KASNEB The Professional Journal of KASNEB Issue No. 1, January - March 2016

KASNEB NEWSLINEEDUCATIVE INFORMATIVE ENTERTAINING

TOPICS FEATURED

STRATEGIC IMPORTANCE OF CAPITAL MARKETS DERIVATIVES SAMPLING METHODS

IN AUDITINGINTELLECTUAL

PROPERTYCONCEPTS OF MARKETING

PORTFOLIO ANALYSIS

CONSUMPTION AND SAVING

CODE OF CONDUCT AND ETHICS

CAPITAL MARKETS

THEIR STRATEGIC IMPORTANCE IN DELIVERY OF KENYA VISION 2030

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KASNEB NEWSLINE, Issue No. 1, January - March 2016 1

KASNEB

Editor HonorarisPius M. Nduatih

Editorial TeamStaff members of KASNEB

Circulation OfficeKASNEB Towers

Hospital Road, Upper HillP.O. Box 41362 - 00100

Nairobi - KenyaTel: 254(020) 4923000

Cellphone: 0722-201214/0734-600624Fax: 254(020) 2712915

E-mail: info@kasneb.or.keWebsite: www.kasneb.or.ke

KASNEB Newsline is the professional students journal of KASNEB.

The views expressed in this journal are those of the respective authors and do not necessarily reflect

those of KASNEB.

The Editor welcomes contributions from readers especially students and trainers in accountancy, finance,

management, administration, ICT and cognate subjects.

The Editor reserves the right to edit articles for the purposes of clarity and brevity.

Trainers and students are free to photocopy materials contained in this journal for purposes of learning without seeking prior consent from

KASNEB.

Reproduction is allowed without charge as long as prior consent is sought and the source

acknowledged.

Correspondence should be addressed to:

The EditorKASNEB Newsline

Marketing and Corporate Affairs UnitP.O. Box 41362 - 00100, Nairobi

E-mail: publications@kasneb.or.ke

CONTRIBUTORS TO THIS ISSUE

Caroline NgugiKellen Kiambati Isaac T. Maina Frederick Nyunja Emlyn J. Ngwiri

15 Derivatives3 Strategic importance of capital markets

60 KASNEB Code of conduct

45 Analysis of consumption and savings

51 KASNEB Experience54 IFA Act57 Updates62 IAESB 66 Pictorial KASNEB is ISO 9001:2008 certified

CONTENTS KASNEB NewslineIssue No.1, January - March 2016

23 Sampling methods in auditing 31 Intellectual property

Abdalla M. Dallu

39 Concepts of marketing

Paul M. MwangiRaymond Kiambati

KASNEB NEWSLINE, Issue No. 1, January - March 20162

From the CEO’s desk

Editor HonorarisPius M. Nduatih

Leadership is about helping others reach for their stars

The Kenya Vision 2030 is anchored on three pillars: Economic, Social and Political. Under the

Economic pillar, financial services are listed among the key drivers to achieve the desired

annual growth in Gross Domestic Product (GDP) of 10%. Specifically, the Kenya Vision

2030 envisages a vibrant and globally competitive financial sector promoting high levels of

savings and financing for the country’s investment needs. This would involve the creation of

an international financial services centre in the country and enhancement of access to capital

through the financial markets.

Granted, financial markets in Kenya have recorded significant growth in the recent past.

However, a lot needs to be done if Nairobi is to be considered in the league of London, Tokyo

and New York, the world’s premier financial centres which are supported by a highly developed

financial, commercial and communication infrastructure.

Taking cognisance of the foregoing, we feature a lead article in this edition of the KASNEB

Newsline whose central theme is the strategic importance of capital markets in delivery of

the Kenya Vision 2030. The writer brings to the fore the critical success factors that underpin

the establishment of a vibrant International Financial Centre. These factors include creating

strong institutions that can support market deepening, establishing a robust alternative

to raising capital to fund infrastructural development and facilitating access to capital by

small and medium sized enterprises (SMEs). The writer further opines that the regulatory

framework will need to be reviewed in order to accommodate emerging instruments in the

regional financial markets, including derivatives and futures in addition to strengthening the

governance structures.

The second article complements the first by spotlighting on derivatives as tools of financial

risk management. The writer navigates readers through the complex mesh of derivatives

instruments, shedding light on the application of futures, forward contracts, swaps and options

in financial risk management. The writer further uses a practical example to assist the reader

bridge the gap between theory and practice.

This edition also features other articles covering varied areas of interest to our readers, including

the importance of intellectual property in value creation for a business and the various marketing

concepts in application today.

We also wish to draw the attention of our readers, in particular KASNEB students and trainers,

to the newly released Code of Conduct and Ethics for KASNEB Students which takes effect from

1 July 2016 and forms part of the features in this edition. Students and trainers are requested to

familiarise themselves with the provisions of the code and to further note that with effect from

1 July 2016, all students will be required to commit themselves in writing to abide by the Code.

Welcome and enjoy your reading.

KASNEB NEWSLINE, Issue No. 1, January - March 2016 3

INTRODUCTION

In 2008, the Government of Kenya

launched a new framework for

national development through

the Kenya Vision 2030, which aims

to create “a globally competitive

and prosperous country with a

high quality of life by 2030.” The

Vision sets an ambitious target for

the economic pillar of 10 percent

compound average annual growth

in gross domestic product (GDP).

Capital markets are a key component

of the financial services sector and

play a critical role in creating a

facilitative environment for the

attainment of the Vision. It is

well recognised that diversified

and liquid capital markets are key

drivers of wealth creation and have

been seen to play a central role in

transformational economies. In this

context, the capital markets provide

the framework for the following core

activities:

• Capital raising for public and

private sectors;

• Promote balance and stability

in the financial system;

• Decrease reliance on donor

funding for priority projects;

• Decrease dependency on short

term funding from the banking

sector;

• Provide alternative options for

savings; and

• Cushion the economy from

adverse impact of fluctuations

associated with fast-flowing

nature of capital.

