Methodist Project (Chapter 1 - 5) - David Mbugua (Kenya)

DETERMINANTS OF INVESTMENT OPPORTUNITIES IN AN ECONOMIES STOCK

EXCHANGE MARKET:A Case Study of the Nairobi Stock Exchange

ByMbugua, David Waruingi

Admin No: BUSS - 1 - 587 - 06

A Research project report submitted to The Kenya Methodist University in partial fulfillment of the requirement for the award of a Bachelors Degree

in Business Administration

August, 2007

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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.

Sign: _____________________________________ Date: _____________________ Mbugua, David Waruingi – BUSS-1-587-06

This research project proposal has been submitted for examination with my approval as the supervisor.

Sign: _______________________________________ Date: _____________________ A. M. Muchai

The Kenya Methodist UniversityDepartment of Business Administration

P.O. Box 45240-00100Nairobi, Kenya

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DEDICATION

This project is dedicated to my parents and my fiancée for all their support and encouragement towards making this research project a success.

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ACKNOWLEDGEMENT

First and foremost, I acknowledge God for giving me this opportunity to live to see the

completion of my project.

I also acknowledge the tireless effort of my supervisor Mr. Muchai ho instructed me

and directed me in writing this paper.

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.

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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

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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.

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TABLE OF CONTENTS

Page

TITLE PAGE iDECLARATION iiDEDICATION iiiACKNOWLEDGEMENT ivABSTRACT vTABLE OF CONTENT viiLIST OF TABLES ix

CHAPTER ONEINTRODUCTION1.1 Research Background 11.2 Research Problem Statement 21.3 Research Questions 21.4 Research Objectives 31.5 Importance of Study 31.6 Research Scope 31.7 Definition of Key Terms 4

CHAPTER TWOLITERATURE REVIEW2.1 Introduction 52.2 Theoretical Orientation 5

2.2.1 Theoretical Framework 82.3 Empirical Review 8

2.3.1 Research Gaps 102.4 Conceptualization 10

2.4.1 Conceptual Framework 112.5 Operationalization 11

2.5.1 Operational Framework 12

CHAPTER THREERESEARCH METHODOLOGY3.1 Introduction 133.2 Research Design 133.3 Study Population 133.4 Sampling Design 14

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3.4.1 Sampling Method and Technique 143.4.2 Sampling Procedure 14

3.5 Data Collection 153.5.1 Data Collection Method and Technique 153.5.2 Data Collection Procedure 15

3.6 Analysis and Reporting 153.7 Limitation of the Study 163.8 Ethical Issue 16

CHAPTER FOURDATA INTERPRETATION, PRESENTATION AND ANALYSIS4.1 Introduction 174.2 Quantitative Analysis 174.3 Qualitative Analysis 23

CHAPTER FIVESUMMARY OF FINDINGS, CONCLUSIONS & RECOMMENDATIONS5.1 Introduction 285.2 Summary of Findings 285.3 Conclusion 295.4 Recommendations 295.5 Suggestions for further research 30

Appendix Appendix 1 Budget 31Appendix 2 Time Schedule 31Appendix 2 Questionnaires 32

Bibliography 37

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LIST OF TABLES

Fig. 2.1 Theoretical Framework 8Fig. 2.2 Conceptualization Framework 11Fig. 2.3 Operationalization Framework 12Fig. 3.1 Target Population 13Fig. 3.2 Sampling Method 14Fig. 4.1 Gender Respondence 17Fig. 4.2 Respondents Level of Education 18Fig. 4.3 Occupation of Respondents 19Fig. 4.4 Age of the Respondents 19Fig. 4.5 Effects of Price of Listed Securities 20Fig. 4.6 Alternative Sources of Finance 20Fig. 4.7 Effect of the Political Climate 21Fig. 4.8 Intensity of External Investors 22Fig. 4.9 Effects of Culture, Attitude and Skills 22

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CHAPTER ONE

INTRODUCTION

1.1 Research Background

Investment is the employment of funds with the aim of achieving additional income or

growth in value and Investment Opportunities are the chances available to investors to

employ their funds with the aim of growth the funds or adding value to the capital.

Stock Exchange is a market that deals in the exchange of securities issued by publicly quoted

companies and the Government. The major role that the stock exchange has played, and

continues to play in many economies is that it promotes a culture of thrift, or saving. The

very fact that institutions exist where savers can safely invest their money and in addition

earn a return, is an incentive to people to consume less and save more.

