THE RELATIONSHIP BETWEEN INFLATION, MORTGAGE INTEREST

RATE SPREADS AND STOCK MARKET PERFORMANCE AT THE

NAIROBI SECURITIES EXCHANGE
 DECLARATION

This research project proposal is my original work and has not been submitted to any
other university for award of a degree.

Signature.Date.

This research project proposal has been submitted for examination with my authority as
the university supervisor

Signature.Date.

i
 TABLE OF CONTENTS

DECLARATION.................................................................................................................i
CHAPTER ONE: INTRODUCTION..............................................................................1
1.1 Background of the Study..................................................................................1
1.1.1 Stock Market Returns................................................................................ 2
1.1.2 Inflation..................................................................................................... 3
1.1.3 Interest Rate Spreads................................................................................. 3
1.1.4 Inflation, Interest Rate Spreads and Stock Returns................................... 4
1.1.5 Nairobi Securities Exchange..................................................................... 5
1.2 Statement of the problem.................................................................................5
1.3 Research objectives..........................................................................................7
1.4 Value of the Study............................................................................................7

CHAPTER TWO: LITERATURE REVIEW.................................................................8

2.1 Introduction......................................................................................................8
2.2 Theoretical Review..........................................................................................8
2.3 Determinants of Stock Return........................................................................10
2.4 Empirical Review...........................................................................................12
2.5 Summary of Literature Review and Knowledge Gap....................................14

CHAPTER THREE: RESEARCH METHODOLOGY..............................................15

3.1 Introduction....................................................................................................15
3.2 Research Design.............................................................................................15
3.3 Data Collection...............................................................................................15
3.4 Data Analysis..................................................................................................17

REFERENCES................................................................................................................19
APPENDICES..................................................................................................................25
Appendix 1: List of Firms Listed at the NSE.......................................................25

ii
1
 CHAPTER ONE: INTRODUCTION

1.1 Background of the Study

Economists have long been fascinated by the sources of variations in the stock market. By the
early 1970s a consensus had emerged among financial economists suggesting that stock prices
could be well approximated by a random walk model and that changes in stock returns were
basically unpredictable (Pesaran, 2005). Fama (1970) provides an early, definitive statement of
this position. Historically, the random walk theory of stock prices was preceded by theories
relating movements in the financial markets to the business cycle and a prominent example is the
interest shown by Keynes in the variation in stock returns over the business cycle. In addition,
the central problem in finance (and especially portfolio management) has been that of evaluating
the performance of portfolios of risky investments. The concept of portfolio performance
has at least two distinct dimensions namely: the ability of the portfolio manager or security
analyst to increase returns on the portfolio through successful prediction of future security prices
and secondly the ability of the portfolio manager to minimize (through efficient
diversification) the amount of insurable risk born by the holders of the portfolio (Jensen,
1968).

The modern portfolio theory suggests that it is possible to construct an "efficient frontier" of
optimal portfolios, offering the maximum possible expected return for a given level of risk. It
suggests that it is not enough to look at the expected risk and return of one particular stock
(Kaplan & Schoar, 2005). Modigliani and Cohn (1979) in their inflation illusion hypothesis
claim that stock market investors are subject to inflation illusion. Stock market investors fail to
understand the effect of inflation on nominal dividend growth rates and extrapolate historical
nominal growth rates even in period of changing inflation. The Arbitrage Pricing Theory (APT)
is an asset pricing model based on the idea that an asset's returns can be predicted using the
relationship between that same asset and many common risk factors (Ross, 1976).

To a large extent, mortgage products and mortgage industry are affected by mortgage interest
spreads. In a nutshell, interest rates are the single and most critical factor that drives the
mortgage market and drives mortgage up take (Mburu & Kakumu, 2013). They further posit
that the mortgage market should be viewed as a large capital market with investors who can
1
assess risk and returns of alternative investments in relation to the mortgage market thus
affecting the mortgage products up take and consumers are rational beings too. Hence the study
of effects of mortgage interest rate spreads on mortgage industry performance in Kenya.

1.1.1 Stock Market Returns

Stock Market Returns are the returns that the investors generate out of the stock market. This
return could be in the form of profit through trading or in the form of dividends given by the
company to its shareholders from time-to-time. Stock Market Returns can be made through
dividends announced by the companies. Generally at the end of every quarter, a company
making profit offers a part of the kitty to the shareholders. This is one of the source of stock
market return one investor could expect (Olweny & Kimani, 2011). The most common form of
generating stock market return is through trading in the secondary market. In the secondary
market an investor could earn stock market return by buying a stock at lower price and selling at
a higher price. Stock Market Returns are not fixed ensured returns and are subject to market
risks. They may be positive or negative. Stock Market Returns are not homogeneous and may
change from investor-to-investor depending on the amount of risk one is prepared to take and the
quality of his Stock Market Analysis. In opposition to the fixed returns generated by the bonds,
the stock market returns are variable in nature. The idea behind stock return is to buy cheap and
sell dear. But risk is part and parcel of this market and an investor can also see negative returns
in case of wrong speculations (Geetha et al., 2011).

Stock markets promote savings and investments by providing an avenue for portfolio
diversification to both individual and corporate investors. These markets fuel economic growth
through diversification, mobilizing and pooling of savings from different parties and availing
them to companies for optimal utilization. The equity markets create a forum for trading in
financial assets, whereby business firms are able to acquire investment funds through the
issuance of shares; and thus facilitating them to meet their investment objectives. Stock markets,
as Olweny and Kimani, (2011) observed, encourage investors with surplus funds to invest them
in additional financial instruments that better matches their liquidity preferences and risk
appetite. In that respect, better savings mobilizations increases the savings rate, thereby
stimulating investments and subsequently earning investment income to the owners of those
funds. In addition, the liquid nature of these markets makes it possible for the investors to
exchange ownership of securities, and reap capital gains in the process.

2
1.1.2 Inflation
Tucker (2007) refers inflation as an increase in the general price level of goods and services in
the economy. Inflation is an increase in the overall average level of prices and not an increase in
any specific product. The most widely reported measure of inflation is the consumer price index
(CPI) which measures the changes of the average prices of consumer goods and services. Sloman
and Kevin, (2007) explain that inflation may be either demand pull inflation or cost push
inflation. Demand pull inflation is caused by persistent rises in aggregate demand thus the firms
responding by raising prices and partly by increasing output.