The 2030 Vision for financial

services is to create a vibrant and

globally competitive financial sector

promoting high-levels of savings and

financing for Kenya’s investment

needs. Further, Kenya intends to

become not only an international

financial services centre but also

the gateway for capital raising

throughout the capital markets in

Africa.

The Kenyan capital market has

grown rapidly in the recent years

with equity market capitalisation

growing from Kshs. 851 billion as at

2007 to Ksh 1.45 trillion in February

2013. The market has also exhibited

enormous capital raising capacity

with some equity issues being as

much as 500% oversubscribed and

raising in excess of Ksh. 430 billion

STRATEGIC IMPORTANCE OF

IN DELIVERY OF THE KENYA VISION 2030CAP TAL MARKETS

The capital market is part of the larger financial service system that facilitates the raising of long term funds for development. It brings together lenders (investors) of capital and borrowers (companies that sell securities to the public) of capital.

Product structure in Kenya

Equity Market

Ordinary Shares

Primary and secondary Market

Debt Market Pooled Funds Derivatives Market

Treasury BondsInfrastructure Bonds

Corporate Bonds Preference Bonds

infrastructure BondsMunicipal Bonds

Asset Backed Securities Mortgage Backed

Securities

REITSCISs (Unit

Trusts)

Financial futures and

optionsCommodity

futuresETFs

Secondary Market

By KELLEN KIAMBATI, Management Consultant

KASNEB NEWSLINE, Issue No. 1, January - March 20164

CAPITAL MARKETS

from equity issuances over the last

decade. Through the debt markets,

the Government of Kenya has raised

approximately Ksh. 1.9 Trillion

domestically over a similar period.

However, the above milestones have

been achieved notwithstanding key

gaps and weaknesses in the structure

and operations of the capital markets

in the country. This realisation

therefore begs the question as to

how much more significant a role

the market could play if a more

conducive environment was in place.

As the nation continues to pursue

middle income status and the heavy

funding needs to drive the Vision’s

programmes, critical attention

needs to be paid to how best the

local markets can be leveraged to

reduce reliance on expensive short

term lending from banks as well as

donor agencies.

In order to create a conducive

environment for the continued

growth and development of the

market, additional focus and

resources must be channeled to

ensure that we have in place truly

world class capital markets that will

be able to intermediate funding

for the Vision 2030 as well as for

the economic development of

the region as a whole. As a case in

point, the size of the Kenyan stock

market compared to GDP is only

46% which is significantly lower than

comparable countries in Africa and

internationally such as South Africa

(261%), India (111.7%), Malaysia

(187%), South Korea (110%) and

the world average of 54%. Similarly,

though the bond market in Kenya has

demonstrated enormous potential,

the turnover ratio (19%) is still low

compared to other jurisdictions

such as South Africa (671%), Nigeria

(32%), Malaysia (110%) and Spain

(561 %). The liquidity of the Kenyan

stock market measured by the

current equity turnover ratio of 44%

falls below countries whose capital

markets we aspire to emulate, such

as Singapore (65%) and Hong Kong

(80%).

Establishment of an International Financial Centre (IFC)

The capital market is strategically

positioned to be one of the key

catalysts to the establishment of

an international financial centre

in Nairobi. As in many other

jurisdictions, the IFC will provide

a secure and efficient platform for

business and financial institutions to

reach into and out of the emerging

markets in Africa and beyond. The

effectiveness of the IFC will depend

on the responsiveness as well as

robustness of the Kenyan capital

market in addition to the quality of

its regulatory framework, supportive

infrastructure and tax regime in

order to make it globally competitive

In order to deliver on this strategic

role in realising the objectives of the

International Financial Centre focus

should be placed on:

(a) Creating strong institutions that can support market deepening and effective supervision

It is critical that the core market

institutions responsible for the fair,

efficient and orderly functioning of

the capital markets are sufficiently

robust to provide investors with

confidence to channel their funds

through the Kenyan markets. This

involves ensuring that:

(i)The capital markets regulator is:

• duly empowered by a clear,

transparent and enforceable

legal framework in line with

international best practice

standards;

• vested with sufficient autonomy

and independence from central

government to ensure that it

is able to remain responsive to

changing market dynamics;

What is an IFC?City or its district (1) that has a heavy concentration of financial institutions, (2) that offers a highly developed commercial and communications infrastructure, and (3) where a great number of domestic and international trading transactions are conducted. London, New York, and Tokyo are the world’s premier financial centers

What is an International Financial Services Centre (IFSC)?An IFSC caters to customers outside the jurisdiction of the domestic economy. Such centres deal with flows of finance, financial products and services across borders.

In financial markets, capital PROVIDERS find capital USERS

PROVIDERS MARKET MAKERS USERS

SpeculatorsCorporate investorsStock shareholders

BondholdersBank depositors

Venture capitalInvestment bank

Mutual fundPension fund

BankTreasury

Startup companiesExpanding companiesProperty developersProperty investorsFamily consumers

Home buyers

KASNEB NEWSLINE, Issue No. 1, January - March 2016 5

CAPITAL MARKETS

• granted sufficient resources to

invest in competitive human

capital as well as systems and

technology to fully execute its

regulatory functions;

• headed by an independent

board with an appropriate mix

of skills and experience as well

as strong awareness of sound

corporate governance ;

• vested with adequate discretion

and flexibility with respect

to determining and applying

budgets for its regulatory

purposes;

• vested with authority to

approve market guidelines

and rules to support responsive

market development and

facilitation of innovation;

• vested with adequate autonomy

with respect to setting market

fees and levies to ensure

flexibility and responsiveness

to market dynamics to promote

competition within the market

as well as competitiveness of

the Kenyan market as against

global markets;

• vested with suf f ic ient

supervisory independence to

allow for ex post as opposed

to ex ante regulation in order

to provide a more conducive

environment for innovation;

and

• vested with suf f ic ient

supervisory and enforcement

powers to ensure compliance

with market rules and conduct

requirements.