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

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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.

1.2 Research Problem Statement

In Kenya today, it has been observed that the key hindrance to investment opportunities are

more factors that relate to politics, government, investment avenues, environmental, risks,

lack of investment culture, inadequate investment avenues among others. (Jimna Mbaru

2002). Despite the desire of the country’s commitment, over 80% of the investors are

foreigners while locals make up to 20%. Kenya has 750 investors out of which 500 are

foreign owned and 250 owned by Kenyans. (Manu Chandaria 2001). This study investigated

on the determinants of these occurrence and suggestions of improving these impediments to

viable investment.

1.3 Research Questions

In order to answer the above stated research purpose, this study sought to answer the

following research questions: -

1. Are the investment opportunities at the Stock Market adequate?

2. What are the determinants of investment opportunities at the NSE?

3. What should be done to improve the investment opportunities at the NSE?

4. What effects are derived from an increase in investment opportunities at the NSE?

5. To what extent does investment policy, cultural attitude or skills affect investment

opportunities?

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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.

1. To find out the determinants of investment opportunities at the NSE.

2. To find out what can be done to improve the investment opportunities at the NSE.

3. To find out the effects derived from an increase in investment opportunities at the NSE.

4. To find out the extent that investment policies, culture & attitudes or skills affect

investment opportunities at the NSE.

1.5 Importance of the Study

Kenya is noted to be among the weak economies globally that needs to jump-start in

investment. Encouraging both internal and external investors can be one of the strategies that

can be used to build the economy.

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.

1.6 Research Scope

The study covered a variety of selected samples from the convenient sample of common man,

NSE employees, investors, subject’s experts and investment companies. Questionnaires were

used to collect the required information which was used to analyze both qualitatively and

quantitatively.

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.

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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.

1.7.2 Investment Opportunities

According to Aradhani Singh, 1990, Investment opportunities are the avenues in which an

investor can inject capital with the expectation to yield some gain or return over a given

period of time.

1.7.3 Stock Exchange

According to the Nairobi Stock Exchange Handbook, 2005, the Stock Exchange is a market

that deals in the exchange of securities issued by publicly quoted companies and the

Government

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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

2.2 Theoretical Orientation

This section focused on contributions various people made in the past towards the study of

investment and investment opportunities. The researcher evaluated their theories and tried to

understand how they have been instrumental in the field of study.

2.2.1 Common man’s concept of investment Preeti Singh (1990)

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,

benefits or the appreciation of the value of their principle Capital.

2.2.2. Economist Concept of Investment Jordan & Singh (1990)

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

construction, new procedures of durable equipment such as plant and equipment.

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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.

(Aradhani Singh) (1990)

2.2.4. Theory of investment popularized by Jorgensen, 1967

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.

2.2.5. According to Little and Minecess, investment attributes in an economy

The following are the attributes for evaluating an investment avenue: -

Rate of Return

Return simply means a reward from an investment. Rate of return therefore is the total annual

income and capital gain as percentage of investment. This is expressed as:

Rate of return = Annual Income + (Ending Price - Beginning Price)

Beginning Price

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In general, the rate of return of a security is ascertained or the basis of what the investors get

out of investing their funds in the security.

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

free or those which are less risky.

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

assets and securities which provide high marketability.

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.

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Convenience

This refers to the case with which the investment can be made and looked after. Convenience

determines investment opportunities in that investors will be interested in investing in an

economy that is convenient from them.

Fig. 2.1 Theoretical Framework

Investment Policy

Political Climate Investment

Sources of Finance Opportunities

Economic Factors at the NSE

Investor Culture, Attitude & Awareness

INDEPENDENT VARIABLES DEPENDANT VARIABLES

(Source: Author 2007)

2.3. Empirical Review

Although various scholars have mentioned the determinants of investment opportunities as

volume of output, cost of capital interest rates amongst others, they have not mentioned other

important determinants such as political factors, investment risks, economic factors,

government policies, investment attitude, culture and awareness.

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

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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: -

The neo-classical theory of investment popularized by Torgensen (1967).

“That all level of investment depends on the volume of output and the user cost of capital.