Cost push inflation is associated by persistent increase in the costs experienced by firms. Firms
respond by raising prices and passing the costs on to the consumer and partly cutting back on
production. Hendry (2006) agrees that inflation is the resultant of many excess demands and
supplies in the economy. Tucker (2007) observed that there are many measures of inflation,
because there are many different price indices relating to different sectors of the economy. Two
widely known indices for which inflation rates are reported in many countries are the CPI, which
measures prices that affect typical consumers, and the GDP deflator, which measures prices of
locally-produced goods and services.

1.1.3 Interest Rate Spreads

Financial holding companies engage in a wide range of activities of commercial banks,
investment banks, and insurance companies. First, interest rates directly affect activities of
commercial banks. One of the traditional ways that retail banks make money is taking deposits
from depositors or savers and issuing different kinds of loans to their customers such as business
loans, personal loans, credit cards, and mortgage loans (Wong, Habibullah & Jun, 2006). The
interest that banks pay savers and depositors is short-term, while they charge interest of their
borrowers for a longer term. The difference between the short-term rate and the long-term rate is
banks net interest spread. Although profitability of banks comes from a variety of sources,
interest rate movement still has some effect on it. Besides, commercial banks are also involved in
the activities of underwriting bonds, insurance products and are able to take part in some bond
investment. So, the interest rates also have an impact on the performance of commercial banks
(Tran, 2013).

3
An interest rate is described as the price a borrower pays for the use of money he does not own,
and has to return to the lender who receives for deferring his consumption, by lending to the
borrower. Interest can also be expressed as a percentage of money taken over the period of one
year. An interest rate is very well stated as the rate of increase over time of a bank deposit. An
Interest, which is charged or paid for the use of money, is often expressed as an annual
percentage of the principal. It is calculated by dividing the amount of interest by the amount of
principal. Interest rates often change as a result of the inflation and Government policies. The
real interest rate shows the nominal interest rate inflation (Devereux & Yetman, 2002).

1.1.4 Inflation, Interest Rate Spreads and Stock Returns

The linkage between stock market returns and inflation if any has drawn the attention of
researchers and practitioners alike particularly since the twentieth century. The foundation of the
discourse is the Fisher (1930) equity stocks proclamation. According to the generalized Fisher
(1930) hypothesis, equity stocks represent claims against real assets of a business; and as such,
may serve as a hedge against inflation. If this holds, then investors could sell their financial
assets in exchange for real assets when expected inflation is pronounced. In such a situation,
stock prices in nominal terms should fully reflect expected inflation and the relationship between
these two variables should be positively correlated ex ante (Ioannides et. al., 2005; Omotor,
2010). This argument of stock market serving as a hedge against inflation may also imply that
investors are fully compensated for the rise in the general price level through corresponding
increases in nominal stock market returns and thus, the real returns remain unaltered. Further
extension of the hedge hypothesis posits that since equities are claims as current and future
earnings, then it is expected that in the long run as well, the stock market should equally serves
as a hedge against inflation.

The theoretical link between interest rate spreads and banks financial structure and performance
cannot be doubted since rates of interest are linked directly to cost of capital or funds. In
addition, a slight change (increase or decrease) of rates of interest has a direct influence on the
following factors: debt and equity choices; cost of capital and real rates of interest. Scholars like
Hualan (1992) have found a direct connection between interest rate and financial performance of
banks. In addition, interest rates charged by banks have a huge impact on the whole economy
since they tend to influence a nations economic growth.

4
1.1.5 Nairobi Securities Exchange
The stock exchange acts as a primary or secondary market where public limited companies can
raise finance by issuing new shares, whether to new shareholders or existing ones. As a
secondary market, the stock exchange operates as a market where investors can sell existing
shares to one another. Nairobi Securities Exchange was constituted as Nairobi Stock Exchange in
1954 as a voluntary association of stock brokers in the European community registered under the
societies act. It is the fourth largest stock exchange in Africa in terms of traded volumes. In 2008,
NSE All Share Index was introduced as an alternative index. Its measure is an overall indicator
of the market performance. The index incorporates all the traded shares of the day. The share
index mainly focuses on overall market capitalization rather than the price movements of select
counters.

NSE 20 Share Index is a price weight index and a major stock market index that tracks the
performance of 20 of the best performing companies listed on the NSE. The companies are
selected based on a weighted market performance for a 12 month period based on market
capitalization, number of traded shares, number of deals and turnover. A well organized and
managed stock market will facilitate an economys increase in economic growth by increasing
the liquidity of financial assets, diversification of global and domestic risk, promotion of wiser
investment decisions and influencing better corporate governance (Were, 2014).

1.2 Statement of the problem

Interest rate has a wide and varied impact upon the economy. When it is raised, the general effect
is to lessen the amount of money in circulation, which works to keep inflation low. It also makes
borrowing money more expensive, which affects how consumers and businesses spend their
money; increases expenses for companies, lowering earnings somewhat for those with debt to
pay; and, finally, it tends to make the stock market a slightly less attractive place to investment
(Saunders & Cornett, 2008).

The effect of interest rates on stock returns has received considerable attention in literature. In
the research paper in 1981, Fama proves that the expected inflation and short-term interest rates
are negatively correlated with real economic activities. That is, the higher the inflation rate, the
lower the growth of real economic activities. Then, anticipated real activities are positively
related to the return of stock prices since stock prices reflect values of corporations based on

5
their actual growth. Therefore, expected inflation has a negative correlation with stock prices. In
addition, the research also indicates the influence of long-term interest rates on stock prices
through the effect of discount rates on the present value model (Tran, 2013; Wong et al., 2006).
It is argued that inflation and stock prices are inversely related (Jaffe and Mandelker, 1976;
Bodie, 1976; Nelson, 1976; Fama and Schwert, 1977). This is contrary to prior expectations by
the Fisher hypothesis of a one to one increasing relationship between stock returns and inflation.

The Stock market in Kenya has been growing rapidly and has diversified to provide not only the
primary role of providing an alternative source of capital for investment, but also many other
functions. The NSE has recently adapted an automated trading system, to keep in pace with other
major world stock exchanges, and this has greatly increased the volumes of stocks traded in the
market. Currently the NSE is trading more than a 100 million shares each month, making it to
play a great role in the economic growth of Kenya. This has been facilitated by enabling idle
money and savings to become productive by bringing together the borrowers and lenders of
money at a low cost. The market has helped in educating the public about the need to invest in
the stock market as well as boosting the confidence of investors through the requirement of listed
companies to have published financial reports.

