the middle of the 13th century Venetian bankers began to trade in government securities.
In 1351 the Venetian government outlawed spreading rumors intended to lower the price of
government funds. Bankers in Pisa, Verona, Genoa and Florence also began trading in
government securities during the 14th century. This was only possible because these were
independent city states not ruled by a duke but a council of influential citizens.
The Dutch later started joint stock companies, which let shareholders invest in business
ventures and get a share of their profits - or losses. In 1602, the Dutch East India Company
10
issued the first shares on the Amsterdam Stock Exchange. It was the first company to issue
stocks and bonds.
The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the first
stock exchange to introduce continuous trade in the early 17th century. The Dutch "pioneered
short selling, option trading, debt-equity swaps, merchant banking, unit trusts and other
speculative instruments, much as we know them" Murray Sayle, "Japan Goes Dutch",
London Review of Books XXIII.7, April 5, 2001.
There are now stock markets in virtually every developed and most developing economies,
with the world's biggest markets being in the United States, Canada, China (Hongkong),
India, UK, Germany, France and Japan.
11
1.4 Research Objectives
To find out the factors which determine investment opportunities in Kenyan economy with
special reference to the Nairobi Stock Exchange the following research objectives were
addressed during the study.
Knowing the investment opportunity at the NSE will attract many sectors which will enhance
its growth. Since there is need to know the determinants of investment opportunities at the
NSE this study report is valuable and significant to the various sectors of the economy.
In Kenya, dealing in shares and stocks started in the 1920's when the country was still a
British colony , however the Nairobi Stock Exchange was constituted as a voluntary
association of stockbrokers registered under the Societies Act to allow the exchange of
securities issued by publicly quoted companies and the Government.
12
1.7 Definition of Key Terms
This study relied on the investigation of a number of key concepts. This key terms are
defined as below: -
1.7.1 Investment
According to Preeti Singh, 1990, Investment is the employment of funds with the aim of
achieving additional income or growth in value. The essential quality of an investment is that
it involves waiting for a reward. This entails the commitment of resources which have been
saved, put away from current consumption in the hope that some benefits will accrue in
future.
13
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
This study was an evaluation of factors that determines investment opportunities in an
economy survey study of the Nairobi Stock Exchange as a sample study unit. The study
identified key determinants for an investment opportunity in a stock market
From the point of review of the ordinary man who invests his funds, he perceives investments
as commitment of a person’s funds in the form of buildings, cars. Securities among others, in
order to derive future income in the form of interests, dividends, rent, premiums, pension,
The Economists views investments as the net additions to the economy’s capital stock, which
consists of goods and services that are used in the production of other goods or services.
Therefore, investment implies the formation of new and productive capital in the form of new
14
2.2.3. Financial Expert Concept of Investment
Financial experts view investment as the allocation of monetary resources to assets that are
expected to yield some gain or positive return over a given period of time. They further view
it as the exchange of financial claims like bonds, stocks, real estates, mortgages e.t.c.
The neo-classical theory of investment popularized by Jorgensen (1967) proposes that “the
level of investment depends on the volume of o/p and use of cost of capital”.
This theory is consistent because of its assumption of perfect competition and erogeneity of
o/p. More generally, neither the neo-classical nor Tobin’s “Q” theories of investment are
models are based such as perfect capital markets, perfect flow of information and life or no
government investment.
Rate of Return
Return simply means a reward from an investment. Rate of return therefore is the total annual
Beginning Price
15
In general, the rate of return of a security is ascertained or the basis of what the investors get
Risk
This refers to the possibility of incurring a loss in a financial transaction. The risk of an
investment therefore refers to the variability of each rate of return. This determines
investment opportunity in that investors will be interested on those securities which are risk
Marketability
An investment is highly marketable if it can be transacted quickly, the transaction cost is low
and the price change between two successive transactions is negligible. This determines an
investment opportunity in that investors will be interested in investing their funds on these
Tax Shelter/Holiday
This is a tax benefit provided by some investments. Tax benefits are of three kinds: -
Initial Tax Benefits – This is tax relief enjoyed at the time of making the investments.
Continual Tax Benefits – This represents the tax shield associated with the periodic returns in
the investment.
Terminal Tax Benefits - This refers to the relief from taxation when investments is
realized or liquidated.
16
Convenience
This refers to the case with which the investment can be made and looked after. Convenience
The neo-classical theory of investment popularized by Jorgensen (1967) proposes that “the
level of investment depends on the volume of o/p and use of cost of capital”.
This theory is consistent because of its assumption of perfect competition and erogeneity of
o/p. More generally, neither the neo-classical nor Tobin’s “Q” theories of investment are
applicable in developing countries because of their restrictive assumptions on which of these
models are based such as perfect capital markets, perfect flow of information and life or no
government investment.