The user cost of capital in turn depends on the real interest rate, the price of capital goods and

the rate of physical depreciation. An investment equation results from the time gap is caused

by the time lag between the decision to acquire assets and actual delivery.”

James Tobin (1969) proposed the marginal of investment model that is identically referred to

as Tobin’s Marginal Q investment model. According to Tobin, whether firms will increase or

reduce to the installation of additional capital and how much it costs to replace the extra

capital.

Q = Market value of firms

Replacement cost of capital

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

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capacity and positively to the availability of their funds for investment which is represented

by infrastructure investment.

2.3.1 Research Gaps

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: -

2.4.1 Investment Policy

This is a documented statement which provides rules and regulations governing investment

activities at the Nairobi Stock Exchange.

2.4.2 Political Factors

These include the laws which operate in a big environment (NSE). It determines the

investment opportunities in that when there is political instability like civil war, wrangles

within the government in power, investment is discouraged in the economy and vice versa.

2.4.3 Sources of Finance

With the liberalization of financial markets and subsequent demand of specialized financial

securities, the need to develop alternative sources of finance has been more pronounced. With

alternative sources of funds like the introduction of Constituency Development Funds by the

government, investment avenues are realized due to accessible fund in the economy.

2.4.4 Economic Factors

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

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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

economy hence making a decision on whether to invest or not.

2.4.5 Investment Culture, Attitude and Awareness

Investment culture and attitudes are the ways of carrying out investment held by the nationals

and potential investors in the market. This variable investigates on the culture of Kenyans,

their attitude and investment awareness in relation to undertaking investment avenues.

Fig 2.2 Conceptualization Framework

Investment Policy

Political Climate Investment

Sources of Finance Opportunities

Economic Factors at the NSE

Investor Culture, Attitude & Awareness

Independent Variables Dependant Variables


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.

2.5.1 Government Bills / Policies

With favorable bills and policies, investors will get encouraged to invest in the country since

they are assured that they have government support which is already discussed and

documented by parliament.

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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.

2.5.3 CDF Funds / Affordable Capital

The government efforts towards distribution of wealth and eradication of poverty have

brought about the introduction of Constituent Development Fund which is meant to empower

people at the constituent level. This has the potential of opening avenues of investment.

2.5.4 Exchange Rates, Inflation

With the strengthening of the exchange rates and the stability of the economy, investment

opportunities are arising due to attractive returns being realized by the investor.

2.5.5 Training Seminars & Advertising

The Nairobi Stock Exchange has ventured into training and sensitizing investors on the

benefits of investing in the stock market thus listed companies have a good opportunity to

seek funding through the stock market hence investment opportunities for investors are

increased.

Fig 2.3 Operationalization Framework

Investment Policy

Investment Political Climate

Opportunities Sources of Finance

at the NSE Economic Factors

Investor Culture, Attitude

& Awareness

Variable Parameter Statistics


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Government Bills / Policies

Civil Wars, democracy

CDF, Affordable Capital

Exchange Rates, Inflation

Training Seminars, Advertisement

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.

3.2 Research Design

Claire (1976) defines a research design as the specification of methods and procedures for

acquiring the information needed. The main type of research design which was used was

descriptive. Descriptive research refers to a set of methods and procedures that describe

variables. Descriptive studies portray these variables by answering who, what, why and how

questions. Descriptive research was adopted in this study alongside the use of convenient

samples of the variables.

3.3 Research Population

Population in research refers to all classes of people, organization or institutions who are

relevant to the requirement of a given research study.

The target population of interest during the study comprised of all those who play a key role

at the Nairobi Stock Exchange who includes investors (institutional / individual), NSE

Employees, Business men, financial experts i.e. scholars and common man.

FIG 3.1 TARGET POPULATIONS

Population categories Population size Percentage of population (%) C. % of population

NSE Employees 10 25 25

Businessmen 10 25 50

Financial Experts 10 25 75

Common man 10 25 100

Total Population 40 100 100


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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.

3.4.1 Sampling Methods and Techniques

The methods of analysis used were both qualitative and quantitative.

3.4.2 Sampling Procedure

The researcher used both primary and secondary data from the investors found at the trading

floor during trading hours, and the Nairobi Stock Exchange public library. The library has

information readily available and all the researcher did was to get permission from The airobi

Stock Exchange allowing him to visit their library and study their records. It was not difficult

for the researcher to get this permission from the Stock Exchange since he worked at there in

the past and he knew who to consult for such access.