Further empirical tests on the response of stock returns to inflation in the 1980s by Fama (1981),
Gertler and Grinols (1982), and Solnik (1983), amongst others yielded similar results of negative
relationship. It is argued that there is an inverse relationship between interest rates and stock
returns. Thorbecke, (1997) and Smal and de Jager, (2001) observe that a reduction in interest
rates induces an injection of liquidity into the economy. This extra liquidity could be channeled
to the stock market, driving up the demand and prices of stocks. Patelis, (1997) notes that interest
rate changes are helpful in predicting stock market returns over a long period. Thus, there is
evidence to conclude that interest rate policies should also target stock market price movements.

There are, however, counterarguments that seek to show that interest rate changes may not be
enough to influence stock-price misalignments. Bernanke and Gertler, (1999, 2001) observe that
the volatile nature of asset prices makes them hard to predict and that monetary authorities
should only change interest rates in reaction to stock-price movements, when they expect such
movements to affect inflation. Whereas Banks performance is often linked to financial health
especially profitability and financial ratios (Baffoe and Tettey, 2008; Ahmed, 2009), most studies
6
tend to ignore the fact that stock returns is a key indicator of performance. In many cases
investors, creditors and other stakeholders besides shareholders tend to look at stock market
returns or prices in order to evaluate a viable investment. This is the gap that this study seeks to
fill by establishing a link between interest rate spread, inflation and stock market returns. Instead
of examining the relationship between interest rates, inflation and stock returns in general, this
paper focuses on the impact of interest rates and inflation on returns on stocks issued by
Mortgage Banks.

1.3 Research objectives

The main objective of the study will be to investigate the relationship between inflation,
mortgage interest rate spreads and stock market returns. This study will investigate the influence
of inflation, mortgage interest rate spreads on stock market returns of Kenyan commercial banks
listed at the Nairobi Securities Exchange.

1.4 Value of the Study

The findings of this research will assist the fund managers to be able to offer sound advice to
their clients on the current available investment opportunities available. The fund managers are
able to establish what works more efficiently. This study will be of importance to the
management of players in the Kenyan mortgage industry as the information into the effects of
interest rate spreads on financial performance of mortgage banks would be useful for decision
making on enhancing the banks performance. The outcome of the study will thus help managers
in making informed decisions about the macroeconomic effects on the industry.

The Mortgage industry regulators would use the information to develop a regulatory framework
for management of interest rate spreads and subsequently optimizing performance of the
mortgage banks which play a critical role in enhancing home ownership in Kenya.

To scholars and academicians, the study will add value to the body of knowledge on the area of
inflation, interest rate spreads and stock returns. Future researchers will also use this study as
reference for further studies, help stimulate future research on the topic and suggest future
research gaps that can be explored

7
 CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction
This chapter focuses on the theories and empirical evidence on the topic of study. The initial
section reviews the underlying financial theories and determinants of stock market returns. The
last section reviews the empirical evidence and knowledge gap that this study intends to fill.

2.2 Theoretical Review

There are different theories in this area of study each identifying own paradigm and concept
about the interest rates and inflation behavior. The study is greatly interested in theories that
identify its relationship between interest rate spreads, inflation and lending institutions
performance in terms of stock returns. Highlighted below are some of such theories.

2.2.1 Modern Portfolio Theory

Modern Portfolio Theory (MPT), a hypothesis put forth by Harry Markowitz in his paper
"Portfolio Selection," (published in 1952 by the Journal of Finance) is an investment theory
based on the idea that risk-averse investors can construct portfolios to optimize or maximize
expected return based on a given level of market risk, emphasizing that risk is an inherent part of
higher reward. It is one of the most important and influential economic theories dealing with
finance and investment (Kaplan &Schoar, 2005). Also called "portfolio theory" or "portfolio
management theory," MPT suggests that it is possible to construct an "efficient frontier" of
optimal portfolios, offering the maximum possible expected return for a given level of risk. It
suggests that it is not enough to look at the expected risk and return of one particular stock. By
investing in more than one stock, an investor can reap the benefits of diversification, particularly
a reduction in the riskiness of the portfolio. MPT quantifies the benefits of diversification, also
known as not putting all of your eggs in one basket (Kaplan & Schoar, 2005).

The theoretical rationale for investing in an alternative asset class such as private equity (guided
by Modern Portfolio Theory) is to improve the risk and reward characteristics of an investment
portfolio, with the expectation that the asset will offer a higher absolute return whilst improving
portfolio diversification (Bodie et al., 2005). In comparison with investing in more traditional
securities such as public stocks or bonds, however, investing in PE funds is considered a
complex task. This is due to their long-term and illiquid nature, as well as the noticeable lack of
transparent and publically available information pertaining to PE funds (Tuck, 2003). Moreover,
8
there are material variations in performance across PE funds, implying that while PE investing
may generate excellent returns, investors could also face large losses (Phalippou & Gottschalg,
2009).
2.2.2 Inflation Illusion Hypothesis
Modigliani and Cohn (1979) money illusion hypothesis requires equity returns to decline in
periods of inflation because investors use nominal rates of return to discount real future cash
flows. In a landmark paper, Inflation, Rational Valuation and the Market, they argued that
investors fundamentally undervalued stocks in the 1970s because of two important cognitive
errors: 1) they use nominal interest rates to discount real cash flows; and 2) they do not take into
account the capital gain that accrues to equity holders of firms with fixed rate debt liabilities. The
authors maintain that, One should capitalize the current level of adjusted profits at the very
same real rate that prevailed before the inflation, even though the nominal interest rate will have
increased.

Modigliani and Cohn (1979) claim that stock market investors (but not bond market investors)
are subject to inflation illusion. Stock market investors fail to understand the effect of inflation
on nominal dividend growth rates and extrapolate historical nominal growth rates even in period
of changing inflation. Thus when inflation rises, bond market participants increase nominal
interest rates which are used by stock market participants to discount unchanged expectations of
future nominal dividends. The dividend-price ratio moves with the nominal bond yield because
stock market investors irrationally fail to adjust the nominal growth rate to match the nominal
discount rate. From the perspective of a rational investor, this implies that stock prices are
undervalued when inflation is high, and may become overvalued when inflation falls. The
dividend yield that emerges from the interaction of national and irrational investors is positively
correlated with inflation and the long term nominal interest rate.

2.2.3 Description of Arbitrage Theory

Ross (1976) proposed the main alternative to the CAPM the Arbitrage Pricing Theory (APT).
Without making many assumptions about investor behavior, the APT extended the CAPM by
allowing for multiple factors in the economy. The notion of arbitrage is simple. It involves the
possibility of getting something for nothing while having no possibility of loss. Thus, it is an
asset pricing model based on the idea that an asset's returns can be predicted using the

9
relationship between that same asset and many common risk factors. Created in 1976 by Stephen
Ross, this theory predicts a relationship between the returns of a portfolio and the returns of a
single asset through a linear combination of many independent macro-economic variables.

