KENYA COUNTRY REPORT. Prince Muraguri, Simón Ortiz and David Soler

Transcription

1 KENYA COUNTRY REPORT Prince Muraguri, Simón Ortiz and David Soler MARCH 218

2 KENYA COUNTRY REPORT 218 The Kenya Country Report is a publication by the Navarra Center for International Development. The report is a collection of the major economic, social and political indicators describing the Kenyan economy, obtained from reliable sources such as the World Bank, The International Monetary Fund, the Central Bank of Kenya and others. In-depth analysis is conducted by the researchers at the Center to provide a holistic understanding of the opportunities and emerging trends in the highlighted indicators.

3 TABLE OF CONTENTS 1. KENYA COUNTRY OVERVIEW ECONOMY OVERVIEW OF KENYA KENYA GROSS DOMESTIC PRODUCT Kenya GDP Analysis Outlook of Kenya s Economic Performance in POPULATION IN KENYA Background of Kenya s Population Analysis of Population trends in Kenya Age Structure Gender Structure in Kenya Work and Employment KENYAN TRADE AND BALANCE OF PAYMENTS Background of Kenya s Trade Kenyan Exports Kenya Imports Balance of Trade International Liquidity Kenya Trade Outlook GOVERNMENT FINANCE IN KENYA Background of Government Finance Government Revenue Government Expenditure Public Debt FINANCIAL MARKETS Background of Kenyan Markets Capital Markets Money Markets Currency Market MOBILE FINANCIAL SERVICES IN KENYA Background of Mobile Financial Services in Kenya Brief History on Commercial Banks in Kenya Mobile Financial Services Mobile Money... 47

4 8.6 Agency Banking Mobile Banking EDUCATION IN KENYA General Statements Attendance and literacy Role of the government in Education CORRUPTION Analysis of Corruption in Kenya STATE OF DEMOCRACY IN KENYA Analysis of Democracy Indicators Impact of Ethnicity on Elections in Kenya FREEDOM OF EXPRESSION AND CIVIL LIBERTIES Extra-Judicial Killings Security Cost Terrorism BIBLIOGRAPHY... 66

5 1. KENYA COUNTRY OVERVIEW Kenya, officially the Republic of Kenya, is a country in Africa and a founding member of the East African Community (EAC). Kenya s capital and largest city is Nairobi. Kenya s territory lies on the equator and overlies the East African Rift covering a diverse and expansive terrain that extends roughly from Lake Victoria and further south-east to the Indian Ocean. It is bordered by Tanzania to the south and southwest, Uganda to the west, South-Sudan to the north-west, Ethiopia to the north and Somalia to the north-east. Kenya covers 581,39km 2 (224,445 sq mi), and had a population of approximately 48 million people in January 217. The economy of Kenya is the largest by GDP in East and Central Africa. According to the 217 World Bank GDP rankings, Kenya is the ninth largest economy in Africa and the fourth in Sub-Saharan Africa (World Bank Group, 217). The capital, Nairobi, is a regional commercial hub. Agriculture is a major employer in Kenya; the country traditionally exports tea and coffee and has more recently begun to export fresh flowers to Europe. The service industry is also a major economic driver. Additionally, Kenya is a member of the East African Community trade bloc. After attaining its independence in 1963, Kenya promoted rapid economic growth through public investment, encouragement of smallholder agricultural production, and incentives for private often foreign industrial investment. Gross domestic product (GDP) grew at an annual average of 6.6% from 1963 to 1973 and 7.2% during the 197s. Agricultural production grew by 4.7% annually during the same period, stimulated by redistributing estates, diffusing new crop strains, and opening new areas to cultivation. Between 1974 and 199, however, Kenya's economic performance declined. GSP growth averaged 4.2% per year in the 198s and 2.2% a year in the 199s (Kimenyi, Njuguna, & Mwega, 216). Kenya is a world leader in mobile money 1 and has made significant progress in financial inclusion since 27. Increasingly, Kenya has become a center of innovation especially in mobile phone-based financial services, whose growth and employment opportunities have ignited economic growth in the economy. Kenya has also been an important player in the horticulture export market. The country has a youthful population and is well positioned to reap the population dividend. In addition, the 1 Kenya is home to the world s leading mobile money platform M-Pesa.

6 country discovered oil in 212 in the Northern Turkana region and it is likely to be an oil exporter in the near future and will join Uganda and South Sudan. The Kenyan economy serves five landlocked countries that are relatively resource-rich (Ethiopia, South Sudan, Uganda, Rwanda, and Burundi). Therefore, Kenya s comparative advantage lies in improving its port facilities, road and railway networks, and transit airports as trade routes for these five countries. Even more significant has been the strengthening of the institutions of governance through the 21 enactment of a progressive constitution that radically altered the previous dominance of the executive. At the core of the new constitutional dispensation is devolution of decision-making powers to 47 county governments. All these factors augur well for continued strong economic performance. However, the country s future growth faces several pitfalls even with the above set of opportunities. Some of the risk factors include: first, the emerging terrorist attacks by the Al-Shaabab group based in Somalia which has adversely impacted the country s economy; second and increasingly, although the country has recorded high rates of economic growth, joblessness especially among the youth remains very high and a likely source of instability; and third, poverty and inequality both at individual and regional levels remain high and pose threats not only to sustained growth but also to stability. In addition, internal institutional weaknesses and governance challenges threaten the gains of the new constitution. These and other risk factors are of concern to the country s ability to sustain growth and retain its position as a dominant economy. More recently, there have been growing concerns over the ballooning public debt and an interest rate cap that has slowed down private sector credit growth. This report seeks to analyze the main economic indicators of the Kenyan economy, to provide a holistic understanding of the opportunities and emerging trends in various economic sectors.

7 2. ECONOMY OVERVIEW OF KENYA Kenya s economy is market-based with a few state-owned infrastructure enterprises and maintains a liberalized external trade system. The country is generally perceived as Eastern and central Africa's hub for Financial, Communication and Transportation services. Major industries include: agriculture, forestry and fishing, mining and minerals, industrial manufacturing, energy, tourism and financial services. As of 216 estimates, Kenya had a GDP of $7.53 billion. The GDP value of Kenya represents.11 percent of the world economy, making it the 68 th largest economy in the world (World Bank Group, 217). Per capita GDP was estimated at $1, in the 216. The government of Kenya is generally investment friendly and has enacted several regulatory reforms to simplify both foreign and local investment, including the creation of an export processing zone. The export processing zone has grown rapidly through input of foreign direct investment. An increasingly significant portion of Kenya's foreign inflows are remittances by non-resident Kenyans who work in the US, Middle East, Europe and Asia. Compared to its neighbours, Kenya has well-developed social and physical infrastructure.. Kenya s real GDP growth has averaged over 5% for the last eight years. Since 214, Kenya has been ranked as a lower middle income country because its per capita GDP crossed a World Bank threshold. Kenya has a growing entrepreneurial middle class and steady growth. Agriculture remains the backbone of the Kenyan economy, contributing one third of GDP. About 75% of Kenya s population of roughly 44.2 million work at least part time in the agricultural sector, including livestock and pastoral activities. Over 75% of agricultural output is from small-scale, rain-fed farming or livestock production. Inadequate infrastructure and weak governance continue to hamper Kenya s efforts to improve its annual growth to the 8%-1% range so that it can meaningfully address poverty and unemployment. The Kenyatta administration has been successful in courting external investment for infrastructure development. International financial institutions and donors remain important to Kenya s economic growth and development, but Kenya has also successfully raised capital in the global bond market. Kenya issued its first sovereign bond offering in mid-214, and recently raised an additional $2 billion in February 218 Eurobond issue. Nairobi contracted a Chinese company to

8 construct a new Standard Gauge Railway (SGR) connecting Mombasa and Nairobi, which was completed in May 217. The Central Bank of Kenya follows an inflation targeting monetary policy regime, targeting an inflation range of 5% +/- 2.5%.Inflation pressures and sharp currency depreciation peaked in early 212 but have since abated following low global food and fuel prices and monetary innovations by the Central Bank. Drought-like conditions in parts of the country pushed inflation in 217 above 8%. Chronic budget deficits, including a shortage of funds in mid-215, hampered the government s ability to implement proposed development programs, but the economy is back in balance with many indicators, including foreign exchange reserves, interest rates and FDI moving in the right direction. Underlying weaknesses were imposed in the banking sector in 216 when the government was forced to take over three small and undercapitalized banks. In 216, the government enacted legislation that limits interest rates that banks can charge on loans and set a rate that banks must pay their depositors. This measure led to a sharp shrinkage of credit in the economy. Tourism holds a significant place in Kenya s economy. A spate of terrorist attacks by the Somalia-based group al-shabaab reduced international tourism earnings after their deadly 213 attack on Nairobi s Westgate mall, which killed 67 people, but the sector is now recovering. In 216, tourist arrivals grew by 17% while revenues from tourism increased by 37%.