FIG 3.1 SAMPLING METHODS

Population Categories Population Size Sample Unit Percentage (%)

NSE employees 20 5 40

Investors 20 20 40

Stock Brokers 10 5 20

Total Population 50 30 100


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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.

3.5.1 Data Collection Method and Techniques

The researcher used questionnaires and this method consisted of making a list of questions

relating to the field of inquiries and providing space for the answers to be filled by the

respondents. And as for observation method, the researcher examined the behaviour's,

activities and comments on the subject in order to study their characteristics. It did not

involve direct communication between the observer and the respomdent.

3.5.2 Data Collection Procedure

The researcher sought the necessary authority from the Nairobi Stock Exchange to conduct

the research. The researcher made telephone calls to book appointments to visit the Nairobi

Stock Exchange library, and at the same time also to visit the other respective respondent's

i.e. stock brokers etc.

3.6 Analysis and Reporting

The type of data collected was both qualitative and quantitative. The researcher planned in

such a way that the resulting data was amendable to treatment by the available established

techniques. Descriptive statistics was used in the analysis of data. This included the use of

tables. The feedback that was obtained from the respondents who fill out the questionnaires

was used to gather data. The researcher examined the data and coded it for the purpose of

organizing for analysis. The data analysis was put in form of frequency tables and the

percentages shown.

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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.

3.8 Ethical Issues

The researcher gave a written declaration to assure the respondents of the confidentiality and

that the information given was to be used for purposes of learning and was to be treated very

confidentially. A description of the aims of the study, information about procedures and what

was expected of the respondent, account of confidentiality of information given to the

researcher, what will be done with the data, the right to withdraw from the study at any time

and name and contact of person or organization the participant can lodge a complain with.

3.9 Expected Outcomes

The researcher was expected to come up with a comprehensive research document detailing

the determinants of investment opportunities at the stock exchange market. With this

document, the researcher will share his opinion as far as the research topic presented is

concerned.

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CHAPTER FOUR

DATA INTERPRETATION, PRESENTATION AND

ANALYSIS

4.1 Introduction

The chapter represents the research findings from questionnaires completed by the

stakeholders at the Nairobi Stock Exchange. These stakeholders being Nairobi Stock

Exchange Employees, Institutional investors, Financial Experts, and local investors. The

findings are presented mainly in the form of tables and in percentages of descriptive

frequencies.

4.2 Quantitative Analysis

The researcher collected data by use of questionnaires since it was a quick method of

collecting data and it was the primary source of data collection. The researcher also used

secondary method of data collection which is got from journals, magazines, reports, libraries

which was used to enrich the analysis of the study. The data was collected from the NSE

stakeholder and was done by the researcher.

The researcher went to the field and distributed the questionnaires among all the stakeholders

and came up with a concrete analysis of the response from the questionnaires. The data was

interpreted by use of tables which was to give the actual response from the respondents.

4.2.1 Respondents Gender Analysis

The study sought out the respondents gender and the below were the respondents who

answered the questionnaires as shown in the table 4.1.

Table 4.1: Gender respondence

Category Frequency Percentage (%) C. Percentage (%)

Male 28 70 70

Female 12 30 100

Total 40 100 100

Source: Author 2007

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The study mainly targeted 28 male and 12 female which was a total of 40 students at the

Stock Exchange who answered the questionnaires. 70 percent of the respondents were male

and 30 percent were female which made a total of 100 percent.

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


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.

4.2.3 Occupation of respondents in regards of work experience

The study sought to find out the occupation of respondents in regards of work experience.

Among the respondents who responded to the questionnaire, many of the stakeholders

analyzed were shown in the table below.

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Table 4.3: Showing the occupation of respondents in regards to work experience


NSE Employee 4 10 10

Business men 8 20 30

Financial Experts 8 20 50

Local Investor 20 50 100

Total 40 100 100


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.

4.2.4 Distribution of respondent age

The study sought to know the respondent age distribution from the questionnaires given as

shown below.