Copeland (2005) defines arbitrage as purchasing and selling something taking advantage of
differences is prices in order to make profits that are riskless. This raises one fundamental
question what is something and doubts are cast on whether or not PPP and law of one price hold
water. The term arbitrage might be used in commodity markets, market fir currencies, services,
equity markets etc. Even when goods and services or commodities are taken into account, they
are of different types and produced in various countries and costs incurred by economic agents
vary. Perfect commodity arbitrage is somewhat a mirage. Basically, arbitrage works on
speculation by arbitrageurs and it depends on the type of information available in the market
(Lafrance & Schembri, 2002). Information and communication are vital elements for proper
functioning of markets.

2.3 Determinants of Stock Return

Based on the different theories, a number of empirical studies have identified firm-level
characteristics that affect the stock return of firms. Among these characteristics are the size of the
firm, leverage, profitability (earnings before interest, tax, depreciation and amortization) and
liquidity.
2.3.1 Size of the firm
According to the trade-off theory, larger firms, which are more diversified, have lower
bankruptcy costs, and easier access to capital markets, obtain more debt. The pecking order
theory, however, suggests that larger firms rely on internal sources of finance and, hence, do not
choose debt or equity as their first option for financing. Empirically, studies have found that
larger firms borrow more in order to take maximum advantage of tax shields. Thus, firm size is
expected to have a positive effect on leverage. Since smaller firms may suffer from earnings
depression and information asymmetry, it involves more risk than larger firms, and investors
demand more return on their stock (Gallizo & Salvador, 2006). Hence, firm size is expected to
have a negative effect on stock returns.
2.3.2 Leverage
Theoretically, if a firm is highly leveraged, then the investor will demand a higher return on its
stock due to the high risk of bankruptcy (Bhandari, 1988; Yang et al., 2010). Therefore, one
would expect leverage to have a positive effect on stock returns. Moreover, according to the
10
pecking order theory, if a firms internal sources are not enough to fund new projects; it will opt
for debt financing. This shows that high-growth firms are highly leveraged because they can
acquire more debt due to their need for greater financing. The trade-off theory hypothesizes that
growth opportunities cannot be collateralized to acquire debt and that growing firms have
enough resources to finance new activities. So, there is a negative relationship between growth
and leverage. Empirical studies have also found that growth has positive and negative effects on
leverage. Chen and Chen (2011) explain that a firms growth causes variation in its value, and
greater variation is associated with greater risk. This implies that growth positively affects stock
returns.

2.3.3 Profitability
The pecking order theory of capital structure implies that profitable firms will not opt for debt or
equity financing because they have sufficient funds to finance their assets. However, the trade-
off theory proposes a positive relationship between profitability and leverage. Intuitively, this
suggests that higher-profit firms can, on the strength of their reputation, easily acquire debt and
take maximum advantage of tax shields. Hovakimian, Opler and Titman (2001) argue that there
is no association between profitability and leverage because unprofitable firms also issue equity
to offset the effect of excessive leverage. Empirically, a negative relationship emerges between
firm profitability and leverage (Chen & Chen, 2011; Yang et al., 2010). Thus, we expect
profitability to have a negative effect on leverage. Since higher-profit firms provide more return
on their stocks, profitability should have a positive effect on stock returns.
2.3.4 Liquidity
The pecking order theory explains that retained earnings increase liquid assets; excess liquid
assets are negatively associated with firm leverage. The trade-off theory suggests that firms with
a high ratio of liquid assets should borrow more because they have the ability to meet their
contractual obligations on time. This theory predicts a positive relationship between liquidity and
leverage. Based on the empirical studies carried out, firms with high levels of liquid assets are
likely to acquire less debt and rely on internally generated funds. Thus, liquidity should
negatively affect leverage. While analyzing the effect of liquidity on stock returns, many
empirical studies have found a negative relationship between liquidity and stock returns. Most
theoretical and empirical studies have demonstrated that liquidity has a negative effect on stock
returns since liquid stock involves less risk, so the return on liquid stock is low (Chen & Chen,

11
2011; Yang et al., 2010). Thus, there is a negative relationship between liquidity and stock
returns.

2.4 Empirical Review

Lee (1997) analyzed the relationship of short-term interest rates and the stock market. He used
the 3-year rolling regression to forecast the excess return with short-term interest rate as an
independent variable. However, the relationship is not the same over time. Based on the earlier
research, the interest rate has a negative correlation with the movement of stock market return. In
addition, Nyamute (1998) studied the relationship between stock prices and other financial
variables like money supply, interest rates, inflation rates and exchange rates in Kenya. He found
a positive relationship between stock prices and exchange rates. However, his research
performed data analysis on non-stationary series which may adversely affect the validity of the
results.

Sifunjo (1999) sought to establish the causal relationship between exchange rate and stock prices
at NSE between 1993 and May 1999. He studied the monthly average stock price 18 index and
nominal dollar exchange rates by employing co-integration and error-correction methodology.
Sifunjo found the exchange rate and stock prices are co-integrated, non-stationary in first
difference and integrated of order one. The results showed a unidirectional causality from
exchange rate to stock prices. However results from Sifunjo could have been obsolesced by
passage of time owing to stock automation at NSE and introduction of the Central Depository
System.

Rapach (2002) employed data of 16 OECD countries to determine the direction of the correlates.
He observed that long-run inflation neutrality exists in the stock markets of the countries.
Following the methodology of King and Watson (1997) in the establishment of time series
properties, Rapach explained that the long-run Fisher effects exists if the long-run real stock
returns do not respond to a permanent inflation shock (Yeh & Chi, 2009). Studies on the
inflation-stock return maxim for the Nigerian economy as the scan on the literature revealed are
however relatively sparse. The available few from our search equally have their limitations.

12
Chen and Jin (2004) conducted a multivariate analysis on twenty portfolios of the New York
Stock Exchange (NYSE) using a set of economic variables. Chen and Jin (2004) applied
conditional mean encompassing test for model specification with the assumption that it is robust
to heteroscedasticity. The specific economic variables that were included in the model were term
structure of interest rates, the change in expected inflation, contemporaneous unexpected
inflation, and monthly growth rate in industrial production, lags of the above six economic
variables. The dependent variable was the lag of excess rate of returns. The authors concluded
that the conditional excess rates of returns are explained by lagged expected inflation, lagged
unexpected premium for default, lagged unexpected change in term structure, a seasonal dummy,
and lagged market returns.