9 3. KENYA GROSS DOMESTIC PRODUCT 3.1 Kenya GDP Analysis Since attaining its independence in 1963, Kenya s economic growth and expansion of the Gross Domestic Product have experienced phases of growth and contraction based on a number of factors. Kenya accomplished good economic performance in the 196s and early 197s but contracted in the 198s and 199s due to limited economic transformation. The economy expanded from 2 to 216 following a new political regime, adoption of a new constitution and strengthening of institutions. Even so, a number of factors have occasionally disrupted economic growth such as drought, postelection violence of 27 and low commodity prices. The Gross Domestic Product (GDP) in Kenya was worth 7.53 billion US dollars in 216. This GDP value of Kenya represents.11 percent of the world economy (World Bank Group, 217). GDP in Kenya averaged USD Billion from 196 until 216, reaching an all-time high of 7.53 USD Billion in 216 and a record low of.79 USD Billion in In the longterm, the Kenya GDP is projected to trend around 82. USD Billion in 22. Figure 1: GDP of Kenya: Source: World Development Indicators 217 Analyzing Kenya s GDP growth rate over the years: In the 196s, growth averaged 5.7 per cent, accelerating in the 197s to 7.2 per cent. It declined in the 198s to 4.2 per

10 cent and in the 199s to 2.2 percent. In the new millennium, the economy has experienced relatively strong economic performance compared to the Sub-Saharan region and the global economy at large. In the period 2-21, GDP growth averaged 4.1 per cent and accelerated to 5.45% from 211 to 217 (World Bank Group, 217). Figure 2: Kenya GDP growth rate ( ) Kenya GDP Growth Rate ( ; projections to 222) GDP Growth Rate (%) Source: World Bank Development Indicators 217 The subdued economic growth of the 198s was mainly due to the global recession, commodity price decline, delayed structural adjustment policies, a political succession in the country, as well as slow moving candidates such as institutional quality and distributional policies (Ndulu, Bates, Chukwuma, O'Connell, & Collier, 28). Kenya s economy experienced sustained recovery and sound economic growth since 2. This growth was consistent with the Africa Rising narrative of a resurgence of economic growth in the region in the new millennium supported by the emergence of strong institutions and increasing demand for political accountability. The rapid growth in Africa has been attributed to a range of factors as discussed by Robertson (213): better government finances and fiscal policies reflected in reduced debt and general government expenditures ratios;

11 booming commodity exports, especially to China, although the region runs a trade deficit with the country increased FDI new discoveries of oil and other minerals increased role of telecoms ease of doing business reforms increased investments in education democratization of the continent Figure 3: Kenya GDP Growth Rate in the recent age: Kenya GDP Growth Rate (2-217) Growth Rate (%) Source: World Bank Development Indicators 217 In 2, the economy recorded an all-time low growth rate of.6 per cent, increasing to 3.8 per cent in 21, but declining to.5 per cent in 22. Following a peaceful change of government in December 22 from the Kenya African National Union (KANU), which had ruled the country since independence, to the National Rainbow Coalition (NARC) under Mwai Kibaki, the growth rate accelerated. The economy expanded steadily from 2.9 per cent in 23 to 5.1 per cent in 24, 5.9 per cent in 25, and 6.3 per cent in 26, to reach a peak of 7.1 per cent in 27, the highest in over two decades and the only episode of five-year growth acceleration in Kenya s independence history (World Bank Group, 214). The sound economic performance was bolstered by the

12 implementation of bold economic and structural reforms under the Economic Recovery Strategy (ERS) and a favourable external environment. The ERS was a five-year blueprint prepared to address Kenya s macroeconomic vulnerabilities and structural weaknesses. The Kibaki government put in place economic policy and governance reforms that enhanced economic performance. Kenya s rankings in the World Bank Country Policy and Institutional Assessment (CPIA), which rates 2 aspect of governance and policies, generally improved in 25-6 (from 3.52 to 3.58); declined in 27-8 /to 3.55 and 3.52 respectively) as a result of the post-election violence, drought, and the global financial crisis; and improved in (from 3.67 to 3.8). It has maintained at 3.8 till 216. Figure 4: Kenya CPIA scores: World Bank CPIA Scores (28-216) CPIA score IDA Borrow ers Average Kenya SSA IDA average Source: World Bank Country and Policy Institutional Assessment 216 Kenya s economic growth declined in 28 as a result of post-election violence, drought and the global finance crisis eroding the achievements of the previous halfdecade. Following counter cyclical demand management policies and favourable weather conditions that improved agricultural performance, growth subsequently picked up to 3.31 per cent in 29 and to 8.41 percent in 21.As a result of a surge in global food and oil prices as well as a drought in the country, growth declined to 6.12 per cent in 211, to 4.45 per cent in 212, 5.74 per cent in 213, and was 5.3 percent in 214.

13 The economy experienced slight recovery in 215 (5.71 per cent) and also in 216 (5.84 per cent) on the backdrop of heavy government spending on infrastructural projects including the Standard Gauge Railway connecting the port city of Mombasa to the capital city of Nairobi. In 217, growth declined to 4.8 per cent. This was mainly due to a prolonged election period during which Kenya had a repeat presidential election. Also hampering economic growth in 217 was weak private sector economic activity following the adoption of legislation by the government in September 216 where the Government of Kenya set the lending and deposit rates to be charged by banks to customers 2. Private sector credit growth in Kenya slowed down to very low levels in 217. Figure 5: Slowdown in private sector credit growth Growth in Private Sector Credit ( ) 3 25 Percentage Growth Q1 214 Q2 214 Q3 214 Q4 214 Q1 215 Q2 215 Q3 215 Q4 215 Q1 216 Q2 216 Q3 216 Q4 216 Q1 217 Q2 217 Q3 217 Q4 217 Period Source: Brookings Institution, obtained from Central Bank of Kenya 2 The Government of Kenya capped the commercial bank lending rates to 4 basis points above the central bank interest rate. Deposit rates were set to 7 per cent of the central bank rate.

14 3.2 Outlook of Kenya s Economic Performance in 218 In 217, Kenya s economic growth was derailed by elevated uncertainty during the prolonged election cycle, a crippling drought that damaged agricultural output, and the government s ongoing cap on lending rates charged by commercial banks. Economic activity expanded again in January 218 against a backdrop of political stability, evidenced by a PMI reading above the 5-point threshold; the private sector returned to growth in December 217 following seven months of contraction. At the same time, the economy s public and external debt stocks have been piling up while revenue flows have declined, eroding debt affordability. Data released by the Central Bank of Kenya shows that both domestic debt and external debt jumped by double-digit figures over the previous year in 217. A deteriorating fiscal position led Moody s to downgrade Kenya s credit rating from B1 to B2 on 13 February 218. The agency views fiscal trends worsening in the near-term, with greater reliance on commercial external debt. However, it assigned a stable outlook, given the economy s relatively diversified structure, strong growth potential and mature financial sector. In 218, the economy is expected to expand more due to increased agricultural output, supported by more favorable weather conditions; an expansion in construction activity for planned infrastructure projects; and an upturn in investment should bump up growth in 218. That said, the government s interest rate cap policy will continue to dent growth. The economy s rising debt levels may subdue growth in the medium term.

15 4. POPULATION IN KENYA 4.1 Background of Kenya s Population Kenya is a multi-ethnic state, inhabited primarily by Bantu and Nilotic populations, with some Cushitic-speaking ethnic minorities in the northern regions of the country. Kenya has a very diverse population that includes most major ethnic, racial and linguistic groups found in Africa. Bantu and Nilotic populations together constitute around 97% of the nation's inhabitants. Swahili and English are official languages. Swahili is compulsory in primary education, and, along with English, serves as the main lingua franca between the various ethnic groups. According to the C.I.A World Factbook profile on Kenya, the main ethnic groups are as follows: Kikuyu 22%, Luhya 14%, Luo 13%, Kalenjin 12%, Kamba 11%, Kisii 6%, Meru 6%, other African 15%, non-african (Asian, European, and Arab) 1%. Since Kenyan independence in 1963, Kenyan politics have been characterized by ethnic tensions and rivalry between the larger groups. This devolved into ethnic violence in the post-election violence. The main religion in Kenya is Christianity, which is practised by 83% of the population. Of the Christians, Protestant are 47.7%, Roman Catholics are 23.4% and Other Christians are 11.9%. Islam religion in Kenya is practiced by 11.2% of the population. 4.2 Analysis of Population trends in Kenya Kenya has experienced dramatic population growth since the mid-2th century as a result of its high birth rate and its declining mortality rate. The last census to be undertaken in Kenya was done in 29, where the population was recorded at 38.6 million. The I.M.F World Economic Outlook 217 database indicates that Kenya s population as of 218 is estimated to be 48.3 million persons, and is expected to grow to persons by 222. Kenya has experienced dramatic population growth since the mid-2th century as a result of its high birth rate and its declining mortality rate. More than 4% of Kenyans are under the age of 15 because of sustained high fertility, early marriage and childbearing. Kenya s persistent rapid population growth strains the labor market, social services, arable land, and natural resources. Although Kenya in 1967 was the first sub-

16 Saharan country to launch a nationwide family planning program, progress in reducing the birth rate has largely stalled since the late 199s, when the government decreased its support for family planning to focus on the HIV epidemic. Government commitment and international technical support spurred Kenyan contraceptive use, decreasing the fertility rate (children per woman) from about 8 in the late 197s to less than 5 children twenty years later, but it has plateaued at just over 3 children today (Central Intelligence Agency, 217). Figure 6: Kenya Population 55 Kenya Population ( ; projections to 222) : 38.5 Million 216: 45.4 Million 222: 53.5 Million Millions Kenya is a source of emigrants and a host country for refugees. In the 196s and 197s, Kenyans pursued higher education in the UK because of colonial ties, but as British immigration rules tightened, the US, the then Soviet Union, and Canada became attractive study destinations. Kenya s stagnant economy and political problems during the 198s and 199s led to an outpouring of Kenyan students and professionals seeking permanent opportunities in the West and southern Africa. Nevertheless, Kenya s relative stability since its independence in 1963 has attracted hundreds of thousands of refugees escaping violent conflicts in neighboring countries; Kenya shelters more than 3, Somali refugees as of April 217.