Table 4.4: Showing the age of the respondents


18 – 20 3 7.5 7.5

21 – 30 8 20 27.5

31 – 40 20 50 77.5

41 and above 9 22.5 100

Total 40 100 100


All the respondents in the study carried out were above eighteen years of age. 7.5 percent of

the respondents lay in the age of 18 – 20 years, 20 percent were in the bracket of 21 – 30

years, and 50 percent were in the bracket of 31 – 40 years while 22.5 percent were in the

bracket of 40 and above.

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

Good

Fair

Poor

Very poor

2

8

16

10

4

5

20

40

25

10

5

25

65

90

100

Total 40 100 100


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.

4.2.6 Sources of Finance at the Stock Market?

The study sought to know the avilability of alternative sources of finance at the stock market

and the response is shown in the table below. Therefore the analysis will look into the various

category of study as shown below.

Table 4.6 Availability of alternative Sources of Finance at the Stock Market

Percentage Availability of

Sources of Finance

Frequency Percentage (%) C.Percentage (%)

High

Low

Moderate

Not known

10

26

0

4

25

65

0

10

25

90

90

100

Total 40 100 100


It shows that 25% of the respondents answered that there is availability of Sources of Finance

to cater for investment of securities listed at the NSE, 65% stated that the sources of Finance

29

available to investors for investment purposes at the NSE is notably low while no one thought

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.

4.2.7 Effect of the political climate on investments?

The study sought to find out whether the political climate in kenya affected investment

opportunities at the stock market. The respondent’s response to the questionnaires as shown

below.

Table 4.7 Effect of the political climate on investments

Effect Frequency Percentage (%) C.Percentage (%)

Strongly

Fairly

Moderately

Does not affect

Cant say

32

4

2

0

2

80

10

5

0

5

80

90

95

95

100

Total 40 100 100


80% of the respondents answered that political climate affects investments at the NSE. 10%.

None suggested that political climate doesn’t affect investments of the NSE. 5% suggested

that the political climate affects moderately and another 5% could not tell. From the above

survey, the researcher concluded that politics in every environment affects investments

strongly

4.2.8 Intensity of external investors at the NSE?

The study sought to find out external investors play a role in attracting investment

opportunities at the stock matrket. The respondent’s response to the questionnaires as shown

below.

30

Table 4.8 Intensity of External Investors at the NSE

Percentage of External

Investors

Frequency Percentage (%) C.Percentage (%)

High

Low

Medium

Not known

26

0

10

4

65

0

25

10

65

65

90

100

Total 40 100 100


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.

4.2.9 Effects of Culture, Attitude and Skills at the NSE

The study sought to find out whether different culture, attitude and skills contributed to the

avilability of investment opportunities at the stock maret. The analysis is shown in the table

below.

Table 4.9 Effects of Culture, Attitude and Skills at the NSE

Extents of Effects Frequency Percentage (%) C.Percentage (%)

Strongly

Fairly

Moderately

Does not Affect

Could not Say

16

20

2

0

2

40

50

5

0

5

40

90

95

0

100

Total 40 100 100


40% of the respondents answered that culture, attitude and skills affect investment at the NSE

, 50% said it was fair, 5% answered it was moderate. None of the respondents indicated that

it does not affect and 5% could not tell if it affects. From the feedback the respondents gave,

the researcher concluded that culture, attitude and skills affect the investment at the NSE.

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

32

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.

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.

4.3.2 Financial Experts

From the research done, this groups also enjoy their occupation giving reasons that it offers

them an opportunity to participate in the economic portfolios existing in the economy. They

sighted that risk factors such as occurrence of natural calamities, price fluctuates and

insecurity matters do reduce the level of investment opportunities if they prove imminent to

occur. They further supported the encouragement of foreign investors to Kenya giving

reasons that they have for a huge capital outlay thus they can invest in the diverse investment

avenues existing. The government too earns revenues in form of corporate tax from foreign

entities. They incorporate companies that produce products that could have been imported at

a high cost (loosing foreign exchange) and also they exploit the existing investment

potentials.

They also argued that government policy affects investment performance at the NSE giving

reasons such as government deliberate policy on import control help boost domestic industry.

Taxation policy on corporate bodies frustrates investors if exorbitant and the government

control on lending rates if favorable.They also answered that they do not know the duration in

which the NSE and Kenya economy will pick stating that to jump start the economy required

the harmonization of factors that favor and attract investors’ vis-à-vis, political stability,

security, government policy e.t.c. The paramount is the prevalence of the government

political will which is enshrined in the existence of good governance which is uncertain

whether the government will uphold to it. Finally, it’s not clear/certain whether the donor

funding will continuously flow into the economy.