Gavin (2010) studied the factors affecting banking sector interest rate spread in Kenya. This
study sought to establish the factors that influence interest rate spreads in commercial banks in
Kenya. The study adopted a descriptive and quantitative research design on a sample of 15
commercial banks in Kenya which accounted for 85% of all the loans disbursed between 2002
and 2009. The study used secondary data obtained from the Banking Survey publication, Africa
Development indicators and the Central Bank of Kenya reports. Study found that intermediary
efficiency is affected by bank market share of assets, overheads, and return on assets, liquidity,
and market share of loans and proportion of non-interest income to total income. There is
evidence of capital adequacy ratio, treasury bills rate and the discount rate also having a
significant impact on interest rate spreads. The study could not find evidence to support the
impact of market share of deposits, inflation and cash reserve ratios on banking interest rate
spreads.

Anene (2011) studied the relationship between exchange rate and stock prices in Kenya. He used
Granger Causality (GC) model. The study showed that there is a unidirectional causal
relationship between exchange rates (Ksh /US $) for the five year period, that is Granger causes
stock prices at NSE. The study was strong and significant at 90% confidence level.

Another study by Sifunjo and Mwasaru (2012) analyzed the causal relationship between NSE
stock prices and foreign exchange rate using monthly data from November 1993 to May 1999.
Johansen consideration procedure and error correction model were used for analysis. The

13
empirical results indicate that in Kenya, nominal exchange rate of shillings per dollar Granger
causes stock price. The study also found out a unidirectional causality from exchange rates to
stock prices. Therefore, the movements in exchange rates exert significant influence on stock
price determination in Kenya.

Were and Wambua (2013) carried out a study to establish determinants of interest rate spread of
Kenya commercial banks. Study intended to investigate the determinants of interest rate spreads
in Kenyas banking sector .Study collected data from all 44 commercial banks. The empirical
results showed that bank-specific factors play a significant role in the determination of interest
rate spreads. These include bank size based on bank assets, credit risk as measured by non-
performing loans to total loans ratio, liquidity risk, return on average assets and operating costs.

2.5 Summary of Literature Review and Knowledge Gap

From the literature review it is evident that there are conflicting results on the relationship
between inflation, interest rate spreads and stock returns. Lee (1997) found that interest rates had
a negative correlation with the movement of stock market return. On the other hand Nyamute
(1998) found a positive relationship between stock prices and exchange rates. The study by
Sifunjo (1999) found that exchange rate and stock prices are co-integrated, non-stationary in first
difference and integrated of order one. The results showed a unidirectional causality from
exchange rate to stock prices. Gavin (2010) found that intermediary efficiency is affected by
bank market share of assets, overheads, and return on assets, liquidity, and market share of loans
and proportion of non-interest income to total income. The study by Were and Wambua (2013)
showed that bank-specific factors play a significant role in the determination of interest rate
spreads. These include bank size based on bank assets, credit risk as measured by non-
performing loans to total loans ratio, liquidity risk, return on average assets and operating costs.

There exists a knowledge gap in this area in that few studies have looked at the relationship
between inflation rate, interest rate spreads and stock return. This study seeks to analyse the
relationship between inflation rate, mortgage interest spreads and stock returns of Kenyan
commercial banks listed at the NSE.

14
 CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Introduction
This chapter outlines the research methodology as a way to systematically solve the research
problem. It involves; drawing the research design, determination of the population, sampling,
data collection and data analysis.

3.2 Research Design

This investigation is a descriptive time series correlation study with monthly stock market
returns as the dependent variable while the independent variables are: the monthly inflation rates
and mortgage interest rate spreads. Webb, Campbell, Schwartz, and Sechrest (1966) posit that a
time series study is descriptive in nature. This descriptive nature is particularly imperative when
a variable being studied extends over a considerable time period. It is the only research design
that considers a continuous record of fluctuations in study variables over an entire period in
which the variables are being studied.

The approach to be used is deductive approach since the researcher will use secondary data
collected from commercial banks financial statements in the UK and use it to test existing
theories (Saunders et al., 2009; Bryman and Bell, 2007).

3.3 Data Collection

The study shall use data from secondary sources. Statement on financial performance will be
extracted from the financial statements for the commercial banks for a ten year period (2005 to
2014). Weighted average deposit rates and weighted average lending rates data will be
established from the Central bank of Kenya and Kenya national bureau of statistics databases.
Thus, the data set consists of monthly observations of the closing share price index, inflation
rates, interest rates, exchange rates and market liquidity. Time series secondary data is used in the
study. Monthly data on the Nairobi Securities Exchange Index is obtained from the Nairobi
Securities Exchange. Monthly data on interest rates, inflation rates and exchange rates are
obtained from the Central Bank of Kenya and the Kenya National Bureau of Statistics.

The data set consists of monthly stock from 2005 to December 2014. The data were obtained
from the Central Bank of Kenya (CBK). Data include monthly observations on Stock Price Index
15
(STK) measured as the Nigerian Exchanges All Share Index simply ASI and consumer price
index (CPI). The monthly STK is used as a proxy for stock returns (also known as equity
returns). The growth rates of the series are defined as the first difference of the logarithmic price
levels.

In this study we will capture interest rate spread by combining the accounting and optimal firm
behaviour models. The accounting value of net interest margin uses the income statement of
commercial banks, defining the bank interest rate margin as the difference between the banks
interest income and interest expenses, which is expressed as a percentage of average earning
assets (Barajas, Steiner & Salazar, 1996). The firm maximization behaviour, on the other hand,
allows derivation of profit maximization rule for interest rate and captures features of market
structure. Depending on the market structure and risk management, the banking firm is assumed
to maximize either the expected utility of profits or the expected profits. And, depending on the
assumed market structure, the interest spread components vary. For example, assuming a
competitive deposit rate and market power in the loan market, the interest rate spread is traced
using the variations in loan rate (Wong, 1997). But with market power in both markets, the
interest spread is defined as the difference between the lending rate and the deposit rate that is:
S= r l r d
The study will adopt the following models to calculate the interest rate spread (Ngugi, 2001):
r l =()+()+()
=()++()
Therefore S =()+()+() - ()++()
..(1)
Where r l is the lending rate;
is the Reserve requirement as a proportion of the total deposits;
rb the government securities interest rate ;
is the proportion of liquidity gap from the inter-bank market and
w is the proportion of non-performing loans assumed to be random, taking values between (0,1)
that is influenced by interest rate on loans, uncertainty in the economy and the bank policy on
collateral. Thus, credit risk includes both the endogenous and exogenous risk.