17 4.3 Age Structure Kenya has a vibrant young population. Approximately 6% of the Kenyan population is under 25 years. This gives the country a great chance to build an educated and civic community, together with having a growing market for manufactured good. The youthful population also provides a wide tax base for the government, although informal employment makes up the largest employment sector, making taxation more difficult. Table 1: Kenya Population Age Structure AGE % of Total MALE FEMALE Population % 9,557,274 9,497, % 4,552,448 4,567, % 8,17,264 7,976, % 856,92 1,9,75 65 years and over 3% 614, ,32 Source: C.I.A World Factbook 217 Figure 7: Population Pyramid in Kenya Source: C.I.A World Factbook 217

18 4.4 Gender Structure in Kenya The gender structure in Kenya is fairly evenly distributed between the male and female population. Data from the World Bank indicates that in 216, there were 24,85,548 males in Kenya, and a fairly equivalent female population of 24,376,19. Figure 8: Gender Structure in Kenya 28,, Gender Distributio in Kenya (Male vs Female): ,, 2,, Male Population Female Persons 16,, 12,, 8,, 4,, Source: World Bank Development Indicators 217 However, there are significant differences in terms of participation in the formal labour force. As with many other African economies, there are more males in the formal employment sector. This was mainly because of lack of access to education and employment opportunities for girls, but since the introduction of free primary education and abolishment of cultural malpractices, the situation has greatly improved. Figure 9: Male and Female Workers in Employment 6 Kenya Wage and Salaried Workers as a percentage of total employment (Male vs Female) 5 4 % of total employment Wage and salaried workers, male (% of male employment) Wage amd Salaried Workers, female (% of female employment) Source: World Bank Development Indicators 217

19 The 216 United Nations human development report indicates that Kenya s HDI was recorded at.555 in 215, placing Kenya 146 th in the world. Kenya s HDI position places it in the medium human countries. Other African countries in this category include Botswana, Gabon, Egypt and Ghana. Figure 1: Kenya Human Development Index Kenya HDI value Source: United Nations Human Development Index Indicators 216 The report states that the Life expectancy at birth in Kenya is 66.2 years. Other major rankings in the 216 report are as follows: Table 2: Inequality Adjusted Human Development Index in Kenya (216) HDI Rank HDI Value Inequality- Adjusted HDI Coefficient of Inequality Inequality in life Expectancy (%) Inequalityadjusted life expectancy Inequality in education Inequalityadjusted education index Inequality in income Inequalityadjusted income index Table 3: Gender-Adjusted Human Development index in Kenya (216) The gender development index of the United Nations report notes the following: Gender Development Index Human Development Index Life Expectancy at Birth Expected years of schooling Mean years of schooling Estimated gross national income per capita Value Value s s s (211 PPP $) Male Female Male Female Male Female Male Female Male Female

20 4.5 Work and Employment The World Bank reports employment to population ratio for ages total % as follows: Figure 11: Kenya Employment to Population Ratio (Ages 15-24) 48 Kenya Employment to Population Ratio ( ) : 38.9% 27: 31.4% 217: 3.29% 4 % of population Source: World Bank Development indicators 217 The CIA World Factbook reports the following indices regarding Kenya s population: Table 4: Kenya Population Summary - C.I.A World Factbook INDEX VALUE DEPENDENY RATIO (215 est.) Total dependency ratio 78.3 Youth dependency ratio 73.7 Elderly Dependency Ratio 4.6 Potential support ratio 21.7 MEDIAN AGE (217est.) Total 19.7 years male 19.6 years female 19.9 years Country comparison to the world 2 POPULATION GROWTH (217 est.) Population growth rate 1.69% Country comparison to the world 63 BIRTH RATE (217 est.) Birth rate 23.9 births / 1, population Country comparison to the world 59 DEATH RATE (217 est.) Death rate 6.7 deaths / 1, population NET MIGRATION RATE (217 est.) Net migration rates -.2 migrants / 1, population

21 5. KENYAN TRADE AND BALANCE OF PAYMENTS 5.1 Background of Kenya s Trade Kenya is the 17th largest export economy in the world and the 76th most complex economy according to the Economic Complexity Index (ECI). Kenya has a relatively well-developed agricultural sector and relies on it for a significant portion of its exports. Kenya is different from most medium to larger African economies in that it has significant intra-african trade and, conversely, while China is growing as an import source, China does not figure as an export destination. Kenya principally relies on agricultural products for its exports, with agriculture contributing approximately 3 percent of the Gross Domestic Product in 217. The agricultural sector faces a number of challenges, one of which is having the Kenyan population tripling over the past 3 years and a large problem of poverty (both urban and rural); another is the severe droughts and flooding in recent years (Sandrey, Mwanza, & Swarts, 215). The main component if Kenya s imports are machinery and equipment primarily sourced from China and the Middle East. In 217, Kenya exported KES B ($5.49B) and imported KES 1,583.29B ($15.8B) resulting in a negative trade balance of KES 1,34.11B ($1.34B). This led to expansion of the trade deficit from KES B in 216 to KSh billion in 217.There was a drop in the export to import ratio from 4.34% in 216 to 34.69% in 217. The terms of trade stood at 78.8% in 216.

22 5.2 Kenyan Exports Kenya s exports to the rest of the world grew on average by 9.2% on a year-to-year basis, from KES billion ($1.3B) in 2 to KES B ($5.49B) in 217. Figure 12: Total Kenyan Exports 6, Kenya Total Exports ( ) 5, 217: KES B ($5.4B) 216: KES B ($5.7B) 215: KES 581.2B ($5.8B) Ksh (Millions) 4, 3, 2, 1, Source: Central Bank of Kenya & Kenya National Bureau of Statistics Kenya s principal exports are agricultural products. In 217, tea contributed 45% of all domestic exports, followed by horticulture which contributed 29.8%. Other export products include coffee and fish, while re-exports to other African countries include cement, chemicals and petroleum. Figure 13: Value of Selected Domestic Exports Source: Central Bank of Kenya & Kenya National Bureau of Statistics

23 Intra-African trade has been the leading destination of the Kenya s exports. The Kenya National Bureau of Statistics 217 Economic Report highlighted that African exports accounted for 4.6 per cent of total exports, with East African Community (EAC) accounting for 21.1, from During the review period, Europe and Asia accounted for 24.5 and 24.3 per cent of the total exports, with European Union (EU) and the Far East accounting for 21. per cent and 15.6 per cent, respectively (Kenya National Bureau of Statistics, 217). Kenya s major regional trading partners are Uganda, Tanzania, Somalia, D.R.C and Egypt. Figure 14: Kenya Exports to Selected African Countries Kenyan Exports to Selected African Countries ( ) 7, 6, 5, 4, Ksh (millions) 3, 2, 1, DRC Ethiopia Egypt Other Rwanda S.Africa Somalia Tanzania Uganda Zambia Zimbabwe Source: Central Bank of Kenya & Kenya National Bureau of Statistics A working paper by the Trade and Law Center (TALAC) reports that recent Africa trade liberalisation initiatives and reforms continue to foster intra-african trade, and this has improved Kenya s exports to the region. However, the report notes that in as much as the results for tariff elimination on intra-african trade are promising, the real news is in confirming that these barriers are not as significant as the various trade-related barriers outside of tariffs (Sandrey, Mwanza, & Swarts, 215). The report emphasizes that over and above the Africa trade liberalisation reforms, the more traditional nontariff barriers to trade such as time in transit costs and reduction in the costs associated with the particular African problem of transit-time delays at customs, terminals and internal land transportation. The Government of Kenya is currently improving trade