However, the scholars have also not mentioned in their arguments other factors such as
government policies which regulate investment big (thus affording greater protection to
investors) and to promote competition in the savings industry, the political climate which
affects investment either positively or negatively. For instance, if the political climate is
favorable, many investors will be attracted from within and outside, on the other hand if the
17
country is facing political instability such as wrangles in the prevailing government or war
(civil) this will have adverse commercial consequences or can discourage investment and
economic activities.
The area of investment opportunities has called for attention of various scholars. Some of the
key research studies carried on the subject include: -
Thus according to Tobin, a natural tendency to increase current stock occurs if the increase in
current value of the additional capital stock exceeds the cost of replacing it. This ratio
referred to by some standard of literature as marginal “Q” systematically differs from one due
to delays in delivery of capital and adjustment or installation costs. The major weakness of
this theory is that this ratio is difficult to measure, forcing researcher to resort to the use of
average “Q” as the ratio of the market value of the entire stock (not merely the additional) to
the replacement but with certain assumptions such as constant returns to sale in production
(Blanchared 1989).
Blejer and Khan (1984) attempted to develop a simple framework for studying investment in
developing countries. They examined the impact of government economic policies on
investment activity in 24 countries. They found out that the level of investment activities was
related positively to the change in expected red GDP, negatively to excess productivity
18
capacity and positively to the availability of their funds for investment which is represented
by infrastructure investment.
Tentatively, this study improves on the work of Jorgensen (1967) entitled neo-classical
theory of investment. In his study, he outlined that the determinants of investment include
volume of output and user cost of capital which in turn depends on the interest rates, the price
of capital goods and rate of capital depreciation.
2.4 Conceptualization
Investment opportunities can be explained in the following ways: -
These include factors such as level of income, rate of inflation, exchange rates, capital
formation, etc. These factors have specific implications to the investors. For instance, when
19
there is high level of income more investment will be made in the economy and vice versa.
On the other hand, the exchange rate will assist the investor to know about inflation in the
2.5 Operationalization
This shows how the research identifies the factors that the researcher used to measure
variables. The researcher got to know how the impact of Government policies, civil wars, the
introduction of CDF funds / unsecured loans, inflation & exchange rates, and lastly training /
advertising determines investment opportunities at the stock market.
20
2.5.2 Civil Wars
When a country is peaceful it tends to attract both local and foreign investors, however if a
country is at war either sparked by political in-sighting, or governments luck of providing of
basic utilities, investors tend to pull out of a stock market hence creating a bad investment
environment.
21
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
This chapter shows the research design which was employed in the study, target population,
sample design, data collection instruments and procedures used in the research and data
analysis procedures.
22
3.4 Sampling Design
A sample refers to section of the population that has been selected for observation and
measures to be obtained; data to be used in making inferences about the targeted population
sampling is the process of selecting a sample. The researcher sampled because of the
possibility of error, which may not have been captured in previous studies.
23
3.5 Data Collection
One set of questionnaires was used; observations and informal interviews were also
employed. The questionnaires consisted both of structured and unstructured questions and
were dispatched to targeted respondents to complete. They were delivered in person from
office to office and a brief explanation of the purpose of the study was given to the
respondents. A master list was kept to keep track of the questionnaires dispatched and to have
documentation of the questionnaires that were returned duly filled out. Phone calls and
personal visits were made at various intervals to ensure that the population did not forget to
fill out the questionnaires. The data was then collected from each respondent personally. The
information received was stored in a file ready for analysis and assisted the researcher make
recommendation and find answers to the research problem.
24
3.7 Limitations of the Study
Lack of sufficient funds, time and lack of appropriate data to carry out the research were the
limiting factors that posed as a challenge to the researcher as he undertook the research study.
25
CHAPTER FOUR
26
4.2.2 Respondent’s profile
The study sought out the respondent rate to answering to the questionnaire for the research as
shown below from the table. The respondents profile is quite important in any research study
since it shows how various individuals are in regards of their career and education level.
Table 4:2 Showing the respondents level of education
Category Frequency Percentage (%) C. Percentage (%)
Post graduate 9 22.5 22.5
Undergraduate 11 27.5 50
Diploma 14 35 85
Pre – university 6 15 100
Total 40 100 100
Source: Author (2007)
The study mainly targeted stakeholders at the Nairobi Stock Exchange as respondents to the
questionnaires. From the study targeted 40 stakeholders, 22.5 percent of the respondents were
postgraduate who actually responded, 27.5 percent were undergraduate students, 35 percent
were diploma students and 15 percent of the students were pre – university. The total
percentage of the respondents was 100 percent.
