Extent of Basel II accord adoption and perceived implications on banks' operations in Kenya
Ndimu, Paul K
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Basel II framework is based on the 1988 accord's basic structure of setting capital requirements and builds a firm foundation for capital regulation, supervision and market discipline to enhance prudent risk management to achieve financial stability. The framework better reflects the underlying risks that banks face and provides incentives for risk management. This study sought to examine the extent of Basel II adoption and its perceived implications on commercial banks in Kenya. The study was guided by the following specific objectives: (i) to establish the extent to which Basel II requirements have been adopted by commercial banks in Kenya; and (ii) to determine the perceived implications of Basel II Accord on commercial banks in Kenya. For purposes of this study, a descriptive survey was undertaken. The population was all the commercial banks registered and licensed to undertake commercial banking business in Kenya. The total number of commercial banks stood at 45 as at December, 2009 (CBK, 2009). The respondent from each of the commercial banks was the Chief Executive Officer (CEO) or their designates, who are charged with the responsibility of shaping the strategic direction of their respective organization. The survey method was used to collect data. A semi-structured questionnaire was used to collect primary data from the respondents. The data pertaining to profile of the respondents and their respective organizations was analyzed using content analysis while data pertaining to the objectives of the study was analyzed by employing descriptive statistic. Descriptive statistics were used to describe the basic features of the data in the study. Findings of the study indicate a substantial progress of the Kenyan banking sector as far as Basel II implementation is concerned. The international banks, drawing on the support of their parent groups, are in a better state of adoption compared to local institutions. The findings also show that many banks in Kenya do not rely on External Ratings saves for their international counterparties and large corporate counterparties. This finding is consistent wi th the limited credit rating penetration in the country. In view of the findings and conclusions, the following recommendations are made for policy and practice: There is limited credit rating penetration in the country. Unrated exposures under the standardized approach would attract higher risk weights and thus more capital would be required to be set aside for such exposures; since Basel II allows for the use of internal models by banks to determine their capital charges pursuant to supervisory approval, a transition period will therefore be required for Kenyan banks to collect the requisite data for the model based approaches to assessing their capital adequacy needs; human resources competencies have been identified as a cross-cutting challenge. Basel II will require banks to upscale their human resource base and a 'talent war' in the banking sector can be anticipated going forward; and upgrades and overhauls of existing IT literature systems for most banks will be required. Robust, scalable systems will be required to ensure banks can meet the rigorous Basel II information requirements.
University of Nairobi, Kenya