(ii) The securities exchange has in

place:

• world class trading systems;

• strong and transparent

governance structures and

clear rules on market access

and competition;

• proactive benchmarking

with competing international

exchange providers to ensure

product diversification, market

inter-connectivity and effective

straight through processing;

and

• adequate regulatory capacity

and resources to operate as

an effective self-regulatory

organization;

(iii)The central depository and

clearing system:

• is compliant with international

best practice standards

on clearing, payment and

settlement systems for financial

markets infrastructure;

• has a robust c lear ing

infrastructure that ensures

stability in the face of

intermediary insolvency;

• provides reliable records

on securities ownership

and realtime records on all

transaction activity;

• provides seamless connectivity

with all relevant trading

p l at fo r m s a n d, w h e re

possible, allows for sufficient

co n s o l i d a t i o n fo r t h e

management of costs; and

• creates confidence for all users.

(b) Providing a robust alternative to raising capital to fund infrastructure development

Infrastructure development is

a pre-requisite for realising the

Vision 2030. Considering the huge

capital expenditure attributed to

infrastructure development, the

capital markets will be the key

avenue for funding which should

see reducing reliance on costly

short term financing from the money

markets (banking sector). In the

face of the changing international

regulation of banks through Basel

III, the availability of traditional bank

capital for long term investments is

expected to be significantly curtailed

thereby demanding the capital

markets to provide appropriate

alternative products for mobilising

long term capital. The key products

that have been identified to support

this include:

FEATURES OF A CENTRAL DEPOSITORY SYSTEM (CDS)

A CDS is an electronic book entry system used to record and maintain securities and their transfer’s registration. In the depository system, securities are held in depository accounts, which is more or less similar to holding funds in bank accounts.

The system changes the ownership of securities without any physical movement or endorsement of certificates and execution of transfer instruments. In other words, transfer of ownership is done through simple account transfers.

This method does away with all the risks and hassles normally associated with paperwork. Consequently, the cost of transacting in a depository environment is considerably lower as compared to transacting in certificates.

In Kenya, the Central Depository Systems Corporation (CDSC) acts as the depository of securities traded at the Nairobi Securities Exchange.

KASNEB NEWSLINE, Issue No. 1, January - March 20166

• Asset backed securities (securitisation)

Asset-backed securities (ABS) are

securities which are based on pools

of underlying income generating

assets. These assets, due to their

future flow nature, are usually illiquid

and private in nature. Through

appropriate structuring, these

assets can be leveraged to ensure

immediate access to the long term

revenue while at the same time

making these performing assets

available for investment to a much

broader range of investors.

This product offers a prime

opportunity for infrastructure

financing including components

of LAPSSET, the road development

infrastructure, airport and port

development, power generation and

so on, as well as funding for health,

education and sanitation projects

as they allow for the repackaging

of any revenue generating project

for purposes of securing long term

borrowing.

• Real estate investment trusts (REITs)

The introduction of REITS as a

collective investment product for the

real estate sector will have numerous

benefits to the economy including

the following:

- REITs wil l introduce a

transparent and secure product

to allow Kenyans at all levels of

financial capacity to participate

in the thriving real estate boom

in the country.

- REITs will allow for the effective

pooling of international and

local capital for investment in

large scale real estate projects

like Konza Technopolis and Tatu

City amongst other mega-city

initiatives and resort city

initiatives as envisioned in the

Vision 2030. The estimated Kshs.

600 billion needed to develop

Konza can be effectively raised

through this produc.

- REITs will provide an effective

product to raise capital for

housing development to

meet the housing deficit

in the country and release

critical government funding

for the development of

non-commercially viable low

income segment.

- REITs will introduce additional

capital markets products to

encourage saving.

- REITs will make available

additional capital markets

instruments to both retail

and institutional investors to

invest in and diversify their

risks particularly for the pensions and

insurance sectors.

- Through the use of the capital markets,

REITs will substantially reduce the costs

of capital for real estate financing which

is currently heavily reliant on expensive

short term bank financing.

- REITs will effectively provide an avenue

through which investors will get

exposure to real estate without having

to own real estate assets. Additionally,

REITs for retail investors will be required

to be listed at a securities exchange

(for instance the NSE) and this will

provide access to liquidity from their

investments in real estate properties.

- REITs also tend to perform well as

investment vehicles due to increased

corporate governance checks and

measures that have been included in

the framework.

- REITs also offer transparent real estate

investment structures which improve

tax administration, market disclosure

and reporting requirements and

corporate governance.

Cornerstone investors

Institutional funds

RetailLenders

REIT Manager

Services company (Property manager)

Unit holders

Real estate assets

Ownership Rental income

Distributions(Dividends)

Management feesActs on behalf of unit holders

Property management services

Services fees

Loan/ BondInterest/coupon

Trustee’s fees Management services

Ownership of units

REIT Trustee REIT

HOW THE REIT WORKS

CAPITAL MARKETS

KASNEB NEWSLINE, Issue No. 1, January - March 2016 7

Regional Issuance of debt instruments in the East African Community partner states

This is a key milestone towards the full

implementation of the EAC Common Market

Protocol which came into effect on July

1, 2010. This framework will allow for the

raising of debt funds from across the regional

capital markets through a single issuance.

The increased fund raising capacity that

will be facilitated by this new approach

will significantly reduce the time and costs

involved in financing major infrastructural

development and other commercial

ventures. Due to its regional nature,

this product would be instrumental

for funding the LAPSSET corridor, the

trans-continental standard gauge railway

line and the construction of the regional road

infrastructure amongst others by addressing

the need to raise capital for application

across multiple national borders.

Facilitation of SME’s and venture companies to access public capital

Through the establishment of a Growth

Enterprise Market Segment (GEMS) within

the Nairobi Securities Exchange an avenue

has been created to promote capital raising

and listing of small companies on the Nairobi

Securities Exchange(NSE), thereby also

providing avenues for venture funding and

private equity exits. This is informed by the

Government identification of Micro, Small

and Medium Sized Enterprises (MSME)

sector as one of the key drivers of Vision

2030, destined to play an effective role as

an engine for economic growth, poverty

eradication and employment creation. This

segment also provides a more facilitative

listing framework in order to broaden the

entities able to leverage the capital markets

to raise capital for the growth, innovation

and development critical for job and wealth

creation.

