A survey of asset-liability management practices in commercial banks in Kenya.

Abstract

This study was designed to achieve two objectives: establish the asset/liability management practices by commercial banks in Kenya and to find out the extent of assetliability management by the banks. Much of the evidences used have been derived from the responses given by the banks that participated alongside with findings of other studies done in related areas. These have been employed for comparison with other prescriptions on strategic risk management/ balance sheet management to banks by the central bank of Kenya. The study focused on the head offices, specifically the treasuries of the forty-five commercial banks operating in the country but only thirty of these banks responded. This study was an exploratory one in the area of assetlliability management and was thus carried out as a census survey. Qualitative primary data was used on the practices adopted by the commercial banks on assetlliability management as well as the structure of ALM. This data was gathered through Self-administered questionnaires, which were administered to the treasury departments of the banks that were dropped to the heads of treasury operations and picked later. The analysis widely employed content analysis but in other areas descriptive statistics were used to analyze the data. Several deductions were drawn from the findings. These included: responding banks employed both conventional and bank-specific asset liability management practices. Most banks considered credit/default risk to be the most critical of all financial risk exposures though some empirical evidence shows that foreign exchange risk is the most critical risk for most firms. Majority of the banks did not find the Kenyan currency market to be information efficient: speculation and forecasting techniques were extensively used by most of them. Regular and systematic appraisal of asset/liability management policies was a common practice amongst most banks. Most banks also indicated that their asset/liability management systems were governed by guidelines set by the management board which is a cross functional outfit covering all the major functions in the bank this showed that ALM is a highly strategic issue in the banks Most banks, regardless of their SIze, extensively utilized most of the conventional hedging instruments. Micro hedge approach, accounting and economic exposure measurement strategies, natural hedging and diversification were some of the most utilized strategies. Some hedging practices were considered by most banks to be more important than others. These included use of forward contracts and foreign currency options as hedging instruments, and use of matching/natural hedging strategy.