Securitization Enhancing Liquidity in Kenya

Authors

  • Margaret Kibera

DOI:

https://doi.org/10.47604/ijfa.2167
Abstract views: 74
PDF downloads: 49

Keywords:

Securitization, Liquidity, Capital Markets

Abstract

Purpose: This paper aims to explain the benefits of securitization in Kenya’s economy that is to both the government, the private sector, and the Kenya capital market. The paper provides a road map on how the government and private sector can diversify their funding sources, lower borrowing costs, improve liquidity, and transfer risk.  It will help offer clear policy direction to government policymakers in efforts geared towards the introduction of asset securitization in the country which will increase liquidity, economic growth, and expansion of capital in the country. The regulator of the financial market Capital Market Authority (CMA) will therefore formulate guidelines and regulatory requirements that can enhance the performance of the securitization industry. The paper will also be useful to corporate strategists of companies as they seek to optimize return considerations in driving shareholder wealth margins. The paper is expected to motivate and be a key reference for future research work in the securitization industry in Kenya. Securitization is one of the innovative products that may be used by government and private firms and investors to increase wealth.

Methodology: The study adopted a desktop methodology. Desk research refers to secondary data or that which can be collected without fieldwork. Desk research is basically involved in collecting data from existing resources. Thus, the study relied on already published studies, reports and statistics. This secondary data was easily accessed through the online journals and library

Findings: Securitization will bring benefits in terms of growth in the economy and expansion of capital markets and hence wealth creation. Securitization involves the conversion of a pool of assets with a regular and predictable cash income such as mortgage repayments receivables, and credit card receivables e,t,c  into a security or marketable instrument that allows the institution to transact a large number of its assets, which would otherwise not be attractive as individual. The originator who will be the financial institution or the government then creates a legal entity known as a Special Purpose Vehicle (SPV). The special purpose vehicle may be in the form of a Limited Liability Company, a trust, a partnership, or even a subsidiary of the Originator. These selected receivables are then transferred to the special purpose vehicle which then becomes the owner of these receivables. The securities to be issued by the special purpose vehicle are usually rated by a rating agency. This is due to the fact that such instruments are unsecured, which will require that investors are protected.

Unique Contribution to Theory, Practice and Policy: Profit maximising theory and theory of innovation can be used to anchor future studies on securitization enhancing liquidity. If the Government or the financial institution wants to issue 'AAA' rated asset-backed securities or mortgage-backed securities, collateralized mortgage securities, or collateralized debt obligations (CDOs)then they must choose first-class loans not prone to prepayment and default risk where originators conduct their own rating, they select all the best asset bundles for investment. In order to get a favorable rating, the special purpose vehicles can provide credit enhancement to the securities.

Downloads

Download data is not yet available.

References

Abdullah, T. M. (2010). Profit Maximization Theory, Survival-based theory and contingency theory: A review on several underlying research theories of corporate turnaround. . Jurnal Ekonom, , 13(4), 136-143.

Abera, A. (2012). Factors Affecting Profitability: An Empirical Study on Ethiopian Banking Industry. . Addis Ababa University.

Badessich F.A (2011). Mortgage Backed Securities in Argentina. An implementation Study. Unpublished Msc Research. Massachusetts Institute o f Technology

Berkovitch, and Kim (2010), Financial contracting and leverage induced over and underinvestment incentives. Journal o f Finance, 45. 765-794.

CBK. (2019). Financial Institutions Annual Report. Central Bank of Kenya.

CBK. (2016). Commercial Bank Supervision Report,. Central Bank of Kenya.

Chechet, I. L., & Olayiwola, A. B. (2014). Capital structure and profitability of Nigerian quoted firms: The agency cost theory perspective. American International Journal of Social Science,, 3(1), 139-158.

Christine Whitehead, Allan Holman’s & Kofi Karley (2008), The potential for mortgage securitisation in mortgage backed securities in the UK' summary of findings funded by the Office of the Deputy Prime Minister

De Soto, Hernando, (2001), The mystery of Capital: Why Capitalism triumphs in the West and Fails Everywhere else (2000) New York, Basic Books

Dwight M. Jaffee & Bertrand Renaud (2010), 'Securitization in European Mortgage Markets' World Bank Paper prepared for First International Real Estate Conference

Fabozzi, F.J. (Ed.) (2011), Investing in Asset-Backed Securities, Wiley, Capital markets mortgage: a ratable model for Main Street and Wall Street, Real Property, Probate and Trust Journal,

Greenbaum, S.l. and Thakor, J.V. (2017), Bank funding modes: securitization versus deposits, Journal of Banking and Finance, 11,379-392.

Frederick Feldkamp (2001), The alchemist's dream: International Financial Law Review, London

Jay Sa-Aadu (2000), Housing Finance systems in Africa: Perspectives, policies & strategies in the next millennium. Shelter Net Bulletin, No. 15, May 2000

James, C. (2008), The use of loan sales and standby letters of credit by commercial banks. Journal o f Monetary Economics,22, 395-422.

Jobst, A. (2006), Asset Securitization as a risk management and funding tool: What small firms need to know, Journal of Managerial Finance, 32 (9), 731-760

Klaas, J., & Vagizova, V. (2014). Tools for assessing and forecasting financial stability of the commercial bank under conditions of instability. . Investment Management and Financial Innovations , (4), 157-163.

Laurie S. Goodman and Frank J. Fabozzi (2003), Collateralised Debt Obligations, (New Jersey: John-Wiley & Sons Inc. 2002.

Oriri, F. (2010). An Investigation Into The Factors That Influence Housing Finance In Developing Countries. . Nairobi: University of Nairobi.

Orodho, A. J. (2003). Essentials of educational and social sciences research method. . Nairobi: Masola Publishers.

Owiti, K. (2016). Determinants of Mortgage Uptake in Kenya using the Capital Market Approach. Unpublished MBA research paper).University of Nairobi.

Raashid, M., Rasool, S. A., & Raja, M. U. (2015). Investigation of profitability of banking sector: Empirical evidence from Pakistan. . Journal of Finance, , 3(1), 139-155.

Peter King (2001), Understanding Housing Finance, London: Routledge,

OECD (1995), Securitization: A Public policy tool? New Zealand

Vinod Kothari (2003), Securitisation: The Financial Instrument of the New Millennium 2nd Edition 2003 (Culcutta: Academy of Financial Services)

securitization latin america.pdf

Accelerating Securitization in Africa.pdf

The-Rebirth%20-of-Securitization.pdf

Downloads

Published

2023-11-01

How to Cite

Kibera, M. (2023). Securitization Enhancing Liquidity in Kenya. International Journal of Finance and Accounting, 8(3), 33–49. https://doi.org/10.47604/ijfa.2167

Issue

Section

Articles