Factors Hindering The Growth Of The Derivative Market In Kenya

Abstract

A financial derivative is any security whose value is derived from the price of some other underlying asset. Derivatives are in this way considered a vital tool for financial risk management. The transacting in derivative instruments has now become common among institutional investors such as banks, fund managers, insurance companies and other nonfinancial corporations. However, in as much as the derivative market has been proclaimed as a risk management tool, its growth and reputation has not been widely spoken of as much as other financial instruments traded in Securities exchange institutions in Africa as a whole and Kenya in specific. To this effect the study sought to assess the current factors that hinder the growth of the derivatives market as an acceptable risk management and investment option in Kenya. This study was undertaken in Nairobi, Kenya where findings were based on the derivative market within the Nairobi Securities Exchange. The target population of the study was the employees from trading participants within the NSE dealing in derivative transactions. The researcher adopted a purposive sampling technique to select the sample population for data collection. The researcher collected data through the use of selfadministered questionnaires. The set of questions within the questionnaire were comprised of closed and open ended questions. Processing and analyzing of the raw data was done using the data analyses program Statistical Package for the Social Sciences (SPSS) which was used to generate inferential statistics and descriptive statistic and run a regression analysis. The study found that amongst the factors discussed, the regulatory framework and liquidity levels in the capital market significantly hinder the growth of the derivative market in Kenya. The findings of the study show that the derivative market in Kenya has an average to below average growth rate as indicated by majority of the respondents. The reasons provided for this scenario include a regulatory framework that is not able to capture all financial risks in the market and hence protect investors, as well as low level of liquidity characterized by large changes in asset prices. The study recommends that the current framework should be reviewed and standardized so as to capture all inherent risks associated to the derivative market in Kenya. The authorities governing the capital market should also come up with ways that improve speculation and reduce the large changes in asset prices as well as create more channels that can be utilized to increase information about trading in the derivative market