In the context of the new

opportunities in the oil, mining

and minerals sector, this segment,

given that it does not require a profit

history, provides a prime opportunity

for exploration companies to raise

necessary capital through the local

markets and by extension creates

an avenue for communities around

these industries to participate

directly in the long term growth and

profitability of these enterprises by

taking up shares.

BROADENING ACCESS TO THE FINANCIAL MARKETS

One of the key features of

International Financial Centres

the world over is the accessibility

of financial services especially for

potential investors. Financial access,

also known as financial inclusion,

goes substantially beyond access to

credit and includes elements such as

the safe-keeping of money, access

to appropriate savings products,

payment and settlement services

and so on. Successful financial access

therefore implies sustained usage

and offers choice to consumers. It

is therefore important to consider

capital markets access as an important

concept in the Kenyan Vision 2030. The

following are the opportunities for capital

markets access in the proposed IFC.

(i) Introducing Global Depository Notes

As a way of broadening the source of its

long term funding, the Government of

Kenya (GoK) has been having the intention

of issuing a sovereign bond in the foreign

markets. Such a bond will have to be

denominated in major global currencies

such as the dollar or euro. The main driver

for this intention is to pool resources from

the sizeable number of the Kenyans in the

Diaspora as well as to act as a catalyst to

attract foreign direct investment (FDI) to

Kenya.

The government also has a responsibility

to ensure that the domestic borrowing

is maintained at manageable levels to

ensure that it does not stifle private sector

borrowing from the banking sector, which

is a driver in the economic development of

the country. However, due to global financial

crisis in 2007-2009 and the euro-crisis

thereafter, GoK has not been able to actualise

its intention due to the resultant volatility of

the Kenyan Shilling against the major global

currencies. There are also other challenges

associated with issuing financial instruments

The venture capital industry has four main players: entrepreneurs who need funding, investors who want high returns, investment bankers who need companies to sell and the venture capitalists who make money for themselves by making a market for the other three.

HOW THE VENTURE CAPITAL INDUSTRY WORKS

Ideas

Corporations and government

Privateinvestors

Public markets and corporations

Investment bankers

Venture capitalists

Stock

IPOsEntrepreneurs

CAPITAL MARKETS

KASNEB NEWSLINE, Issue No. 1, January - March 20168

in the foreign markets including the need

to comply with the listing requirements in

those jurisdictions and the danger of poor

performance of the issue which may have a

signalling effect to investors.

With continued globalisation, foreign

investors increasingly aim to diversify

their portfolios globally. There are many

obstacles that preclude foreign institutional

and individual investors from purchasing

domestic debt instruments. These include

undependable settlements, regulatory

barriers, and unreliable custody services

for foreign securities, costly currency

conversions, poor information flow,

confusing tax issues and unfamiliar market

practices.

To deal with this dilemma, some countries

around the globe have been able to issue

Global Depository Notes. Good examples are

countries like Peru, United States of America

and Brazil.

A Global Depository Note (GDN) is a

debt instrument created by a depositary

bank that evidences ownership of a local

currency-denominated debt security. GDNs

emulate the terms (interest rate, maturity

date, credit quality, etc.) of particular local

currency-denominated bonds; however, they

trade, settle, and pay interest and principal

in foreign currency.

A GDN enables investors to invest in

domestic securities without concern

for the often complex and expensive

cross-border transactions, and offer

substantially the same economic,

corporate and rights enjoyed by

domestic investors. GDNs are quoted

and traded in foreign currency and

are settled according to procedures

governing the foreign market.

The Global Depository Note (GDN)

is designed to bring incremental

investment capital into a local

market, thereby enhancing liquidity

in the local market. GDNs represent

an enhanced form of local custodial

services, simply enabling off-shore

investors to access local bonds/

local market liquidity without

having to establish a local custody

arrangement. The GDN holder will

have the option to cancel its GDNs

and receive local bonds in the local

market should it desire to become

a holder of the local bonds rather

than the GDNs.

The Government of Kenya may

consider issuance of Global

Depository Notes (GDN) against its

Treasury Bonds as an alternative to

issuing Eurobonds. GDNs will allow

trade in Government Bonds on

foreign markets without the Foreign

Exchange Risk of a Eurobond in

order to increase visibility of Kenya

and enhance liquidity in our capital

markets.

(ii) Supporting the establishment of a derivatives and commodity futures market

The introduction of Commodity

Futures markets offers an

opportunity to transform the Kenyan

commodities market by introducing a

formal, regulated commodity futures

market to allow for more effective

post-harvest crop management and

leveraging a national infrastructure

for warehouse receipting.

HOW A GDN WORKS

Instruct CD to pay issuer

LeadManagerIssuer

Common depository

(CD)

Clearing system

Global note

Confirm receipt of global note

$ for bonds

$ for bonds

Acknowledge receipt of global note

1

3

4

2

5

6

Bond Instructions/ letters Cash flow

INTERMEDIARIES

Underwriters

and then assembles other firms to share in the

underwriting risks of the issue Finally, the management group organises a group of firms to place the bonds with the ultimate investors

The lead management group meets with the issuer to design the issue

size, currency, maturity, coupon, etc.

A Eurobond offering brings together the bond issuer and investor. The process is facilitated by intermediaries.

Selling Group

Bond investor

Bond issuer

Management Group Fiscal agent or

trustee and principal paying agent

STRUCTURE OF A EUROBOND SYNDICATION

CAPITAL MARKETS

KASNEB NEWSLINE, Issue No. 1, January - March 2016 9

In addition to commodity futures contracts

to be settled through physical delivery,

distinct opportunities exist for cash settled

futures contracts for currencies (USD, Euro,

Yen, Kshs etc.), minerals (Gold, Silver, Copper

etc.), energy (natural gas, petroleum, electric

power etc.) and carbon credits.

Through the creation of hedging instruments

in the form of derivative and futures contracts,

local and international investors will be

granted an avenue to manage interest rate

and foreign exchange volatility and thereby

encourage more long term investment in

order to support economic development.