24 prospects in Kenya through the construction of two transport corridors the Kenya to Uganda transport corridor and the Kenya, South Sudan and Addis Ababa transport corridor. The major non-regional destinations for Kenya s exports are the member states of the European Union, the United States, and Pakistan. After Uganda, the U.S.A have for a long time been Kenya s main international export markets. However, in 217, Pakistan grew to become Kenya s leading export market. Pakistan mainly imports tea from Kenya, importing million kilogrammes of tea in December 217 alone. Figure 15: Kenya Exports to the Rest of the World Kenyan Exports to The Rest of The World ( ) 6, 5, 4, Ksh (Millions) 3, 2, 1, Belgium France Germany Netherlands Pakistan UK USA Source: Central Bank of Kenya & Kenya National Bureau of Statistics

25 5.3 Kenya Imports Kenya s imports from the rest of the world grew on average by 13.1% on a year-toyear basis, from KES B ($2.5B) in 2 to KES 1,583.28B ($15.83B) in 217. Figure 16: Total Kenyan Imports 1,8, Total imports in Kenya ( ) 1,6, 1,4, 1,2, 217: KES Trillion (USD 15.8 billion) 215: KES Trillion (USD 14.3 billion) 213: KES 1.58 Trillion (USD 15.8 billion) Ksh (Millions) 1,, 8, 6, 4, 2, Source: Central Bank of Kenya Asia accounted for 66.8 per cent of total value of imports in 216 continuing its dominance as the leading source of Kenya s imports. The top 5 Import Partners to Kenya are China, India, the United Arab Emirates, Saudi Arabia, and Japan. Imports from China have continued to grow over the last five years making the country the leading source of Kenya s imports from Kenya s recent surge in imports from China was related to the construction of the Standard Gauge Railway (SGR), which was largely financed by China Exim Bank. Figure 16: Kenya Import Partners Imports from the Rest of the World ( ) 4, 35, 3, 25, Ksh (Millions) 2, 15, 1, 5, Source: Central Bank of Kenya CHINA FRANCE GERMANY INDIA ITALY JAPAN S.AFRICA S.ARABIA U.A.E U.K U.S.A

26 The main products imported to Kenya are non-food industrial supplies. Specifically, machinery and equipment; fuel and minerals and manufactured goods constitute the largest components of Kenya s imports. The major commodities imported from China include wind-powered generators, rails and signaling systems. Petroleum products were the main items imported from the United Arab Emirates and Saudi Arabia. Figure 17: Kenya s Main Import Products 6, Kenya s Main Import Products ( ) 5, 4, Ksh (Millions) 3, 2, 1, Source: Central Bank of Kenya Animal & Vegetable Oils Beverages and Tobacco Chemicals Food and Live animals Fuels and Minerals Inaudible Crude materials Machinery & Equipent Manufactured Goods 5.4 Balance of Trade For a long time, Kenya has sustained a balance of trade deficit. The volume of imports is significantly higher than the volume of exports, leading to a worsening of the exportimport ratio. The trade deficit is exacerbated by a weakening Kenyan Shilling. Figure 18: Imports vs Exports 1,8, Kenya Total Imports vs Total Exports ( ) 1,6, 1,4, Total Exports Total imports 1,2, Ksh (Millions) 1,, 8, 6, 4, 2, Source: Kenya National Bureau of Statistics

27 Figure 19: Balance of Trade Kenya Trade Balance ( ) -2, -4, Ksh (Millions) -6, -8, -1,, 217: KES Billion (USD -1 Billion) 212: KES Billion (USD -8.6 Billion) 27: KES Billion (USD -3.3 Billion) -1,2, Source: Central Bank of Kenya & Kenya National Bureau of Statistics The recent worsening of the trade balance in 217 was on the back of increased food imports due to a drought that posed a major risk to people, livestock and wildlife. Imports increased 2.93 per cent to KES 1,58 billion in November 217 while exports rose a measly 3.37 per cent to KES billion. The widening deficit is piling pressure on the Kenyan shilling against global currencies such as the dollar. The high demand for the dollar to fund imports forces the Central Bank of Kenya to intervene, depleting stock of foreign exchange reserves. Figure 2: Export to Import Ratio

28 Kenya s current account has mostly been in deficit. There had been sustained improvement from 2 to 24 following the establishment of the Mwai Kibaki administration where the country experienced its best record performance of year-onyear GDP growth rate. However, the situation worsened from 25 to 214 as the deficit became more sustained. The government of Kenya is currently implementing job creation reforms to improve the deficit. Figure 21: Kenya Current Account Balance Kenya Current Account Balance ( USD (Billions) Source: IMF World Economic Outlook 218 Figure 22: Current Account as a Percentage of GDP Kenya Current Account % of GDP ( ) : : *: % of GDP Source: IMF World Economic Outlook

29 5.5 International Liquidity The Central Bank of Kenya maintains a reserve position to enable it to hold approximately 4-5 months of import cover. Figure 23: Foreign Exchange Reserves 11,5 Central Bank of Kenya Usabe Foreign Exchange Reserves ( ) 11, 1,5 USD (millions) 1, 9,5 9, 8,5 I II III IV I II III IV I II III IV Source: Central Bank of Kenya Figure 23: Foreign Exchange Rate Kenya Shilling Exchange Rate against USD, EUR and GBP ( ) KES EUR GBY USD Source: YahooFinance.com

30 5.6 Kenya Trade Outlook Kenya continues to be a leading regional trade hub in East and Central Africa. The Government of Kenya is currently undertaking major strides to aid transportation of goods and services into the East African Region and to improve international trade. In 217, the Government of Kenya completed the construction of the Mombasa Nairobi Standard Gauge Railway that connects Kenya's port city of Mombasa to Nairobi, the nation's capital. The SGR was constructed to replace the parallel Uganda Railway that was built during British colonial rule in the 19th century. The SGR is the country's largest infrastructure project since independence. Under the East African Railway Master Plan, the Mombasa Nairobi SGR will link up with other standard-gauge railways being built in East Africa. Phase 2 of the project will extend the railway to the Uganda border by 221. The SGR is expected to greatly improve trade between the East African communities. The second major infrastructure project currently being undertaken by the Government of Kenya to improve trade in the East-African community is the construction of the Lamu Port and Lamu-Southern Sudan-Ethiopia Transport Corridor (LAPPSET). This will serve as the country s second transport corridor, after the Mombasa-Uganda transport corridor. The LAPSSET project is a combination of various components ports, pipelines, roads and railways. The LAPSSERT Lamu port is currently under construction Lamu, a coastal town near Mombasa in Kenya. In addition to the port, a standard gauge railway will be constructed from Lamu to Juba in South Sudan and Addis Ababa in Ethiopia. This will be accompanied by a highway crude oil pipelines from Lamu to Addis Ababa. The LAPSSET corridor will greatly improve intra-african trade. China is targeting Kenya s ports of Mombasa and Lamu in expanding its global influence through trade and connectivity. The Chinese government lists the two ports as important to its One Belt One Road (OBOR) Initiative, an ambitious programme meant to create a community of common destiny from among 63 countries around the world with about 4.5 billion people. The East African member states of Kenya, Uganda, Tanzania, Rwanda and Burundi recently launched an East-African e-passport. Kenya launched the passport in September 217, while Tanzania launched in February 218. Uganda, Rwanda and Burundi are yet to roll out the e-passport, but have reported various stages of progress.

31 The e-passport also known as the biometric passport complies with guidelines set by the International Civil Aviation Organisation (ICAO), making it admissible globally. The East African e-passport is set to increase trade between the East African Countries over the coming years.

32 6. GOVERNMENT FINANCE IN KENYA 6.1 Background of Government Finance Since attaining independence in 1963, the Government of Kenya has taken significant strides in improving its fiscal position. Kenya s government revenues have improved significantly in the 21 st century, backed by innovations in mobile money that have accelerated tax efficiency. Tax-based revenue constitutes a significant proportion of Kenya s tax revenue. However, majority of the Kenyan businesses are in the informal trade sector, making tax collection a significant challenge as most businesses are not registered and do not file returns. Government spending in Kenya has also increased in line with improved revenues. However, recurrent expenditure occupies the largest proportion of government expenditure, taking up 71 percent of the total expenditure in Kenya. Given that Kenyan expenditure has consistently been higher than government revenue, the government has been financing its expenditure through domestic and external debt. The Kenyan treasury raised $2 billion in 214 through an international Eurobond. This was the highest bond amount to be raised by an African economy in international bond markets then. In March 218, Kenya secured another $2 billion Eurobond. A proportion of these funds will be used to finance maturing loans. Policy experts and development institutions such as the World Bank and the International Monetary Fund have raised concerns about Kenya s ballooning public debt, which increased from 4.9 percent in 213 to percent in 218.