The market returns will be derived from the end of month share indices as:

16
 Indext Indext 1
Market Re turnt
Indext 1
The returns are then regressed against the monthly interest rates, inflation rates, exchange rates
volatility and liquidity. Here the linear relationship between the dependent and the independent
variables is determined through panel approach for the regression analysis and inferences will be
drawn based on the regression analysis.

3.4 Data Analysis

After data collection data analysis will be done. The quantitative data in this research will be
analyzed by descriptive statistics using statistical package for social sciences (SPPS). Descriptive
statistics includes mean, frequency, standard deviation and percentages. In addition to measures
of central tendencies, measures of dispersion and graphical representations will be used to
tabulate the information. Findings will be presented in tables, charts and graphs. Linear
relationship between dependent and independent variables will be determined through panel
approach for the regression analysis and inferences will be drawn based on the regression model
below:

Y = 0+ 1X1+ 2X2+
Where:
Y = Stock market returns of Mortgage Banks in Kenya over time as measured standard
deviation/variance
X1= is the interest rate spread over time,
X2= is the inflation over time,
1 and 2= Coefficients of the independent variables
0 is the constant and will be estimated by OLS (Ordinary Least Squares) method.

= error/term or variable which represents all the factors that affects the dependent variable but
were not included in the model either because they were difficult to measure or not known.

A key statistic is R squared which will show the percentage variance in the dependent variable
(Mortgage banks stock market returns) that can be explained by the independent variables
(Mortgage industry interest rate spread and inflation). A regression analysis will be performed to
test the relationship between the variables. The size of the bank will be taken as the control

17
variable. According to Zarruk (1989) size affects the financial performance of banks. In this
study size of the banks was defined by the number of employees.

3.4.1Test of significance
T-tests will be used to test the significance of the relationship between mortgage banks financial
performance and interest rate spreads. Also, the F-Statistic (ANOVA table) a will be employed.

18
 REFERENCES

Abugri, B.A. (2006). Empirical relationship between macroeconomic volatility and stock
returns: Evidence from Latin American markets. International Review of Financial
Analysis.19.228-245

Acharya, V., Hasan, I., & Saunders, A. (2007). Should banks be diversified? Evidence from
individual bank loan portfolios. Bank for International Settlements, BIS Working Papers
No 118.

Adrangi, B., Chatrath, A. & Sanvicente, A. Z. (2000). Inflation, Output and Stock Prices:
Evidence from Brazil. Working Paper, 34.

Ahmed, M. B. (2009). Measuring the Performance of Islamic Banks by Adapting Conventional

Ratios German University in Cairo Faculty of Management Technology Working Paper
No. 16, pp 1-26.

Angbanzo, L. (1997). Commercial Bank Net Interest Margins, Default Risk, Interest-Rate Risk
and Off-Balance Sheet Banking. Journal of Banking and Finance, Vol. 21, 5587.

Artmann, S., Fitner, P. & Kempf, A. (2010). Determinants of Expected Stock Returns: Large
Sample Evidence from the German Market. CFR Working Paper, No. 10-01.
http://hdl.handle.net/10419/41363.

Asness, C. (2000). Stocks versus Bonds: Explaining the equity Risk Premium. Financial
Analysts Journal.

Baffoe, I.T. & Tettey, I. (2008). Investigating shareholders economic value creation in the
banking industry: - The case of the HSBC and Barclays plc, UK, MBS Thesis.

Bagehot, A. (1973). Description of Money Market with Currency Monopoly. Homewood

Bai, Y. & Green, C.J. (2008). Determinants of Cross-Sectional Stock Return Variations in
Emerging Markets. AES, Business School, Napier University, Edinburgh, EH14 1DJ,
United Kingdom.

Barajas, A., Steiner, R. & Salazar, V. (1996). Interest spread in banking: Costs, financial taxation,
market power and loan quality in the Colombian case, 19741988. IMF Working Paper
No. 110. Washington, D.C.

Barsky, R. & DeLong, B. (1991). Forecasting pre-World War I inflation: The Fisher effect and
the gold Standard. Quarterly Journal of Economics, CVI, 3, 815-836.

Bleaney, M. & Fielding, D. (2002) Exchange rate regimes, inflation and output volatility in
developing countries. Journal of development economics, 68, 233-245.

Branson, W.H. (1979). Macroeconomic Theory and Policy. Princeton University.

19
Campbell, J. Y. & Vuolteenaho, T. (n.d). Inflation Illusion and Stock Prices, American
Economic

CBK (2015). Inflation Rates https://www.centralbank.go.ke/index.php/balance-of-payment-

statistics/inflationrates

Chen, C. & Jin,Y. (2004). A Robust Test on the Multifactor Pricing Model Investment
Management and Financial Innovations.

Coakes, S. & Ong, C. (2011). SPSS version 18 for windows analysis without anguish. Milton:
John Wiley and Sons Australia Ltd.

Coleman, A. K. & Tetty, K. F. (2008). Impact of Macroeconomic variables on Ghana stock

exchange. Journal of Risk and Finance, 4, 365-378.

Copeland, L.S. (2005). Exchange Rates and International Finance. 4th edition. FT Prentice Hall

Demirguc-Kunt, A. & Huizinga, H. (1997). Determinants of Commercial Bank Interest Margins

and Profitability: Some International Evidence. Washington, D.C: World Bank Policy
Research Working Paper No. 1900.

Devereux, M. B. & Yetman, J. (2002). Price setting and exchange rate pass through: Theory and
evidence. In the book Price Adjustment and Monetary Policy, pp. 347-371, a
compendium published following the eponymous conference held at the Bank of Canada,
November 2002. Ottawa: Bank of Canada.

Eita, J.H. (2011). Determinants of Stock Market Prices in Namibia. Working Paper 209. Monash
University.

Emmanuelle, N.Y. (2003). A European Study Of Bank Interest Margins: Is Net Fees Revenue A
Determinant. Doctoral Thesis. United Kingdom, U.K: University of Birmingham.

Falkena, H.B., Fourie, L.J. & Kok, W.J. (1988), The mechanics of the South African Financial
System, (3rd Ed.), London: Macmillan Press Ltd.

Fama, E. (1965). The Behaviour of Stock Market Prices. Journal of Business, 38, 34-105.

Fama, E. (1981). Stock returns, real activity, inflation and money. American Economic Review,
71, 545-564.