(iii) Granting direct access for commercial banks, insurance companies and fund managers to the bond market

Through granting commercial banks, fund

managers and other institutional investors an

Authorised Securities Dealers (ASDs) licence

they will be able to participate in the bond

market directly. This licence category will

help unlock the potential liquidity of the

debt markets in Kenya and provide increased

opportunities for the Government and

corporates to tap the market for financing

at attractive rates.

ASDs have also been identified as the

licence category that will be contracted by

the Central Bank of Kenya under

the Government Securities Markets

Makers programme developed by

the Central Bank and Treasury.

In order to fulfill the objectives

of increasing liquidity, ensuring

efficiency and lowering costs

of trading and to facilitate the

Government Securities Market Maker

programme necessary changes have

been developed to allow for the

licensing of Authorized Securities

Dealers (ASDs).

(iv) Facilitate price discovery for Initial Public Offers (IPOs) through book building

Book building is a concept for pricing

of IPOs which manages the risk of

an issue coming to market at a price

which is not in line with the markets

own valuation of the security causing

an immediate drop post listing. The

process involves the price being

determined through engagement

with a wide scope of institutional

investors (who have internal research

capacity to independently value the

security) to determine at what price

to offer an IPO based on demand

from institutional investors.

Book building offers an alternative

to the traditional fixed price issues,

and provides a much more efficient

system for determining the level

of market demand. It would be a

crucial tool to allow Government

to maximise its returns through its

privatisation initiatives that target

large pools of investors with different

market outlooks.

Book building is a systematic process of generating, capturing, and recording investor demand for shares during an initial public offering (IPO), or other securities during their issuance process, in order to support efficient price discovery.

IPO process

Fixed price method Book building method Combination method

In the fixed price method, the price at which the securities

are offered is fixed in advance

In the book building method, the investors have to bid for shares within a price band specified by the issuer and

the final price is decided after observing the result of the

bidding

In the combination method, components of both the methods are considered

Forward Futures Options Swaps

Calloption

Put option

Interest rate swap

Currencyswap

DERIVATIVES

CAPITAL MARKETS

KASNEB NEWSLINE, Issue No. 1, January - March 201610

(v) Allowing corporate bodies to be Central Depository Agents (CDAs)

Efforts are underway to facilitate the

trading of government securities

through mobile phones to leverage

developments in mobile money as

well as to better tap retail capital.

This is one of the many initiatives

towards increasing accessibility to

as well as liquidity of government

securities. This will be particularly

instrumental in supporting increased

investment at county level following

devolution as well as supporting the

increase of diaspora investment in

government T-Bills. In connection

with this initiative mobile network

operators and money transfer

companies will be required to be

admitted by the Central Depository

as Central Depository Agents.

The establishment of generally

applicable eligibility standards for

admission of a wider spectrum of

corporate bodies to be appointed

as central depository agents will

broaden the scope of access to the

central depository and facilitate

growth in the number of competitive

service providers in the market.

(vi) Creating a gateway to Africa’s

capital markets

In addition to being an IFC, Kenya

needs to increase its profile even

further in order to be recognised

as the gateway to Africa’s capital

markets. We envisage Kenya

providing an avenue for financing

infrastructure through the capital

markets stretching well beyond the

East African Common Market to the

entire continent. To achieve this,

Kenya has to be gobally competitive

in areas such as:

• ease of doing business;

• operational risk ratings;

• city economic growth levels;

• office occupancy costs;

• globally property indices;

• innovation indices; and

• Foreign Direct Investment

confidence levels.

Further, to attain gateway status

Kenya must be able to attract

significant local listings as well as

high profile dual listings and should

have a clearing and settlement

infrastructure that allows a true

Delivery versus Payment (DvP: the

simultaneous transfer of securities

with payments.) This steps will

further need to be supplemented

by ensuring high liquidity in

Kenya’s onshore currency market,

while supporting the emergence

of an offshore currency market

thereby making the Kenya shilling

a currency of note internationally

and increasing the opportunities

for raising capital in Kenya shillings

in multiple global markets.

SUPPORT REQUIRED

Overhaul of the entire capital

markets legal and regulatory

framework.

The capital markets legal and regulatory

framework is comprised of the Capital

Markets Act, Cap 485A, the Central

Depositories Act No. 4 of 2000 and a raft of

subsidiary legislation including Regulations,

Rules and Guidelines.

The Capital Markets Act was lastly

comprehensively reviewed in year 2000.

Since then, and in order to accommodate

the developments in the capital markets

sector, the Act has been subjected to

numerous piecemeal amendments every

year alongside the budget process via the

Finance Bill.

The Capital Markets Authority commissioned

studies as well as assessments by other

securities regulators of international

repute and identified that the overhaul of

the capital markets legal and regulatory

framework as a priority area in 2008. A key

benchmark in the process were principles

of securities regulation as established by

the International Organisation of Securities

Commissions (IOSCO) of which Kenya is a

member.

In the year 2008, the Authority

commissioned a review of the current legal

and regulatory framework and identified

gaps and weaknesses therein and thereafter

a draft legal and regulatory framework

that addresses all the gaps identified and

meets world standards of securities markets

CAPITAL MARKETS

Capital Markets Authority Bill

The Depositories Act

Securities and Investments Bill

International Organisation of

Securities Commissions (IOSCO)

All regulations, agreements, rules and

guidelines

Companies Act

CAPITAL MARKETS LEGAL/

REGULATORY FRAMEWORK

KASNEB NEWSLINE, Issue No. 1, January - March 2016 11

regulation taking into consideration

the findings and recommendations

of all previous assessments was

developed.

Extensive stakeholder consultations

were conducted in the period 2008

to 2011 and this subsequently led

to the drafting of the proposed new

capital markets legal and regulatory

framework; comprised of two new

Bills, that is, the Capital Markets

Authority Bill, and the Securities and

Investments Bill, in addition to a raft

of new regulations to supplement

the new legislation.

The Capital Markets Authority

Bill provides the foundation for

the establishment, functions,

powers, and operations of the

Capital Markets Authority hence

enhancing the Authority’s capacity

and independence in undertaking

its mandate. The Securities and

Investments Bill sets out the key legal

provisions touching on regulated

persons as well as regulated

products.