27
Table 4.3: Showing the occupation of respondents in regards to work experience
Category Frequency Percentage (%) C. Percentage (%)
NSE Employee 4 10 10
Business men 8 20 30
Financial Experts 8 20 50
Local Investor 20 50 100
Total 40 100 100
Source: Author (2007)
Majority of the respondent’s who responded to the questionnaires given out were local
investors who were 50 percent of the respondents, followed by Business men and Financial
experts who held 20 percent each and 10 percent are NSE employee. From the few respomce
got from the respondents the research captured very few employee since many of them are
busy with other duties.
28
4.2.5 Are the prices of securities at the stock market affordable?
The study sought to find out whether the prices of securites at the stock market were
affordable and served as favourable investment opportunity to interested investors. The
response was as shown in the table below
Table 4.5 Effects of Price of Listed Securities at the Stock Market
Prices of Listed Securities Frequency Percentage (%) C.Percentage (%)
Very good 2 5 5
Good 8 20 25
Fair 16 40 65
Poor 10 25 90
Very poor 4 10 100
Total 40 100 100
Source: Author (2007)
According to the analysis done most of the respondents said that the prices were fair with a
percentage of 40 percent, 25 percent respondents said the prices were poor, 20 percent said
they were good, 10 percent said very poor and 5 percent said the prices were very good. This
shows that the Prices of Listed Securities at the NSE are still below the standards.
29
that the available sources of finance were moderate. Some of the respondents did not know
what sources of finance were available for investors at the NSE.
30
Table 4.8 Intensity of External Investors at the NSE
Percentage of External Frequency Percentage (%) C.Percentage (%)
Investors
High 26 65 65
Low 0 0 65
Medium 10 25 90
Not known 4 10 100
Total 40 100 100
Source: Author (2007)
It shows that 65% of the respondents answered the external investors cover a high percentage
at the NSE. None of the respondents answered that external investor’s cover, a low
percentage. 25% answered the external investors cover, a medium and 10% of respondents
did not know the percentage of external investors at the NSE. From this, the researcher
deduced that a high percentage of the investors at the NSE are external and few are local
investors.
31
4.3 Qualitative Analysis
This study helped the researcher to analyze people’s opinions, suggestions, interests, attitudes
and preference in different disciplines.
4.3.1 NSE Employees
According to the analysis done, this group of individuals proved to enjoy their occupation
giving reasons that deal with real issues that affects people’s lives directly and they tend to
work out issues out of personal experience and people’s views. Further more, they adhere to
their set goals and this makes them extremely happy and so involving and industrious.On a
question concerning the level and availability of investment opportunities at the NSE, they
said that it will improve during this political era, many employees gave a positive response
saying that there is a strong support from the government towards investments in the
country.They further explained that investment risks affects investment performance at the
NSE in Kenya giving reasons that in every activity conducted, risks cannot be avoided, and
gave examples of risks which affects investments as inflation, interest rates and negative
returns on some projects among other.
They supported a question on whether to encourage external investors or not, giving reasons
that they are financially equipped and tend to assist in other investment fields that the local
investors might not have enough experience and money. They also supported that
government policy affects investment opportunities at the NSE. Other policies that have been
set up by the government are reflected in the requirements to list at the NSE. This group
sighted concerns that the requirements are abit discouraging limiting many potential
companies from listing at the NSE. This group of individuals has argued that they do not
know the duration which the NSE will pick up giving reasons that it will depend on the
government efforts towards supporting it. They gave the determinants of the investment
opportunities at the NSE to be political environment/climate economic factors and
government policies amongst others. They mentioned that some of the problems which affect
investors at the exchange are unfavorable government policies, poor economic conditions and
lack of interest from local investors to invest amongst others. They suggested that the above
problems can be solved through improving government policies, ensuring that there is a
stable economy, awareness of the NSE opportunities by having training sessions for people
who do not know what the NSE is all about and maintaining zero tolerance to corruption.
32
They suggested that in order to improve investment at the NSE, the government should create
favorable policies to both external and local investors and ensure that there is political
stability in the country.
Finally, they gave comments in relation to Kenyan investment environment saying that it’s
not all that good but there is hope for improving since there is a change of government.
33
stock market since the purchasing power is low, high inflation rate is also prevailing in the
economy hence creating an imbalance at the exchange.
They responded that the existence of adequate numbers if investment avenues increases the
number of investment/investors and vice versa. They listed the problems taking investors in
Kenya as (poor, uninformed and not risk takes) high level of insecurity, high taxation, co-
relation between political scenario/comments and investors speculation. They suggested that
these problems can be solved by improving the infrastructure network in the country,
efficient delivery and settlement system, availability of alternative sources of funds,
tightening security measures and the country should have government policy that attracts
both foreign direct investment at the NSE thus can be improve by building investors
confidence and giving incentives to local and foreign investors.
