Structural Issues in kenya's economy

Private Sector Development

In 2010, the World Bank Doing Business report ranked Kenya 98^th out of 183 economies in the "Ease of doing business", three places below its 2009 ranking. Poor infrastructure, political risk, finding the right quality of staff, and access to adequate credit and financing were among the major constraints faced by small and medium enterprises (SMEs) in 2010. The government’s Economic Stimulus Programme played an important part in boosting infrastructure projects and creating credit for SMEs. The government streamlined the financial sector by regulating microfinance institutions. The 2010/11 budget included a Business Regulation Bill to prevent the regulatory authorities from setting arbitrary charges and fees. It is meant to address the main constraints faced by businesses and promote growth in the private sector.

The Kenyan banking sector performed well in 2010. Total assets of the banking sector rose by 22.6% between June 2009 and June 2010. Growth in asset base was due to growth in deposits, retained profits and capital injections. From June 2009 to June 2010, non-performing loans decreased by 7.9%, total deposits increased by 27.8%, capital and reserves of the banking sector grew by 25.6%. In the meantime, total capital to risk weighted assets ratio only decreased marginally from 19.8% to 19.6%. The banking sector pre-tax profits increased by 41.9% over the same period.

The good performance of the Kenyan economy and the gradual recovery of the global economy in 2010 contributed to the rebound in trading activities at the Nairobi Stock Exchange (NSE). The NSE 20 share index rose by 55% between September 2009 and October 2010. Market capitalisation increased by 58.3% over the same period. Bond turnover for the year up to November 2010 stood at KES 460 billion compared with the annual turnover of KES 110 billion in 2009, representing a 316% increase.

2010 was dubbed the year of Rights Issue. Up to October 2010, KES 16 billion had been raised through rights issues at the NSE as listed firms raised additional capital. This represented 56% of the total amount raised since 1988, which stands at KES 28 billion. During the year, TPS Serena, Kenya Commercial Bank Group, Standard Chartered Bank and KPLC raised capital through rights issues. TPS Serena raised KES 1.60 billion out of the planned KES 1.18 billion while KCB raised KES 12.50 billion out of the targeted KES 15.00 billion. Standard Chartered Bank raised KES 2.50 billion – more than the target of KES 1.88 billion. The funds were raised to complete the buyout of a planned custodial business from rival Barclays Bank. The bank used the excess proceeds to support its balance sheet.

Other Recent Developments

The 2010/11 budget emphasises agricultural and rural development, in recognition of agriculture’s major contribution to GDP (23%), as well as employment and exports. The strategy’s main objectives are to secure livelihoods in rural areas and ensure food security and employment. The government plans to promote agriculture through improving agro-business, value-addition and market access; increasing access to credit and to affordable inputs; and promoting research and training. Key infrastructure facilities were also given major attention in the 2010/11 budget. The government will continue to scale up investments in transport networks, both roads and ports. and energy supply. The development budget for constructing the road network was allocated KES 78.6 billion. KES 34.1 billion were dedicated to diversifying energy sources mainly through the expansion of the national transmission system and the development of geothermal energy.

The Information and Communication Technologies (ICT) sector is vibrant and has actively contributed to economic growth in recent years. Telkom Kenya is the main fixed line telephone service provider in Kenya. Because of intense competition, the company has diversified to other services including enhanced voice and data services. In 2010, Telkom Kenya had a client base of about 460 000 on both fixed line and CDMA wireless. During the year up to June 2010, the number of fixed lines was 234 522, representing a 5.4% decline compared with the similar period in 2009. In the same period, the number of fixed wireless subscriptions declined by 46.2%. The decline in fixed network subscriptions is an indication of the increased availability of more convenient and affordable mobile phones.

As at the end of June 2010, the penetration of mobile phone services was reported at 51.2 per 100 inhabitants, still below the world average of 67.0 per 100 inhabitants. Mobile phone money transfer service is a Kenyan innovation that has performed outstandingly well over time. Safaricom and Airtel have been the major providers of this service through M-pesa and Zap respectively. Orange Kenya started its money transfer service – Orange Money – in 2010. The mobile phone money service subscribers increased to 7.7 million by December 2009 from 5.5 million by December the previous year. It is estimated that the service had attracted over 13.5 million subscribers by November 2010.

The Internet market continued to expand in 2010. From January to June 2010, there were an estimated 7.8 million Internet users in the country, up from 3.6 million users in the same period of the previous year. The increase in the number of Internet users was mainly attributed to increased access of Internet services through mobile phones. In the first half of 2010, there were 3.1 million Internet subscriptions in the country compared with 1.8 million subscriptions reported over a similar period in 2009, representing a 69.8% increase. The increase in the number of Internet subscriptions continued to be dominated by mobile data. Internet subscriptions through GPRS/EDGE and 3G accounted for 99% of total subscriptions. Orange Kenya was granted a 3G licence by Communications Commission of Kenya in 2010.  The number of subscribers therefore increased because of innovations in Internet access by operators from the standard personal computer to mobile handset and portable broadband Internet modems. The effect of the Seacom cable on Internet prices is lagging as investors recoup their investment before bringing down prices.