Through the timely enactment

of these Bills, the Capital Markets

Authority as well as other relevant

market institutions will be in

a stronger position to create a

conducive environment for the

deepening of the capital markets as

an integral part of an international

financial centre.

Encouragement of counties to leverage the capital markets

As a consequence of devolution,

the majority of counties will be

under significant pressure to

establish infrastructure and ramp up

commercial enterprise to respond to

the refocusing of administrative and

commercial activities. In this context,

the revenue allocation arrangements

established under the Constitution

will most certainly not provide the

required levels of funding to support

accelerated county development.

Therefore in setting out the financial

management structures for county

governments, it is critical that

adequate attention be provided

to creating a facilitative framework

for the counties to tap the capital

markets for their funding needs.

This may be achieved through

allowing the county governments

to securitise performing assets

such as road levies, water and

sewerage fees, or even health centre

revenues in order to allow them fast

track the expansion of necessary

infrastructure and services.

In addition to securitisation, counties

should be empowered to act as

promoters of Real Estate Investment

Trusts (REITs) in order to fund the

development of administrative and

commercial premises as well as to

respond to the increased housing

needs arising from the increase of

commercial activity at county level

and the relocation of populations

from the main cities.

With discovery of oil, mining and

mineral extraction opportunities

within certain counties, the capital

markets offer opportunities for local

communities to participate in the

growth and profitability of those

sectors through listing of the relevant

exploration companies. In addition,

Collective Investment Scheme (CIS)

structures can be leveraged to allow

communities to pool investment

to be able to participate in the

ownership of significant companies

in their regions.  Where communities

will be entitled to profit shares in

extraction industries, unit trusts

can be set up through which, shares

can be set aside for community even

where they do not have available

cash to participate at the time of a

public offer and then the revenue

share over time can be allocated to

exercising the options to take up the

shares held in trust.

The SMEs that are operating at

county level will also be under

pressure to significantly grow in

order to respond to devolution.

The capital markets and more

specifically the GEMS segment of

the exchange will therefore provide

a critical avenue for these companies

to access the necessary growth

capital to help them not only better

establish themselves at county level,

but also go on to achieve national or

regional prominence.

Privatisation programme

The privatisation of state enterprises

has emerged as a key factor of

tranformative economic growth.

It generates revenues for the

exchequer and helps to distribute

wealth to Kenyans. The Privatisation

Act 2005 embraces the use of the

capital markets as one of the avenues

to dispose of state enterprises, which

is critical in enhancing the supply

of securities in the market and

facilitating the capital markets to

play the role of resource mobilisation

more effectively.

Privatisation through the securities

exchange is not only efficient

and transparent but also attracts

foreign direct portfolio investments.

With the elaborate disclosure and

corporate governance requirements

in place, such privatised enterprises

will be managed better and can

access additional funding through

the securities exchange.

CAPITAL MARKETS

KASNEB NEWSLINE, Issue No. 1, January - March 201612

Pr i v a t i s a t i o n p r o g r a m m e s

undertaken through the NSE

have not only recorded massive

oversubscription but have also

introduced many investors to the

capital markets. For instance, Kenya

Airways offered 235.4 million shares

in 1996 which attracted 112,000

investors and a subscription rate of

194%, KenGen offered 659 million

shares in 2006 attracting 263,891

investors and a subscription rate

of 333%, and Kenya Reinsurance

Corporation offered 240 million

shares in 2007 attracting 152,000

investors and recording a

subscription rate of 330%. Safaricom

IPO billed as the largest in the history

of the NSE was oversubscribed by

532% and attracted over Kshs 200

billion. This demonstrates the huge

potential of our capital markets

to absorb new issues and finance

infrastructure development.

The NSE provides an efficient avenue

for price discovery and encourages

wider distribution of ownership of

such enterprises. Future privatisation

of state owned enterprises should

therefore be implemented as far

as possible by way of public offers

through the Nairobi Securities

Exchange.

Public Private Partnerships (PPPs)

Existence of a vibrant capital market

with a robust policy, legal and

institutional framework that

facilitates sourcing of finance

including infrastructure

bonds is a critical success

factor for PPPs. One of

the key avenues of

attracting PPP

financing is

t h r o u g h

securit isation especial ly i f

the country wishes to attract

international private sector investors.

It is imperative therefore to have in

place an enabling framework for

the creation of Special Purpose

Vehicles (SPVs) and existence of a

reliable credit rating framework

given the importance that potential

international investors in PPP attach

to it, especially on securitisation

transactions. The scope of rating

should be extended to cover Special

Purpose Vehicles (SPVs) set up for

securitization transactions.

It is important to underscore the fact

that there is sufficient absorptive

capacity for bond issues in Kenya

in terms of single offers as well as

Product Development Partnerships

Coordinatingpartnerships

Financingpartnerships

Servicedelivery

partnerships

Facilitative fiscal environment

Providing appropriate tax treatment

measures to ensure that capital

markets products are successfully

introduced in Kenya through

the recognition of tax neutrality

for holding vehicles, stamp duty

exemptions to allow for pooling of

assets through securitization and

REITS, preferential tax treatment

for collective investment vehicles

to encourage retail savings as

well as the pooling for savings for

more effective investment as well;

as preferential tax treatment for

publicly listed or publicly offered

securities and their issuers to

encourage issuers to tap the long

term capital markets as opposed to

short term money markets. Overall,

the Kenyan economy should also

have competitive taxation regime

for it to operate as a gateway to the

capital markets in Africa.

Prompt passage of relevant regulatory frameworks and policies

The Authority has submitted several

legislative amendments to Treasury

in the recent past. The timely

adoption and implementation

of these submissions would be

instrumental in supporting the

creation of a conducive environment

PPP

COMMON INTEREST

aggregate issues as witnessed

by huge subscriptions of

both Government and

N o n - G o v e r n m e n t

bonds.

CAPITAL MARKETS

for the growth of the capital markets and the

establishment of Kenya as an International

Financial Centre. Additional regulations and

amendment to the Capital Markets Act to

facilitate establishment of a Futures and

Derivatives market will be key in rolling out

this market. The Authority also expects that

the amendments and regulations will be

acted upon expediently once submitted to

Treasury.