They gave other comments in relation to the Kenyan investment environment saying that the
country has high potential for investment, and the Kenyan attitudes and skills towards
investments should be enhanced.
34
common man and government. They suggested that these problems can be solved by
revising an enforcing favorable government policies, offering investor training by the NSE,
putting stiffer penalties on doctored audit reports, encourage economic growth and finally,
conflicts of interest should be solve through dialogue.
They further suggested that the NSE investments opportunities can be improved by
encouraging investors through reduction of tariffs (Fees & Commission Structure), etc.,
unhealthy competition should be eliminated and marketing should be liberalized. Finally,
they commented that local investors should be given more preference than foreign investors
since the local investor will utilize the returns locally and not transfer the profits out of the
country.
35
solved through restoring investors’ confidence, investor training by the NSE on how to
interpret audit reports, reviewing economic conditions e.g. taxation should not be high and
political scene should not in any way be a determinant of the activities or operations at the
NSE. They said that investment could be improved at the NSE through government
involvement, encouraging local investment and developing of manpower so as to have
knowledge and skills on investments.
Finally, they made comments that the NSE investment environment so far is not good but
here is hope as the days go by.
36
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSIONS &
RECOMMENDATIONS
5.1 Introduction
The research was carried out to find out the availability of investment opportunities at the
Stock Market. This study was based on the Nairobi Stock Exchange. To facilitate the study; a
questionnaire was formulated to gather information needed. It is in this chapter that the
researcher outlines the major findings, conclusions and recommendations.
37
5.2.4 Culture, attitude and skills of people at the NSE
The study established that government investment policy, prevailing culture attitude and
skills of people at the NSE affects the investment opportunities significantly.The study also
recognized that the existing investment opportunities could be too risky or require a high cost
of investment which discourages the prospecting investors. Many investors variables
indicated that in most cases investment avenues in comparison with the available invisible
resources can encourage or discourage the investors from pursuing his/her desired investment
venture.
5.3 Conclusion
The study evaluated the major factors that determine the level of investment opportunities at
the stock market. It surveyed the NSE on a comparative evaluation of three (3) month period.
Several findings and implications of the study have been developed. It concluded that the
government, investors and individuals need to strengthen their move to make it a major
practice in undertaking investment at the NSE. The study concluded by making some
valuable recommendations and suggests other areas for further study.
5.4 Recommendation
From the study, the researcher had the following to recommend: -
5.4.1 Government Policies
The Government of Kenya through the NSE should partner to review Investment
Opportunities and Policies. They should come up with new policies and investment
opportunities / avenues that are favorable for a healthy stock market growth and will
encourage vibrant investment activity.
5.4.2 Training
Professional training on investment management and operation at the market should be
encouraged. In fact Kenya needs the adoption of professional bodies such as C.F.A.
(Chartered Financial Analyst) alongside other professional training on security and portfolio
management, investment planning and management etc.
38
5.4.3 Development and introduction of new investment products in the stock
market
Kenya needs to expand its investment opportunities and instruments so as to include activities
such mutual funds, and operation venture capital.
5.4.4 Political Climate
The government should maintain a political environment that is conducive to the investors
thus building their confidence and attracting investment opportunities not only within the
stock market but the country at large.
39
Appendices I - Time Schedule
40
Appendices III - Investment Opprtunities Questionnaire
Introduction Letter
Dear Respondent,
41
SECTION (A) BACKGROUND INFORMATION (Pleas tick one)
above 50,000
42
SECTION B. STRUCTURED QUESTIONNAIRE
5 - Strongly Agree
4 - Agree
3 - Neutral
2 - Disagree
1 - Strongly Disagree
Market?
43
6) Investor’s Age contributes significantly to the level of investment opportunities
Stock Market?
10) Investor’s Level of Education affects the vibrance and level of investment
11) The following statements reflect on factors affect the level of investment
opportunities at the Nairobi Stock Exchange. Kindly rank them in order of your
preference. Note that rank [1] should indicate the most important factor rank [2]
the second most important factor and so on up to the last factor [8]
a. Age [ ]
b. Marital Structure [ ]
c. Income Level [ ]
d. Level of Education [ ]
e. Political Climate [ ]
f. Alternative Sources of Finances [ ]
g. Government Policy [ ]
h. External Investors [ ]
44
SECTION C. UNSTRUCTURED QUESTIONNAIRE
4) What do you think are the problems facing investors at the NSE?
……………………….……………………………………………………………………...
……………………….……………………………………………………………………...
……………………….……………………………………………………………………...
……………………….……………………………………………………………………...
7) Give any other comments that you would like to say in relation to the investment
environment at the NSE?
……………………….……………………………………………………………………...
……………………….……………………………………………………………………...
……………………….……………………………………………………………………...
……………………….……………………………………………………………………...
45
Bibliography
46