33 6.2 Government Revenue The government of Kenya has continued to improve its revenue collection mechanisms. Revenue increased from $1.94 billion in 21 to $14.1 billion according to Central Bank of Kenya data. Figure 24: Government Revenue in Kenya 1,6, Total Revenue in Kenya (21-217) Ksh (Millions) 1,4, 1,2, 1,, 8, 217: $14.1B 216: $12.22B 215: $1.81B 6, 4, 2, Source: Central Bank of Kenya The composition of government revenue in terms of tax revenue and non-tax revenue is as below. Tax revenue continues to be the key component of Kenya s government revenue, occupying approximately an average of 84% of total revenue from Composition of Revenue- Tax vs Non-Tax (21-217) Tax % Non Tax % Source: Central Bank of Kenya

34 6.3 Government Expenditure The Kenyan Government s expenditure has been increased linearly with increase in revenue. The Central Bank of Kenya data shows that government expenditure increased significantly after 215. This was mainly due major infrastructural projects being undertaken by the government. Figure 25: Total Government Expenditure in Kenya 2,4, Total Government Expenditure in Kenya (21-217) 2,, 217: $21.38B 216: $17.65B 215: $15.87B 1,6, Ksh (Millions) 1,2, 8, 4, Source: Central Bank of Kenya The largest component of government expenditure is recurrent expenditure. Many stakeholders, including the International Monetary Fund, have raised concerns over the prevalence of recurrent expenditure over development expenditure in Kenya. After the adoption of a new constitution in 21, Kenya created 47 new devolved units of government, effective as of 213. This greatly increased recurrent expenditure on wages and salaries together with other county administration costs. As can be seen from the chart, government expenditure increases significantly from 213. In 217, the government undertook major infrastructural projects including the construction of a standard gauge railway, also bringing up government expenditure in the same year. Recurrent expenditure takes up the largest portion of expenditure in Kenya, occupying an average of 76.6 of total expenditure between 21 and 217.

35 Composition of Government Expenditure - Recurrent vs Development Expenditure (21-217) Dev % Rec % The creation of these new administrative posts greatly increased the wage bill in Kenya leading to a significant part of the revenue collected to finance recurrent expenditure, and also the repayment of maturing debt. In the Budget Policy Statement 218/19, the National Treasury of Kenya proposed that out of the $16.8 billion revenue, $6.8 billion be allocated to servicing existing public debt (Standard Media Group, 218). 2,4, Total Revenue vs Total Expenditure in Kenya (21-217) 2,, 1,6, Total Revenue Total Expenditure Ksh (Millions) 1,2, 8, 4, Source: Central Bank of Kenya

36 6.4 Public Debt Public debt in Kenya has increased in the past half-decade since 213. Data from the International Monetary Fund World Economic Outlook indicates that net debt increased from $19.2 billion in 213 to billion in 218. This is an increase of 153 percent in a short span of five years. During the same period, debt to GDP ratio jumped from 4.9 percent in 213 to percent in 218. Figure 26: Total Public Debt in Kenya 7, Kenya Governent Net Debt (National Currency): ; predictions to 222 6, 5, 216: KES Billion (Appx. $34 Billion) 217: KES Billion (Appx. $42 Billion) 22 estimate: KES Billion (Appx. $57 Billion) 4, Ksh (Billions) 3, 2, 1, Source: IMF World Economic Outlook Figure 27: Debt to GDP Ratio 6 Kenya net government debt as a percentage of GDP ( ) : 44.42% 216: 47.28% 218: 52.75% % of GDP Source: IMF WEO

37 7. FINANCIAL MARKETS 7.1 Background of Kenyan Markets A vibrant and well-functioning sound, efficient and stable financial system is a catalyst for broad based sustainable economic growth and development. It mobilizes savings and channels them to investors facing shortage of investible funds to support Kenya s development. Kenya s financial markets are relatively well developed in the African region. Kenya s financial sector comprises of deposits-taking institutions (commercial banks and mortgage finance companies, microfinance banks and deposit taking Savings and Credit Co-operatives (SACCOs), non-deposits taking institutions (insurance industry, pensions industry, capital markets industry, Development Finance Institutions and several other entities) and financial markets infrastructure providers. The financial sector in Kenya is well-regulated and supervised by five main regulators responsible for different segments in this sector, namely the Capital Markets Authority (CMA) regulating money and capital markets; Central Bank of Kenya (CBK) regulating commercial banks and instituting monetary policy; Insurance Regulatory Authority (IRA) regulating insurance and re-insurance companies; Retirement Benefits Authority (RBA) regulating pension funds; and the Sacco Societies Regulatory Authority (SASRA) regulating the Savings and Credit Co-operative societies in Kenya. The banking subsector, which comprises of commercial banks, mortgage finance companies and microfinance banks, accounts for more than 6 percent of total assets in Kenyan financial sector. Kenya is therefore a bank-based economy, although capital markets continue to develop in terms of liquidity and depth. For Kenya to develop to a market-based economy, significant improvements need to be made in improving liquidity of the capital markets. One of the strategies being undertaken by the Capital Markets Authority is the introduction of mobile trading for individual investors to access capital markets without the need for brokers. The government launched M-Akiba in 217, which enabled cititzens to buy government bonds using their mobile money accounts. Kenya s financial system is fairly resilient and is able to sustain both domestic and international shocks. The country has not experienced any major banking or financial crisis in the past decade.

38 7.2 Capital Markets Kenya s capital markets are the deepest and most sophisticated in East Africa. The Capital Markets Authority Financial Stability Report of 216 states that sixty-seven companies were listed on the Nairobi Stock Exchange for a total market capitalization of KES 1,834 billion (approximately $18 billion) as of March 217 (Capital Markets Authority, 217). Figure 28: Kenya Equity Market Capitalization 3 Kenya Equity Market Capitalization ( ) 25 2 Billions USD Source: World Bank Development Indicators 217 The market capitalization as a percentage of GDP stood at 26% Figure 29: Market Capitalization as a percentage of GDP 3 Kenya Market Capitalization % of GDP ( ) 25 2 % of GDP Source: World Bank development indicators

39 The Kenyan capital market has grown rapidly in recent years and has also exhibited strong capital raising capacity. The main index of the Nairobi Securities exchange is the NSE 2, an index consisting of 2 of the major listed stocks in the Kenyan market. The performance of the NSE 2 index is as below: Figure 3: Kenya s stock market NSE 2 index Kenya NSE 2 Index (Dec March 218) 6, 5, 4, Ksh 3, 2, 1, Source: Investing.com 7.3 Money Markets Unlike the capital market in Kenya, the bond market, however, is still underdeveloped and dominated by trading in government debt securities. Long-dated corporate bond issuances are uncommon, leading to a lack of long-term investment capital. The government of Kenya actively raises financing for a number of infrastructural projects through domestic credit. Chief ownership of government bonds in Kenya is done by commercial banks. The number of individual investors is low, given the high trading margins required to buy government bonds. However, the government introduced M-Akiba in 217, a mobile traded government bond that enabled ordinary Kenyans to buy government bonds for as low as $3.

40 The bond yields in Kenya are significantly higher than those in western economies, offering investors higher yield to maturity. However, the portfolio flows in the Kenyan stock market are quite volatile and react quickly to increases in interest rates in the United States. Figure 31: Kenya 3-month Treasury bond Yield to Maturity 3-month bond yield for KEN; US; JAP (24-218) 24 2 Japan Yield Kenya Yield USA Yield 16 Yield to Maturity Source: Investing.com Figure 32: Kenya 1- Treasury bond Yield To Maturity 1- Bond Yields (KEN;US;JAP) Japan Yield Kenya Yield US Yield 12 Bond Yield Source: Investing.com

41 7.4 Currency Market The official currency of Kenya is the Kenyan Shilling (KES / KSH). Since the early 199s, the Central Bank of Kenya has pursued a flexible exchange rate regime. The most popular Kenya Shilling exchange rate is the USD to KES rate. The performance of the Kenyan Shilling in comparison to the United States dollar is as below: Figure 34: Kenya Shilling Exchange Rate KSH/USD (Jan March 218) Price Source: YahooFinance.com Main Highlights: The exchange rate of the Kenyan shilling slumped dramatically in mid-211, from about 83 shillings per US dollar to about 1 shillings per US dollar at late 211. The depreciation was mainly due to a 25 basis points cut in interest rates by the Central Bank in January 211 from 6 per cent to 5.75 per cent, in over-hasty recognition of good growth prospects, that backfired and boosted inflation. The Central Bank increased interest rates from 6 per cent in June 211 to a record high of 18 per cent in December 211. The depreciation ceased and the shilling resumed to previous trends. The most recent depreciation of the Kenyan Shilling was experienced in 215. This was following the Chinese devaluation where the U.S dollar extended a further upward global rally against all major currencies. Current-account deficit pressures also put pressure on the Kenyan shilling during the same period.