Fama, E. & French, K. (1993). The Cross-Section of Expected Stock Returns. Journal of
Finance 47:427465.

Fisher, I. (1930). The Theory of Interest, Macmillan, New York.

Flannery, M.J. (1981). Market Interest Rates and Commercial Bank Profitability: An Empirical
Investigation. Journal of Finance 36: 1085-101.

20
Froyen, R.T. (1996). Macroeconomics: Theories and Policies. 5th Edition. New Jersey: Prentice
Hall Publishers.

Fuentes, G. (2010). Leading Indicators for the Stock Market.

Gagnon, J. E. & Ihrig, J. (2004). Monetary policy and exchange rate pass through. International
Journal of Finance and Economics, 9, 315-338.

Geetha, C., Mohidin, R., Chandran, V.V. & Chong, V. (2011). The Relationship between Inflation
and Stock Market: Evidence from Malaysia, United States and China. International
Journal of Economics and Management Sciences, Vol. 1(2), pp. 1-16.

Geske, R. & Roll, R. (1983). The Fiscal and Monetary Linkage between Stock Returns and
Inflation. Journal of Finance, 38, 1-34.

Hancock, D. (1985). Bank Profitability, Interest Rates, and Monetary Policy. Journal of Money,
Credit, and Banking 17, no. 2 (1985): 189-202.

Hendry, D. F. (2006). Modelling UK Inflation, 1875-1991. Economics Department, Oxford

University, U.K.

Hicks, J. (1969). A Theory of Economic History, UK: Clarendon Press.

IFC/CBK (1984). Development of money and capital markets in Kenya. Nairobi: Government
Printer.

Ioannides, D., Katrakilidies, C. & Lake, A. (2002). The relationship between Stock Market
returns and Inflation: An Econometric Investigation using Greek data.

Jayaraman, T.K., & Sharma, R., (2003). Why is Interest Rate Spread High in Fiji? Results from a
Preliminary Study. Fijian Studies, 1(1), 45-67.

Jefferis, K.R. & Okeahalam, C.C. (2000). The impact of economic fundamentals on stock
Markets in Africa.Development Southern Africa, 17(1), 23-51.

Jiranyakul, K. (2009). Economic Forces and the Thai Stock Market, 1993-2007. Journal of
Financial Research.

Kandil, M. (2005). Money, interest, and prices: Some international evidence. International
Review of Economics and Finance, 14, 129-147.

Kestrel Capital (East Africa) Ltd, (2006). Overview of Nairobi Securities Exchange. Available at
http://www.kestrelcapital.com/kestrel_capital_nairobi_stock_exchange_overview.html.A
ccessed on 30th July, 2015.

Kilongosi, J.M. (2005). Net bank interest margin and interest risk among commercial banks in
Kenya, Unpublished MBA Thesis, University of Nairobi.

21
Kilonzo, B.M. (2003). The effects of changes in interest rates on credit granted by commercial
banks in Kenya, Unpublished MBA Thesis, University of Nairobi.

Kimani, D.K. & Mutuku, C.M. (2013). Inflation Dynamics on the overall Stock Market
performance: The Case of Nairobi Securities Exchange in Kenya. Economics and
Finance Review Vol. 2(11) pp. 01 11, January, 2013 ISSN: 2047 0401. Available
online at http://www.businessjournalz.org/efr. Accessed on 16th July, 2015.

Kimutai, T.K. (2003). An empirical analysis of factors contributing to high interest rates spread
in Kenya, Unpublished MBA Thesis, University of Nairobi.

King, R. & Levine, R. (1993). Finance and Growth: Schumpeter might be right. The Quarterly
Journal of Economics, 108(3), 717-737.

Koubi, V. (2008). On the Determinants of Financial Development and Stock Returns. Journal of
Money, Investment and Banking Issue 1.

Lafrance, R. & Schembri, L. (2002). Purchasing-Power Parity: Definition, Measurement, and

Interpretation. Bank of Canada review Autumn 2002. Available at
http://www.bankofcanada.ca/wp-content/uploads/2010/06/lafrance_e.pdf. Accessed on
31.07.2015.

Lansing, K. J. (2004). Inflation-induced Valuation Errors in the Stock Market, FRBSF

Economic letter.

Levine, R. & Zervos, S. (2006). Stock Market Development and Long-run Growth. Policy
Research Working Paper 1582, World Bank Economic Review, 10, 323-339.

Malhotra, N. & Tandon, K. (2013). Determinants of Stock Prices: Empirical Evidence from NSE
100 Companies IRACST. International Journal of Research in Management &
Technology Vol. 3.

Modigliani, F. & Cohn, R. A. (1979). Inflation, Rational Valuation and the Market. Financial
Analysts Journal, 35, 24-44.

Mok, M.K. (1993). Causality of Interest rate, exchange rate and stock prices at market Open and
close in Hong Kong. Asia Pacific Journal of Management, 10(2), 123-143.

Moore, B. J. (1988). The endogenous money supply. Journal of Post Keynesian Economics : 10
(3): 372- 385.

Mun, H. W., Siong, E. C. & Thing, T. C. (2008). Stock Market and Economic Growth in
Malaysia: Causality Test. Asian Social Science, 4(4).

Munga, N. (2012). The Nairobi stock exchange, its history, organization and role in Kenya
economy. Unpublished MBA Project, University of Nairobi.

Ngugi, R. W. (2001). An empirical analysis of interest rate spread in Kenya. AERC Research
Paper 106 African Economic Research Consortium, Nairobi, University of Nairobi.
22
Njuguna, S.N. & Ngugi R.W. (2000). Banking Sector Interest Rate Spread in Kenya.
Macroeconomic and Economicetric Modeling. Kenya Institute for Public Policy Research
and Analysis (KIPPRA) Discussion Paper No 5, 6-8.

Nyamute, M. (1998). The relationship between stock prices and exchange rate, Interest rates,
Money Supply & inflation rate. Unpublished MBA Project, University of Nairobi.

Olweny, T.O. & Kimani, D. (2011). Stock Market Performance and Economic Growth:
Empirical Evidence from Kenya using Causality Test Approach. Advances in
Management & Applied Economic, vol.1(3), pp.153-196 Review, v94, 2004.

Omotor, D.G. (2010). Relationship between Inflation and Stock Market Returns: Evidence from
Nigeria. Journal of Applied Statistics 1.1 (1).

Oost, E. (2002). Risk and return, in Understanding South African financial markets, Pretoria:
Van Schaik Publishers.

Pallant, J. (2007). SPSS survival manual : A step by step guide to data analysis using SPSS for
windows -version 15. 3rd edition. Crows Nest: Open University Press.

