An evaluation of the preparedness of Kenyan Commercial Banks towards basel II implementation

Abstract

This study sought to assess the preparedness of Kenyan Commercial Banks towards Basel II implementation. Primary data was collected through questionnaires based upon a review of the theoretical and empirical literature on Basel II. These were then distributed to persons in charge of risk and operations management, specifically risk managers or their equivalents in the commercial banks operational in Kenya. Data collected through the questionnaires was analysed by use of inferential and descriptive statistics, especially through Microsoft Excel. The findings of the study indicate that none of the banks had implemented Basel II in its entirety. Most institutions will be ready to implement the new accord in the year 2010, as evidenced by the level of awareness and the low number of institutions with ready set budgets for Basel implementation. For successful implementation of Basel II, institutions would have to acquire system infrastructures and upgrade their technology and data systems to facilitate and ensure that models are comprehensively developed and validated, and that the system infrastructures are compatible with the new models with capabilities of effectively managing the requisite data. The risk management policies and strategies will also have to be amended to meet Pillar I stipulations on capital allocation. Despite the highlighted challenges, it is worth noting that Kenyan banks are willing to enact Basel II, which comes with enhanced risk management, improved risk assessment and pricing and objective capital allocation and maintenance. The critical challenges faced by most institutions are among others, model development, model validation, technology and system infrastructure, expertise and human resources competences, and implementation costs. All the resources namely skills, technology, expertise, money, time and data are considered to be influential in Basel implementation. The study's major limitation was the low response time by some institutions. However, on the positive side, the study has set pace for research on the grey aspects that have not been tackled herein. Key words: Basel II, Capital, Risk management, Pillar.