42 Figure 35: Kenya Shilling Exchange Rate against major global currencies 18 Kenya Shilling Exchange Rate against Major Global Currencies (USD; EUR; GBP) KES EUR GBY USD Source: YahooFinance.com

43 8. MOBILE FINANCIAL SERVICES IN KENYA 8.1 Background of Mobile Financial Services in Kenya Kenya s banking has been on a successful trend in recent years, exhibiting increased levels of financial inclusion and financial deepening. The Financial Sector Deepening Annual Report of 216 notes that Kenyans excluded from any form of financial service dropped from over 4% of adults to 17% between 26 and 216. Inclusion was driven by largely by mobile money services, used by over 71% of adults, as well as mobile banking services. Commercial banks in Kenya have adopted agency banking to provide services to client. Just a few years after their introduction in 212, mobile banking services are already used by 17.5% of Kenyans and have become the most common banking solution among youth aged 18 to 25. Before introduction of mobile financial services, commercial banks in Kenya made commendable progress in providing access to formalized financial services, although they were mostly accessible to the middle, upper-middle and wealthy class of society. The greater segments of the population could not access formal banking due to the significant capital requirements needed to start and operate a commercial bank account. The interest margins offered by commercial banks were also quite steep, and lending rates were between 15 and 25 percent in most commercial banks The introduction of mobile money provided an easy to access means of storing and transferring money and became popular among the larger part of the population.

44 8.2 Brief History on Commercial Banks in Kenya Kenya s financial landscape has experienced tremendous growth over the past decade. The Financial Sector Deepening annual report of 216 notes that the percentage of Kenyans not using any form of financial service declined from 25.1% in 213 to 17.4% in 216 (Financial Sector Deepening, 216). Data from the International Monetary Fund Financial Access Survey of 217 indicates access to formal financial services in Kenya continues to improve commendably. The number of commercial banks operating in the Kenyan market has been on a steady increase, providing a variety of services to the Kenyan public. As of the 217 FinAccess survey, there were 42 licenced commercial banks in Kenya, with over 1,514 branches countrywide. There are also a number of international banks with representative offices in Kenya. These include: HDFC Bank, Bank of China, JP Morgan Chase, Nedbank, CitiBank and FirstRand Bank. Figure 36: Branches of Commercial Banks in Kenya 1,6 Branches of commercial banks in Kenya 1,4 1,2 No. of Branches 1, Source: I.M.F Financial Access Survey 217 The commercial banks were initially only located in major towns and urban centres, but have expanded to have representation in all 47 counties in Kenya. The 217 FinAccess survey reveals that there are approximately 5 commercial bank branches per 1, adults. There are 3 branches of commercial banks per 1, km 2, making Kenya a leader in financial inclusion in the East African region.

45 Figure 37: Distribution of Commercial Banks in Kenya 6 Brances of Commercial Banks (24-216) 5 4 No. of Branches Branches of commercial banks per 1, adults Branches of commercial banks per 1, km2 Source: I.M.F Financial Access Survey 217 To complement the physical bank branches, Automated Teller Machines are well distributed in most major and medium-sized towns around the country, with 9 ATMs per 1, adults. This is three times more than the number of physical bank branches. Figure 38: ATMs in Kenya Automated Teller Machines (ATMs) per 1, adults (24-216) No. of ATMs Source: I.M.F Financial Access Survey 217

46 Following the increased availability of commercial banking services around the country, the number of deposit accounts with commercial banks has been steadily increasing, with an average year-on-year growth rate of 38% from In 24, there were just about 1,, deposit accounts. Twelve years later in 216, there were about 43,, deposit accounts with commercial banks. The Financial Sector Deepening report notes that the increase in deposit accounts opened in commercial banks increased to 4.1 million in the third quarter of 216 from 36.5 million in December 215. This was mainly driven by accounts opened through mobile phone platforms and increasing usage of bank agent networks. Figure 39: Deposit Accounts with Commercial Banks in Kenya 5,, Deposit accounts with commercial banks (24-216) 4,, 3,, 2,, 1,, Source: I.M.F Financial Access Survey 217. Outstanding loans and deposits have sustained increased growth, occupying a higher percentage of the Gross Domestic Product over the years. 45 Outstanding Loans and Deposits as a % of GDP 4 35 % of GDP Outstanding deposits with commercial banks (% of GDP) Outstanding loans with commercial banks (% of GDP)

47 8.2 Mobile Financial Services Mobile Financial Services were developed in Kenya to aid in providing access to formal financial services to all segments of the population in a convenient and easy manner. The main mobile financial services in Kenya are Mobile Money, Mobile Banking and Agency Banking. 8.3 Mobile Money Kenya is a world leader in mobile money and mobile banking services. Kenya s pioneer mobile money platform, M-Pesa, was established in 27. Mobile money is a service that allows users to store cash (known as mobile electronic float) in their mobile phone SIM cards. The users can send the electronic float to other users on the same network using their mobile phones. To convert the e-float back to physical currency, the user visits a mobile money agent shop and converts the e-float to physical currency at a fee. Mobile money in Kenya has exhibited monumental growth since its establishment in 27. The number of mobile money users increased from virtually NIL in 27 to 37 million users by December 217. Given that Kenya has a total population of 48 million, this means that over 7% of the adult population in Kenya are actively subscribed to a mobile money account. Figure 4: Number of Mobile Money Accounts in Kenya Number of Mobile money Accounts in Kenya (27-217) 4,, 35,, 3,, 25,, Accounts 2,, 15,, 1,, 5,, Source: Central Bank of Kenya The number of mobile money agents facilitating the mobile money services have also exhibited accelerated growth. In March 27 when mobile money was launched, there

48 were 37 agents. 1 years later in December 217, there were 182,472 mobile money agents. The agents are present in all counties, and even in the smallest towns where commercial bank branches or ATMs cannot be established. The easy accessibility of mobile money agents to process deposit and withdrawal transactions has been one of the key factors promoting the success of mobile money in Kenya. Figure 42: Number of Mobile Money Agents Number of mobile money agents in Kenya (27-217) 2, 16, Agents 12, 8, 4, Source: Central Bank of Kenya The volume and value of mobile money transactions in Kenya portray expeditious growth. In 217 alone, the total value of mobile money transactions was KES 3,638 billion (approximately $36 billion). This transaction value was far greater than that of any commercial bank in Kenya during the same period. Figure 43: Value of Mobile Money Transactions in Kenya 35, Monetary value of mobile money transactions in Kenya (27-217) 3, 25, Ksh (Millions) 2, 15, 1, 5, Source: Central Bank of Kenya

49 8.6 Agency Banking Following the success of the mobile money model whereby mobile money agents facilitated all transactions regarding the deposit and withdrawal of funds into users accounts, a number of commercial banks in Kenya developed the agency banking model be bring their services closer to their customers. The agency banking model is a function of certain Commercial banks in Kenya that allows them to contract third party retail networks as banking agents. Upon successful application, vetting and approval, these Agents are authorized to offer selected products and services on behalf of the Bank. This relationship creates an Agency Banking business model. The primary services offered through agency banking include: (1) cash withdrawal, (2) bills payment, (3) cash deposits, (4) funds transfer, (5) balance enquiry, (6) document collection for debit and credit cards, loan applications and account opening forms, (7) collection of bank correspondence and mail and, finally, (8) mobile banking services. Agency banking became a successful model to carry out commercial banking in Kenya. From its establishment in 21, many commercial banks adopted agency banking and contracted bank agents. The Central Bank of Kenya (CBK s) annual supervision report for 212 showed that more bank customers were making cash deposits, withdrawals and other transactions through agents, fundamentally changing their mode of interaction with banks (Central Bank of Kenya, 212). By December 216, 18 commercial banks and 5 microfinance banks (MFBs) had contracted 53,833 and 2,68 agents, respectively, spread across the country (Central Bank of Kenya, 216). Figure 42: Number of Banking Agents in Kenya 6, Number of Banking Agents in Kenya ( ) 5, 4, No. of agents 3, 2, 1, Source: Central Bank of Kenya

50 Over 87 percent of the approved commercial bank agents were concentrated in 3 banks with the largest physical branch presence namely; Equity Bank Ltd. with 25,428 agents, Kenya Commercial Bank Ltd. with 12,883 and Cooperative Bank Ltd. with 8,856. The number of transactions carried out by bank agents increased considerably over the past 6 years. Figure 43: Number of Agency Banking Transactions in Kenya 12,, Number of Agency Banking Transactions ( ) 1,, 8,, No. of Transactions 6,, 4,, 2,, Source: Central Bank of Kenya Figure 44: Value of Agency Banking Transactions in Kenya Value of Agency Banking Transactions ( ) 8, 7, 6, 5, Ksh (millions) 4, 3, 2, 1, Source: Central Bank of Kenya

51 8.7 Mobile Banking The success of agency banking model and improvements in mobile technology led to yet another significant shift in banking service provision in Kenya - introduction of mobile banking services. Mobile banking is a service provided by a bank or other financial institution that allows its customers to conduct financial transactions remotely using a mobile device such as a smartphone or tablet. Unlike the related internet banking it uses software, usually called an app, provided by the financial institution for the purpose. Mobile banking is usually available on a 24-hour basis. Unlike traditional mobile money accounts, mobile banking accounts allow users to earn interest on deposits and also process loans. The pioneer mobile banking platform in Kenya was M- Shwari, a joint initiative by Safaricom and the Commercial Bank of Africa. M-Shwari accomplished massive success following its introduction to the market and many other commercial banks introduced mobile banking afterwards. The agency banking and mobile banking models proved to be a strategic shift for Kenyan commercial banks. They made it easier for customers to open and maintain a bank account, and rapidly increased financial inclusion in Kenya. In 217, KCB Bank (Kenya s largest Bank), reported that over 86 per cent of all the bank s transactions happened outside the physical bank branches (Kenya Commercial Bank, 217). Specifically, 51% of the bank s transactions were processed through mobile banking and 14% were processed through agency banking. Transactions processed through Automated teller machines were 1% while the transactions carried out at the bank s physical branches constituted only 14%. The Financial Sector Deepening 216 report notes that mobile money stands as the leading driver of financial inclusion by providing access to formal financial services to a significant part of the Kenyan population, over and above commercial banks, savings and credit cooperative societies and microfinance institutions.