Ritter, J. & Warr, R. (2002). The Decline of Inflation and the Bull Market of 1982-1999.

Robert, D.G. (2008). Effect of macroeconomic variables on stock market returns for four
emerging economies: Brazil, Russia, India and China. International Business Economics
Research Journal, 7(3).

Rogers, C. (1985). The monetary control system of the South African Reserve Bank: monetarist
or Post Keynesian? South African Journal of Economics 53 (3): 241- 247.

Ross, S. (1976). The Arbitrage Theory of Capital Asset Pricing. Journal of Economic Theory, v.
13, 341-360.

Saunders, A. & Cornnet, M. M. (2008). Financial institutions management: A risk management

approach (6th Edition.).The McGraw-Hill, New York.

Sharpe, S. A. (1999). Stock Prices, Expected Returns, and Inflation. Finance and Economics
Discussion Series 1999-02.

Shauna, C. (2003). Why do companies care about their stock prices?

http://www.investopedia.com/articles/basics/03/020703.asp 2.3.3 Financial Leverage.

Shaw, E. (1973). Financial deepening in economic development. New York: Oxford University
Press.

Siddiqui, M.A. (2009). Modeling Uncertainty and Investment as Determinant of Returns from
Pakistani Insurance Companies. International Journal of Basic & Applied Sciences
IJBAS 9(9): 461-478

23
Siele, W. (2009). An Empirical investigation of the relationship between selected Macro
Economic variables and the Nairobi Stock Exchange 20 Share Index. Unpublished MBA
Project, University of Nairobi.

Sifunjo, E. & Mwasaru, A. (2012). The causal relationship between stock prices and exchange
Rates in Kenya. Research Journal of Finance and Accounting, 3(7), 121-130.

Sloman, J. & Kevin, H. (2007). Economics for Business. Prentice Hall, Financial Times.

Slovin, M.B. & Sushka, M.E. (1983). A Model of the Commercial Loan Rate. Journal of
Finance 38, 1583-1596.

Sunde, T. & Sanderson, A. (2009). A Review of the Determinants of Share Prices. Journal of
Social Sciences 5(3): 188-192.

Thorbecke, W.O. (1997). Stock Market Returns and Monetary Policy. Journal of Finance,
52,635-654.

Trading Economics, (2015) Kenya Inflation Rate.

http://www.tradingeconomics.com/kenya/inflation-cpi

Wang J., Meric, G. & Meric, I. (2010). A Comparison of the Determinants of Stock Returns in
the 1987 and 2008 Stock Market Meltdowns. Banking and Finance Review.

Waweru, N.N. (2012). Analysis of the determinants of stock price volatility at Nairobi Securities
Exchange. An unpublished MBA project, University of Nairobi.

Wilcox, S. (2007). The Adjusted Earnings Yield. Financial Analysts Journal, 63(5).

Wong, W., Habibullah, K. & Jun, D. (2006). Do Money And Interest Rates Matter For Stock
Prices? An Econometric Study of Singapore and USA. Singapore Economic Review 51,
no. 1: 31-51.

Yang, S. (2012). A Study of Swedish Mortgage Interest Rates and Swedish bank Stock Returns-
Time varying Mortgage Margins and Stock Returns. Unpublished Master of Science
thesis.

Yourougou, P. (1990). Interest-rate Risk and the Principal Depository Financial Intermediary
Common Stock. Journal of Banking and Finance,14,803-20.

Zarruk, R.E. (1989). Bank Spread with Uncertainty Deposit Level and Risk Aversion. Journal of
Banking and Finance, 13, 797810.

24
 APPENDICES
Appendix 1: List of Firms Listed at the NSE
AGRICULTURAL
1 Eaagads Ltd
2 Kapchorua Tea Co. Ltd
3 Kakuzi
4 Limuru Tea Co. Ltd
5 Rea Vipingo Plantations Ltd
6 Sasini Ltd
7 Williamson Tea Kenya Ltd
AUTOMOBILES AND ACCESSORIES
8 Car and General (K) Ltd
9 Sameer Africa Ltd
10 Marshalls (E.A.) Ltd
BANKING
11 Barclays Bank Ltd
12 CFC Stanbic Holdings Ltd
13 I&M Holdings Ltd
14 Diamond Trust Bank Kenya Ltd
15 Housing Finance Co Ltd
16 Kenya Commercial Bank Ltd
17 National Bank of Kenya Ltd
18 NIC Bank Ltd
19 Standard Chartered Bank Ltd
20 Equity Bank Ltd
21 The Co-operative Bank of Kenya Ltd
COMMERCIAL AND SERVICES
22 Express Ltd
23 Kenya Airways Ltd
24 Nation Media Group
25 Standard Group Ltd
26 TPS Eastern Africa (Serena) Ltd
27 Scangroup Ltd
28 Uchumi Supermarket Ltd
29 Hutchings Biemer Ltd
30 Longhorn Kenya Ltd
31 Atlas Development and Support Services
CONSTRUCTION AND ALLIED
32 Athi River Mining
33 Bamburi Cement Ltd
34 Crown Berger Ltd
35 E.A.Cables Ltd
36 E.A.Portland Cement Ltd
ENERGY AND PETROLEUM
37 KenolKobil Ltd
38 Total Kenya Ltd
39 KenGen Ltd
40 Kenya Power & Lighting Co Ltd

25
41 Umeme Ltd
INSURANCE
42 Jubilee Holdings Ltd
43 Pan Africa Insurance Holdings Ltd
44 Kenya Re-Insurance Corporation Ltd
45 Liberty Kenya Holdings Ltd
46 British-American Investments Company ( Kenya) Ltd
47 CIC Insurance Group Ltd
INVESTMENT
48 Olympia Capital Holdings ltd
49 Centum Investment Co Ltd
50 Trans-Century Ltd
51 Home Afrika Ltd
52 Kurwitu Ventures
INVESTMENT SERVICES
53 Nairobi Securities Exchange Ltd
MANUFACTURING AND ALLIED
54 B.O.C Kenya Ltd
55 British American Tobacco Kenya Ltd
56 Carbacid Investments Ltd
57 East African Breweries Ltd
58 Mumias Sugar Co. Ltd
59 Unga Group Ltd
60 Eveready East Africa Ltd
61 Kenya Orchards Ltd
62 A.Baumann CO Ltd
63 Flame Tree Group Holdings Ltd
TELECOMMUNICATION AND TECHNOLOGY
64 Safaricom Ltd

Source: NSE Website (2015)

26