Full implementation of government policy on consolidation of central securities depositories

In order to strengthen the clearing and

settlement system for securities, currently

ranked amongst the most important

elements of an IFC as well as a gateway to the

capital market, the GoK needs to spearhead

the development of a policy framework for

harmonisation and subsequent

consolidation of the Central Bank of

Kenya’s Central Depository System

with the Central Depository and

Settlement Corporation. It should

further fully support negotiations

for consolidation of the EAC Member

States CDSs under the East African

Monetary Union Protocol. This will

significantly facilitate cross border

securities transactions such as

cross-listing, cross-border securities

trading as well as as cross-border

payments and settlements.

Consolidation of resource and

infrastructure will also ensure the

strengthening of that single CDS

to the level of uncompromised

robustness that will raise investor

confidence which is a pre-requisite

for fund flows through an economy.

Independence and enhanced profile of the Capital Markets Authority

As in other jurisdictions that have either

achieved IFC or Gateway status, the

securities market regulator should possess a

similar profile as Central Banks in terms of its

level of autonomy with respect to decision

making and rule making and remuneration

levels. In addition, the Securities Regulator

must be duly empowered to play its role

as a core advisor to the Government on

financial market operations, stability, access

and policy development. As a first and most

important step, the Capital Markets Authority

should in particular be granted powers to

make rules and regulations, considering the

extremely dynamic structure of the capital

matters, without having to go through the

National Treasury for approvals.

CAPITAL MARKETS

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KASNEB NEWSLINE, Issue No. 1, January - March 2016 15

INTRODUCTION

A firm faces several kinds of risks:

its profitability fluctuates due to

anticipated changes in demand,

selling price, costs, taxes, interest

rates, technology and so on.

Managers may not be able to fully

control this risk but can decide the

risk that the firm should take.

Various strategies are adopted

to reduce their risk exposure by

entering into financial contracts

such as financial derivatives to hedge

various kinds of risks.

The value of financial instruments

like shares keeps fluctuating. So, it

is difficult to fix a particular price.

Derivatives instruments come handy

here.

DERIVATIVESDERIVATIVESTOOLS OF FINANCIAL RISK MANAGEMENT

FINANCIAL DERIVATIVE

This is a financial instrument or security whose characteristics and value depend

upon the characteristics and value of an underlying asset, typically a commodity,

bond, equity or currency. Examples of derivatives include futures, forwards,

swaps and options. Advanced investors sometimes purchase or sell derivatives

to manage the risk associated with the underlying security, to protect against

Derivatives are instruments that help you trade in the future at a price that you fix today. Simply put, you enter into an agreement to either buy or sell a share or other instrument at a certain fixed price.

EARN MONEYWITHOUTPHYSICAL

SETTLEMENT

HEDGING AGAINST PRICE FLUCTUATIONS

ARBITRAGE TRADING

TRANSFER OF RISK

WHY DERIVATIVES?

fluctuations in value, or to profit from periods of inactivity

or decline. These techniques can be quite complicated and

quite risky.

Futures contract

This is a financial contract obligating the buyer to purchase an

asset (or the seller to sell an asset), such as a physical commodity

or a financial instrument, at a predetermined future date and

price. Futures contracts detail the quality and quantity of the

underlying asset; they are standardised to facilitate trading on

a futures exchange. Some futures markets are characterised by

the ability to use very high leverage relative to stock markets.

By ISAAC MAINA (CPA), Lecturer, Excel Institute of Professionals, Thika

KASNEB NEWSLINE, Issue No. 1, January - March 201616

Futures can be used either to

hedge or to speculate on the price

movement of the underlying asset.

For example, a producer of corn

could use futures to lock in a certain

price and reduce risk (hedge). On the

other hand, anybody could speculate

on price movement of corn by going

long or short using futures.

Note: Short selling is the sale of

security that is not owned by the

seller, or that the seller has borrowed.

Short selling is motivated by the

belief that a security’s price will

decline, enabling it to be bought

back at lower price to make a profit.

Short selling may be prompted

by speculation, or by the desire to

hedge to the downside risk of long

position in the same security or a

related one. Since the risk of loss on

a short sale is theoretically infinite,

short selling should only be used by

experienced traders who are familiar

with its risks.

Example: Suppose a wheat farmer

fears a fall in prices of wheat in future.

To protect himself from a potential

fall in the price of wheat, he can

enter into a futures contract today

with the manufacturer who wants to

buy wheat for delivery in future. The

farmer agrees today to sell wheat to

the manufacturer at a specified future

date and at a price agreed upon today.

The manufacturer is in a different

position from this farmer. He is worried

that the wheat price might increase in

the future. He can fix the wheat price

ahead of time and take delivery in the

future. He would agree to buy wheat

at a predetermined price or a specified

due date.

Forward Contracts

These are customised contracts

between two parties to buy or sell an

asset at a specified price on a future

date. A forward contract can be used

for hedging or speculation, although

its non-standardised nature makes it

particularly apt for hedging.

Unlike standard futures contracts, a

forward contract can be customised

to any commodity, amount and

delivery date. A forward contract

settlement can occur on a cash or

delivery basis. Forward contracts do

not trade on a centralised exchange

and therefore are regarded as

over-the-counter (OTC) instruments.

While their OTC nature makes it

easier to customise terms, the lack

of a centralised clearing house

also gives rise to a higher degree

A futures contract is an agreement between two parties – a buyer and a seller – wherein the former agrees to purchase from the latter, a fixed number of shares or an index at a specific time in the future for a pre-determined price.

Assume (carcass weight costs and prices):

June futuresExpected June basisLocalised futures priceBrokerage feeInterest on marginCost of feedingTotalExpected hedge profit

0.150.10

65.0065.25

75.00-3.0072.00

-65.256.75 per cwt

Scenario 1: Prices fall after placing hedge

In FebruarySell June contract

In Junebuy June contract

Futures profitCash price

Futures profitFinal hedge priceCost of feedingBrokerage feeInterest on margin

Actual hedge return

Futures

75.00

70.005.00

Cash

Sell cash $ 67.00

67.00+5.0072.00

-65.00-0.15-0.10

6.75 per cwt.