52 Figure 45: Use of Various Financial Products in Kenya Source: Financial Sector Deepening Annual Report 216 Just a few years after their introduction, mobile banking services are already used by 17.5% of Kenyans and have become the most common banking solution among youth (Financial Sector Deepening, 216). Figure 46: Comparison of Traditional Bank account and Mobile Bank account Usage of Traditional and Mobile Bank Account by age group (216) % >55 Mobile Bank account Traditional banking services Source: Financial Sector Deepening

53 9. EDUCATION IN KENYA 9.1 General Statements The national education system in Kenya has evolved over the years with the structure in 1984 with a broad-based (8 years of primary education, 4 years of secondary and 4 years of university education for a basic degree). The system is set to change with the implementation of Kenya Vision 23. The new and actual structure is 2 years of Pre-primary, 6 years of Primary (3 years lower and 3 years upper), 6 years of Secondary (3 years junior and 3 years senior), a minimum of 2 years of Middle Level Colleges and a minimum of 3 years for University education. As a whole, this structure will have two cycles; Basic Education cycle of 14 years which is free and compulsory, and a Higher Education cycle. There are both public and privately-run schools, technical institutions and universities. The progression from primary to secondary education and from secondary to university is through a competitive selection process based on performance in the national examinations: The Kenya Certificate of Primary Education (KCPE) examination for primary education and the Kenya Certificate of Secondary Education (KCSE) examination for secondary education. The government of Kenya introduced Free Primary Education (FPE) programme in January 23. Free Day Secondary Education (FDSE) was introduced in 28 to improve access to basic education. 3 Figure 47: Education Expenditure in Kenya 25 Expenditure on education as % of total government expenditure (%) Source: Worldbank Source: 29 Kenya population and housing census, Analytical report on education, Kenya national bureau of statistics. Volume IX March 212

54 Figure 48: Government Expenditure as a percentage of GDP Government expenditure on education as % of GDP (%) Source: Worldbank Since independence in 1963, the government has invested heavily in education. The idea was to have a universal access to basic education. As we can observe in the graphs the government invests 2% of total government expenditure (5,3% of annual GDP) in education. It is impressive if we compare it to the world average by country (4.7% of annual GDP). 4 Between 2 and 25 percent of total expenditure goes to education, that demonstrates the awareness about the importance of education in the community, however, current analysis indicates that the money is not efficiently used. Throughout the years the Government of Kenya has changed the education structure several times looking for a more productive system. Education policy experts are confident that with the Kenya Vision 23 the education system in Kenya will provide more holistic outcomes. 9.2 Attendance and literacy Primary Net attendance rate % 214 Source: Worldbank Secondary 4 WorldBank

55 The main problem with education in Kenya is not access to education. Children start primary education, however, most of them do not complete secondary education. There is a gap between Primary and Secondary, most of the children do not proceed from Primary to Secondary. This has been attributed to the inadequate number of secondary education institutions to uptake the KCPE graduates. An education report by the Brookings Institution states: Africa has the world s lowest secondary school enrolment rates. Just 28 percent of youth are enrolled in secondary school, leaving over 9 million teenagers struggling for employment in low paid, informal sector jobs. Today, a child entering the education system of an Organization for Economic Cooperation and Development (OECD) country has an 8 percent chance of receiving some form of tertiary education. The comparable figure for sub-saharan Africa is 6 percent 5 Avoiding and eliminating the above issue is one of the aims of Kenya Vision 23: two projects in form of 56 school constructed or rehabilitated, bursaries and recruitment of additional teachers, which we will mention later with the FDSE. Figure 49: Net Attendance - Rural vs Urban Net attendance rate % 214 Soruce:Worldbank Primary. Rural Primary. Urban Secondary. Rural Secondary. Urban 5 Brookings, Too little access, not enough learning: Africa s twin deficit in education

56 Figure 5: Net Attendance Male vs Female 1 Net attendance rate % 214 Source: Worldbank Primary. Female Primary. Male Secondary. Female Secondary. Male Figure 51: Literacy Rate 85 Literacy rate, population years % 214 Source: Worldbank Both sexes Female Male In 215, 9 out of every 1 children aged 6-13 years were enrolled in school. However, on average, 31% of them were behind the level they should be at. Although in past years the girl child in Kenya did not have access to education as the boy child, the situation has improved in recent years - across the country, girls enrol more and progress faster through school than boys, except in North Eastern region where more boys are enrolled than girls. Children from less privileged households are less likely to attend school and to progress in school compared to children from well to do households. 6 6 Uwezo, are our children learning? The state of education in Kenya in 215 and beyond

57 9.3 Role of the government in Education The provision of education and training to all Kenyans is fundamental to the government s overall development strategy. These are the most important objectives for Kenya in education: General access to basic education. Regional and gender equity in Education. Quality of education. 7 Reforms. The main reforms promoted by the government in education with the aim of meeting these objectives mentioned previously are: Independence of Kenya (1963) Kenya adopted a single system of education, the , which consisted of 7 years of primary education, 4 years of secondary education, 2 years of high school and 3 5 years of university education. The system was similar to the British system of education. Education reform 1984 The education structure was changed to (8 years of primary education, 4 years of secondary and 4 years of university education for a basic degree). Free Primary Education (FPE) 23 The government implemented FPE with the aim of making primary education accessible to all children without differences of their economic situations. However, as we saw in the graphs before many children never attend to school or they leave it, one of the main reason is the unforeseeable obstacles (lack of infrastructure and human resources). Therefore, the deeper objective of FPE was to recognize education as a basic right of all children; it was recognised later in the constitution of Free Day Secondary Education (FDSE) 28 7 UNESCO, Development of education in Kenya, ministry of education science and technology, August FREE EDUCATION IN KENYA S PUBLIC PRIMARY SCHOOLS Addressing the Challenges, Fredrick O. Ogola. Organisation for Social Science Research in Eastern and Southern Africa (OSSREA).

58 The purpose of FDSE was the retention of the learners in secondary education to complete the entire basic education required by every citizen. 9 Kenya Vision 23 The general objective of Kenya 23 is for Kenya to become a middle-income country by 23. The reform addresses different sectors of the economy, including education, which experts agree is the most important for a prosperous future. Under education and training, Kenya will provide globally competitive quality education, training and research to her citizens for development and enhanced individual well-being. The overall goal for 212 was to reduce illiteracy by increasing access to education, improving the transition rate from primary to secondary schools, and raising the quality and relevance of education. Other goals include the integration of all special needs education into learning and training institutions, achieving an 8% adult literacy rate, increasing the school enrolment rate to 95% and increasing the transition rates to technical institutions and universities from 3% to 8% by 212. Public and private universities will be encouraged to expand enrolment, with an emphasis on science and technology courses. Kenya intends to have international ranking for her children s achievement in mathematics, science and technology. 1 9 Factors affecting subsidized Free Day Secondary Education in enhancing learners retention in secondary schools in Kenya. 1 Vision 23 popular versión

59 1. CORRUPTION IN KENYA 1.1 Analysis of Corruption in Kenya In the 217 Transparency International Corruption Perception Index Kenya was ranked 143 out of 18 positions with a score of 28 points. Since 212 the country has only escalated one position in the table and is currently behind the average score of Sub- Saharan Africa, which scores 32. Kenya scores halfway in the region, ranking 28 out of 49 countries. The 217 Mo Ibrahim Index of African Governance listed a very short advancement in accountability, with no improvements in corruption in government and public officials. Furthermore, although Kenya has improved in Corruption and Bureaucracy during the last five years, it still bounces back during the last ten years. Corruption is the subsection where Kenya worst scores in accountability, ranking 33 out of the 54 African countries.

