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Structural issues in the Kenyan financial system: improving competition and access

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  • Beck, Thorsten
  • Fuchs, Michael

Abstract

Although by regional standards, Kenya's financial system is relatively well developed and diversified, major structural impediments prevent it from reaching its full potential. Crosscountry comparisons, however, show the importance of a well-developed financial sector for long-term economic growth and poverty alleviation. Experience from other developing economies has shown the detrimental effect of government ownership and the positive impact that foreign bank ownership can have on the development of a market-based financial system. Analyzing and decomposing the high interest rate spreads and margins in Kenya helps identify structural impediments that drive the high cost of and low access to financial services. The limited information sharing on debtors, deficiencies in the legal and judicial system, the limited number of strong and reputable banks and non-transparency and uncertainty in the banking market are major impediments to the development of Kenya's financial system, to reducing spreads and to widening access.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3363.

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Date of creation: 01 Jul 2004
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Handle: RePEc:wbk:wbrwps:3363

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Keywords: Financial Intermediation; Payment Systems&Infrastructure; Financial Crisis Management&Restructuring; Banks&Banking Reform; Economic Theory&Research; Financial Intermediation; Financial Crisis Management&Restructuring; Environmental Economics&Policies; Banks&Banking Reform; Economic Theory&Research;

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  1. Stijn Claessens & Luc Laeven, 2004. "What drives bank competition? Some international evidence," Proceedings, Federal Reserve Bank of Cleveland, pages 563-592.
  2. Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 2002. "Government Ownership of Banks," Journal of Finance, American Finance Association, vol. 57(1), pages 265-301, 02.
  3. Beck, H.T.L. & Cull, R. & Jerome, A., 2005. "Bank privatization and performance: Empirical evidence from Nigeria," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125503, Tilburg University.
  4. Raghuram G. Rajan & Luigi Zingales, . "Financial Dependence and Growth," CRSP working papers 344, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  5. Wurgler, Jeffrey, 2000. "Financial markets and the allocation of capital," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 187-214.
  6. Gerard Caprio, Jr., 1995. "The role of financial intermediaries in transitional economies," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 42(1), pages 257-302, June.
  7. Thorsten Beck & Asli Demirguc-Kunt & Ross Levine, 2004. "Finance, Inequality, and Poverty: Cross-Country Evidence," NBER Working Papers 10979, National Bureau of Economic Research, Inc.
  8. Demirguc, Asli & Laeven, Luc & Levine, Ross, 2003. "The impact of bank regulations, concentration, and institutions on bank margins," Policy Research Working Paper Series 3030, The World Bank.
  9. Clarke, George R. G. & Cull, Robert & Martinez Peria, Maria Soledad, 2001. "Does foreign bank penetration reduce access to credit in developing countries"evidence from asking borrowers," Policy Research Working Paper Series 2716, The World Bank.
  10. Raddatz, Claudio, 2006. "Liquidity needs and vulnerability to financial underdevelopment," Journal of Financial Economics, Elsevier, vol. 80(3), pages 677-722, June.
  11. Clarke, George & Cull, Robert & Martinez Peria, Maria Soledad & Sanchez, Susana M., 2001. "Foreign bank entry - experience, implications for developing countries, and agenda for further research," Policy Research Working Paper Series 2698, The World Bank.
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Cited by:
  1. Demirguc-Kunt, Asli, 2006. "Finance and economic development : policy choices for developing countries," Policy Research Working Paper Series 3955, The World Bank.
  2. Hesse, Heiko, 2007. "Financial intermediation in the pre-consolidated banking sector in Nigeria," Policy Research Working Paper Series 4267, The World Bank.
  3. World Bank, 2009. "Uganda - Making Finance Work," World Bank Other Operational Studies 12502, The World Bank.
  4. Richard Podpiera & Martin Cihák, 2005. "Bank Behavior in Developing Countries," IMF Working Papers 05/129, International Monetary Fund.
  5. Wolde-Rufael, Yemane, 2009. "Re-examining the financial development and economic growth nexus in Kenya," Economic Modelling, Elsevier, vol. 26(6), pages 1140-1146, November.
  6. Beck, T.H.L., 2006. "Creating an efficient financial system: Challenges in a global economy," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3508413, Tilburg University.
  7. World Bank, 2007. "Kenya : Unleashing the Potential for Trade and Growth," World Bank Other Operational Studies 7999, The World Bank.

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