They gave determinants of investment opportunities at the NSE as the prevailing political

climate, security level, economic conditions, government policy, risks involved, level of

infrastructure development, investment avenues existing and people culture attitude and skills

development. They give reasons on how economic factors affect investment opportunities at

33

the NSE as low income levels amongst the locals. This does not allow for flourishing of the

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.

4.3.3 Local investors

According to the research, most of the local investors enjoy their occupations since it’s their

field of delight and source of income. They have supported that the level of investment

opportunities will improve since the government has put effort to enhance investors’

confidence which affects investment performance in that they may weaken the performance

of investment. If the occurrence and frequency of the risks are limited, the performance is

boosted and vice versa. They supported that foreigners investors should be encouraged since

they bring new technology and capital. They too supported that government policy affects

investment opportunities in that ineffective government policies amount to negative

performance and vice versa. On answering the question about the duration that the NSE will

take to pick up, they gave reason that it is dependent on factors such as global markets,

change of weather/climate among others.

They gave determinants of investment opportunities at the NSE to be government policy,

political environment and risk factors. They further suggested that favorable economic

condition increase investors’ confidence and vice versa. They gave the problems facing

investors in Kenya at the NSE to be poorly enforced government policies, lack of investor

information, bad audit reports from the listed companies, some investors being tied to

34

political systems more than economic systems and conflicts of interest between investors,

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.

4.3.4 Business men

From the research analysis, the businessmen said they enjoy their occupation because it gives

them a challenge as Kenyans to build the economy or increase the gross domestic product

(G.D.P.) they believe that the level of investment opportunities will improve during this

political era because goodwill of the current government to fight corruption is very high.

They supported that risk factor affect investment performance giving an example of inflation,

which affects the stock market. They supported that foreign investors should be encouraged

because they will boost our economy by investing in various existing avenues. They

responded saying that government policy affects investment performance in that good

government policy towards investors enhance good investments and vice versa. They also

argued that the Kenyan economy will take another 5 years to pick up giving reasons that due

to change in political scene, it has made the investors to change their attitude toward

investment at the NSE and Kenya at large to be positive. This has also shown good will to

foreign counties thus giving aid to support the economy. They gave determinants of

investment opportunities to be government policy, economic conditions and investment

avenues existing, culture, attitude and skills towards investment. They said economic factors

such as interest rates, exchange rates, inflation and level of income affects investment in that

when they are favorable, many investors will invest and vice versa.

They gave the problems facing Kenyan investors to be lack of investor confidence, lack of

investor information, doctored audit reports given by the companies listed at the NSE,

unfavorable economic conditions, lack of information, illiteracy level i.e. to interpret the

35

financial reports of a company, among others. They said that the above problems can be

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.

5.2 Summary of Findings

The following were the findings of the research study clearly established according to the set

objectives. The study focused on understanding the facts that influence choice of mobile

phones among different individuals. From the findings of the research objectives the

following were found out;

5.2.1 Determinants of investment opportunities at the Stock Market

The study established that investment opportunities themselves are what are known as

investment in an economy. It further established that other determinants of investment

opportunities in an economy are existence of market opportunities. Government policy,

favorable political climate, infrastructure, development, availability of financial services,

human resources, socio-economic indicators, innovation, entrepreneurs’ spirit among others.

5.2.2 Extent to which political climate affects investment opportunities

The study established that 80% of the respondents were of the view that it highly affects the

level of investment opportunities at the market and pertains to the government’s reputation in

attracting the investors and investment legislation policies passed by the parliament.

5.2.3 Effects of economic factors in determining the level of investment

opportunities at the NSE

the study established that, factors such as G.D.P. which is directly proportional to the level of

investment at the NSE. A period of higher economic growth there were high levels of

investment activities in the country e.g. in 1984. Economic Survey 1999) If higher level of

income also results in high capital formulation which comes as a result of a higher level of

investment variables of purchasing power, interest rate and foreign exchange also affects the

investment opportunities at the market.

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.