60 The country has an Ethics and Anti-Corruption Commission since 211, which evaluates corrupt practices. In its 216/217 fiscal year they received 8,44 complaints and allegations, a small increase of 1.5% since the year before. Since the first records in 28, registered reports have doubled, reaching its lowest point in 213, when 3355 complaints were received. Only 46% of the cases were considered relevant and therefore studied. Bribery leads all categories, accounting for 36% of the total allegations of corruption. The last National Corruption and Ethics survey of October 215 registered a significant drop in those who paid bribe, from 68.5% in 212 to 38% in 215. However, the average bribe increased to a record 5, KES (about 45 ). Seeking medical attention, ID and birth certificate were the three services were most bribes were demanded and the Kenyan Police the department perceived to be more prone to corruption, followed by Traffic Police. It is worrying and worth noting that only a 5.3% of Kenyans report corrupt practices, in a majority of the cases for lack of knowledge on where to do so. Nearly half of the citizens believe the government, MPs and governs don t do yet enough to fight corruption. Corruption is the main perceived problem to do business, over tax rates and access to financing, with 17.8% of Kenyans listing it in the World Economic Forum, Executive Opinion Survey 216. One reason for the drop of bribes is the wide increase in the use of mobile money platform M-PESA, which allows people to pay for nearly everything, including school fees, ID certificates and medical attention. With less cash in place, bribes reduce. In 213 Kenyatta pledged to fight corruption, but in late 216 he blamed the judiciary and other agencies for slowing the process and putting difficulties in fighting corruption.

61 11. STATE OF DEMOCRACY IN KENYA 11.1 Analysis of Democracy Indicators Source: The Economist 217 Intelligence Unit s Democracy Index Democracy in Kenya 1.1 Analysis of Kenya was given 5.11 points out of 1 and ranked 95 out of 167 countries in The Economist 217 Intelligence Unit s Democracy Index. This means Kenya isn t considered a democracy, but rather a hybrid regime. This overall scores drops from a record 5.33 last year and only a.3 points increase since 26. Furthermore, Kenya suffered a drawback in the electoral process and pluralism section, scoring only 3.5 out of 1. The drop comes after the August 217 elections which were annulled and had to be repeated, which also was a proof of corruption amongst high ranked institutions. Kenya s Supreme Court annuled the August 217 elections after allegations that the

62 electoral commission hadn t verified the results before announcing them. Whilst this was considered as a landmark step forward in Kenya s democracy and a proof of separation of power, it also indicated a government maneuvering in the election process. Furthermore, eight days before the redo, a senior official of Kenya s electoral commission fled the country saying the system didn t meet expectations for a basic free, fair and credible election. The main opposition leader, Raila Odinga, withdrew from the elections complaining about a corrupt electoral commission and incumbent president Kenyatta won the elections with 98% of the vote. On a good note, Kenya is one of the only 12 African nations who s had a leader that has stepped down after its two mandates, as a study of the African Center for Strategic Studies shows. President Daniel arap Moi did so in 22, being the 4th to do it in Africa and fueling the first change of political party in government Impact of Ethnicity on Elections in Kenya Violence in elections is recurrent in Kenya. In 27 more than 1.1 people were killed after ethnic tensions arose. In were killed during the first election and 67 more in re-election, as Human Rights Watch reports. Source: The World Factbook CIA, Kenya Ethnicity is still very present in Kenyan politics. Deutsche Welle explains in this piece how the 'big five tribes have influenced who is elected, owing to their numerical advantage. According to Kenya's National Bureau of Statistics, the largest native ethnic groups are the Kikuyu (6,622,576), he Luhya (5,338,666), the Kalenjin (4,967,328), the Luo (4,44,44) and the Kamba (3,893,157). The majority of Luos support opposition leader Raila Odinga, the Kambas are behind Kalonzo Musyoka. The Kalenjins back Deputy President William Ruto, while the Kikuyus support President Uhuru Kenyatta. For the 217 elections Kenyatta and Ruto united, meaning Kalenjins and Kikuyus majority of voters for the Jubilee Alliance. The opposition was the National Super Alliance (NASA), with main opposition candidate Odinga (Luo), supported by Wetangula (Luhya) and Musyoka (Kamba).

63 Odinga proclaimed himself as people s president on the 31st January 218, weeks after Kenyatta had won without the NASA participation on the re-run. However, in a change of events Odinga and Kenyatta made a join statement on TV at the start of March 218 calling themselves brothers and putting differences apart in order to reach a new deal of government, as BBC reports FREEDOM OF EXPRESSION AND CIVIL LIBERTIES Kenya is ranked as Partly Free by Freedom House in it s Freedom in the World 218 report. The report includes Kenya as one of the countries where a dramatic decline in freedom has happened over the last few years. The country has dropped 1 points in its score in its last 1 years. Kenya is alongside the average of freedom in Sub-Saharan Africa, as a 43% of countries in the region are listed as Partly Free by Freedom House, whilst 39% are Authoritarian and only 18% Free. Despite ruling unconstitutional in April 216 section 29 of Kenya s Information and Communication Act, which had 13 people prosecuted for being indecent, freedom of expression in Kenya has been threatened for a long time. Human Rights Watch reported at least 5 incidents that restricted freedom of expression since president Kenyatta took power in 213. These include 14 arrests, 17 incidents were 23 journalists where physically assaulted and 16 direct threats against journalists and bloggers by government related institutions, as well as two journalists dead in strange circumstances. Furthermore, in the upcoming of the August 217 elections at least three journalists were arrested. Source: Freedom in the World 218 graphics, Freedom House. Whilst the Kenyan constitution guarantees freedom of expression, assembly and protects freedom of movement, but movements curtailing civil liberties are on the rise. In 216 the NGO regulatory body cancelled the Kenya Human Rights Commission, but the interior cabinet had to rectify Extra-Judicial Killings In 217, Kenya was the most affected in Africa in terms of extrajudicial killings, with 122 cases out of 177 reported by Amnesty International in its latest annual report. Security forces carried out enforced disappearances, extrajudicial executions and torture with impunity.

64 One of the most famous cases is that of Willie Kimani, Josphat Mwendwa and Joseph Muiruri. Kimani, a lawyer with a legal aid charity, his client Mwendwa and their taxi driver Muiruri, were abducted on 23 June at an unknown location. On 1 July, their bodies were found dumped in a river in Machakos County, eastern Kenya; post mortems showed they had been tortured. Josphat Mwendwa, a motorcycle taxi driver, had accused a member of the Administration Police (AP) of attempted murder after the officer shot him in the arm during a routine traffic check. The officer then charged him with a traffic offence to intimidate him into dropping the complaint. The abduction happened after Willie Kimani and Josphat Mwendwa left Mavoko law courts in Machakos County after attending a hearing in the traffic offence case. On 21 September, four AP officers Fredrick ole Leliman, Stephen Cheburet Morogo, Sylvia Wanjiku Wanjohi and Leonard Maina Mwangi were found guilty of murdering the three men. The officers were remanded in custody awaiting sentencing at the end of the year. The killings of the three men triggered protests and mobilized human rights organizations, the media and legal and other professional organizations across the country to demand action against enforced disappearance and extrajudicial executions. These were just the last of several high profile killings in the last year, as BBC reports. This prosecution was named by Justice Lessit as unique and the only one of its kind to be prosecuted in Kenya s judicial history, as local newspaper Daily Nation reports. This case shows that the judiciary is increasingly independent and has no fear in prosecuting police for extrajudicial killings, which is is a proof of the separation of power in the country Security Cost The usage and cost of security services in Kenya have both increased between 27 and 213, as the World Bank 213 Kenya Enterprise Survey shows. More firms pay for security and they also pay more: 2% of total annual sales in 27 vs. 4% in 213. Security expenses are higher in Kenya than in other countries at the same income level and in all countries with ES data. And more firms in Kenya pay for security services than everywhere else (82% of firms compared to an average of 6% for low income countries). On the other hand, losses due to theft and vandalism as a percentage of total annual sales have declined and are currently at par with other low income countries.

65 11.6 Terrorism Kenya ranks as the 22nd country in the world where terrorism has highest impact in the 217 Global Terrorism Index. It is also the 12th African nation, below Nigeria, Somalia, Libya, Egypt, Algeria, D.R.Congo, South Sudan, Cameroon, Sudan, Central African Republic, Niger. Although this might seem a very alarming number, Kenya ranks behind Turkey, India and the Philippines and is just one spot ahead of France. Furthermore, since 214 it has only improved. Back then Kenya ranked as 12th country with a highest impact of terrorism. Moreover, in the same index Kenya has a score of 6.17 out of 1. This is not that far away from other renowned countries such as China (5.55), USA (5.43) or Russia (5.33). The reason why terrorism is still a problem for security in Kenya is the presence of the terrorist group Al Shabaab. Originally from Somalia, which ranks as the 7th country globally with a higher impact of terrorism, this group is pledges alliance to Al Qaeda. In total it has participated in 417 events in Kenya and it is most active in the eastern regions which border Somalia, especially in Mandera County, as the Armed Conflict Location & Event Data Project (ACLED) reports. Al Shabaab s attacks in Kenya can be explained due to numerous reasons, but mainly they are possible due to the geographic proximity with Somalia and the porous border between both countries. The terrorist group has an interest in Kenya as its president, Uhuru Kenyatta, actively supports with Kenyan troops the African Union Mission In Somalia (AMISOM), a peacekeeping mission which has as its first objective to reduce the threat posed by Al Shabaab and other armed opposition groups.