5.5 Suggestions for further research

This study has served as a foundation for further research on the investment opportunities,

performance productivity, culture, policies, etc. The study also suggests that mutual funds

expansion and listing at the Nairobi Stock Exchange, Portfolio Management at the NSE and

emerging markets, challenges facing investors in the kenyan stock market and finally but not

the least, ways and means of improving investment in an economy are viable areas for further

study.

39

Appendices I - Time Schedule

Description April May June July August

1 Proposal Defense <X>

2 Questionnaire Design <X>

3 Presetting Questionnaires <X>

4 Appointments <X>

5 Data Collections <X>

6 Data Analysis <X>

7 Report Writing <X>

8 Report Submission <X>

Appendices II - Research Budget

Budget Items Kshs

1 Stationary 1,000.00

2 Typing 1,000.00

3 Fare 2,500.00

4 Printing 2,000.00

5 Data Collections 300.00

6 Total 7,000.00

40

Appendices III - Investment Opprtunities Questionnaire

Introduction Letter

Dear Respondent,

This questionnaire seeks to gather information regarding investment opportunities at the

Nairobi Stock Exchange. Please spare five minutes to respond to this questions. All the

information you provide will be treated with confedence and for academic purposes.

I thank you in advance

Mbugua, David Waruingi

(Student at The Kenya Methodist University)

41

SECTION (A) BACKGROUND INFORMATION (Pleas tick one)

1) What is your Age? Between 18-20 Between 21-30

Between 31-40 Above 41

2) What is your Gender? Male Female

3) Marital Status? Married Single

Other (Specify) …...………………………

4) Occupation? Employed Self Employed

Other (Specify) ……………………………

5) Level of Education? Primary Secondary

Certificate / Diploma Undergraduate Graduate

Other (Specify) …...………………………

6) Level of Income? 0-10,000 10,001-20,000

20,001-30,000 30,001-40,000 40,001-50,000

above 50,000

42

SECTION B. STRUCTURED QUESTIONNAIRE

Please explain the extent of your agreement in the following options

5 - Strongly Agree

4 - Agree

3 - Neutral

2 - Disagree

1 - Strongly Disagree

1) Kenya’s investment opportunity is adequate?

Strongly Agree Agree Neutral Disagree Strongly Disagree5 ( ) 4 ( ) 3 ( ) 2 ( ) 1 ( )

2) Political climate affects investment opportunities at the stockmarket.


3) External investors influence investment opportunities at the stockmarket.


4) Availability of alternative sources of finance affects investment opportunities at

the Nairobi Stock Exchange.


5) Investor’s income influences level of investment opportunities at the Stock

Market?


43

6) Investor’s Age contributes significantly to the level of investment opportunities

at the Stock Market?


7) Investor’s Culture and skill influences level of investment opportunities at the

Stock Market?


8) Affordable price of listed securities at the Stock Market?


9) Easy procedures for listing securities at the Stock Market?


10) Investor’s Level of Education affects the vibrance and level of investment

opportunities at the Stock Market?


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

1) What are the determents of investment opportunities at the NSE?……………………….……………………………………………………………………...……………………….……………………………………………………………………...……………………….……………………………………………………………………...……………………….……………………………………………………………………...

2) How do economic factors affect investment opportunities at the NSE?……………………….……………………………………………………………………...……………………….……………………………………………………………………...……………………….……………………………………………………………………...……………………….……………………………………………………………………...

3) How do investment avenues/instruments affect the level of investment opportunities activities at the NSE?

……………………….……………………………………………………………………...……………………….……………………………………………………………………...……………………….……………………………………………………………………...……………………….……………………………………………………………………...

4) What do you think are the problems facing investors at the NSE?……………………….……………………………………………………………………...……………………….……………………………………………………………………...……………………….……………………………………………………………………...……………………….……………………………………………………………………...

5) How can the above problems be solved?……………………….……………………………………………………………………...……………………….……………………………………………………………………...……………………….……………………………………………………………………...……………………….……………………………………………………………………...

6) What do you think should be done to improve investment opportunities 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

Anling Fredride, 1984, Investment Management, 3rd Edition,

Aradhani, V.A., 1993,Investment and Securities Market in India,

Bhalla V.K., 1983, Investment Management,

Curley, Anthony J., 1979, Investment Analysis and Management,

Nairobi Stock Exchange Handbook, 2005

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Documents

Methodist Project (Chapter 1 - 5) - David Mbugua (Kenya)