Scenario 2: Prices rise after placing hedge

In February,Sell June contract

In June,buy June contract

Futures lossCash price

Futures lossFinal hedge priceCost of feedingBrokerage feeInterest on margin

Actual hedge return

Futures

75.00

80.00-5.00

Cash

Sell cash $ 76.00

76.00-5.0071.00

-65.00-0.15-0.20

5.65 per cwt.

Hedge example

Jone has 250 hogs that will be marketed in June. Otieno has decided to hedge one hog contract on the Chicago Mercantile Exchange (40,000 carcass pounds contract or approximately 220 hogs). First, calculate expected profit.

In the first scenario, the actual hedge return is the same as the expected return because (1) the actual basis and the expected basis are the same,(2) the brokerage fee was estimated correctly, (3) interest on margin remained the same as estimated, and (4) the cost of production was accurately estimated.

The hedger would receive a profit of $6.75 per cwt for 220 hogs and only $ 2.00 per cwt for the 30 unhedged hogs ($67.00 cash price - 65.00 cost of feeding = $2.00).

In the second scenario, the actual hedge return is $1.10 per cwt. less than the estimated return ($6.75 - 5.65 = $1.10) because the actual basis ($76 - 80 = $-4) is one dollar more negative than the expected basis, and because of the added interest on margin that was the result of additional funds having to be deposited during the price rise.

FUTURES CONTRACTS

Stock futures

Currency futures

Index futures

Commodities futures

DERIVATIVES

KASNEB NEWSLINE, Issue No. 1, January - March 2016 17

of default risk. As a result, forward

contracts are not as easily available

to the retail investor as futures

contracts.

Swaps

A swap is an exchange of one thing

for another. It is a formal agreement

whereby parties or an organisation

contractually agree to exchange

payment on different terms e.g.

different currencies or interest rate

where one is a fixed rate and the

other a floating rate.

Traditionally, the exchange of one

security for another to change

the maturity (bonds), quality of

issues (stock or bonds), or because

investment objectives have

changed. Recently, swaps have

grown to include currency swaps

and interest rate swaps.

EXAMPLE

If firms in separate countries have

comparative advantages on interest

rates, then a swap could benefit both

firms. For example, one firm may

have a lower fixed interest rate, while

another has access to a lower floating

interest rate. These firms could swap to

take advantage of lower rates.

Types of swaps

Currency swaps

This involves exchange of debt from

one currency to another. The parties

agree to swap equivalent amount of

currency for a period of time. This

effectively involves the exchange of

debt from one currency to another.

Currency swap can provide a hedge

against exchange rate movement for

a longer period of time.

Interest rate swap

This swap involves the same

currency. It is normally used

when two companies can borrow

at different interest rates. One

company at a fixed rate while the

other can borrow at a variable or

floating rate.

Types of risks associated with swaps

Credit risk – This is the risk that the

counter party in swap arrangement

will default before the end of

the swap and fail to carry out his

agreed obligation. This risk can

be reduced by having a reputable

bank as an intermediary to the swap

arrangement.

Market risk – This is the risk that

interest/exchange rates will move

unfavourably against the company

that committed itself in the swap

arrangement.

Sovereign risk - It is the risk associated

with the country in whose currency

a swap has been organised. This

covers political instability, possibility

of exchange rate being introduced

by government and so on.

Forward Futures

Customised

Unregulated Regulated

Standardised

Low counterparty risk

Initial margin payment required

High counterparty risk

No initial payment required

Profit Profit

Loss LossF (O,T) F (O,T)S (T)

S (T)

Long forward Short forward

The long profits if the spot price at delivery, S(T), exceeds the original forward price, F(O,T)

The short profits if the spot price at delivery, S(T), is below the original forward price, F(O,T)

FORWARD CONTRACTS: PAYOFF PROFILES

DERIVATIVES

KASNEB NEWSLINE, Issue No. 1, January - March 201618

Mismatch risk – It is the risk that

the Bank that has been used as

intermediary may not be able to

carry out the obligation of swap

should the third party default.

Benefits of swaps

Swaps are easy to arrange since they

can be arranged in any size and in

any bank that may be willing to act

as counterparty to the arrangement.

Therefore it may not be necessary

to look for another company to

act as counter party. The swap

arrangement can also be reversed by

maturity date of the agreement by

swapping with other counter parties.

Low cost – The transaction cost, such

as fees paid to the banks as well as

legal cost, are usually low owing

to the fact that many banks offer

these services without charging a

commission or premium.

Flexibility – The swaps are not

standardised and as such are tailored

to meet the particular need for a

specific customer.

A company can use swaps to manage

the mix of its fixed and floating

debt obligations without having to

change the underlying loans.

Currency swaps provide means of

reducing exchange rate exposure.

This is because currency swaps are

used to restructure the currency

base of company liabilities. This

is important where the company

is trading overseas and receiving

revenues in foreign currency but its

borrowing is denominated in the

currency of the home country.

Put option

This is an option contract giving

the owner the right, but not the

obligation, to sell a specified

amount of an underlying security at

a specified price within a specified

time. This is the opposite of a call

option, which gives the holder the

right to buy shares.

Put options are contracts giving the

option holder the right to sell the

underlying stock at set price. The

stock price at which the option can

be exercised is called the strike price.

All option contracts have a buyer and

seller. The buyer has the right to

exercise the contract at any time up

until the expiration date. The seller

must buy shares at the strike price if

A is currently paying floating, but wants to pay fixed. B is currently paying fixed but wants to pay floating. By entering into an interest rate swap, the net result is that each party can 'swap' their existing obligation for their desired obligation. Normally, the parties do not swap payments directly, but rather each sets up a separate swap with a financial intermediary such as a bank. In return for matching the two parties together, the bank takes a spread from the swap payments.

Party A is currently paying floating rate, but wants to pay fixed rate. Party B is currently paying fixed rate, but wants to pay floating rate. By entering into an interest rate swap, the net result is that each party can swap their existing obligation for their desired obligation

A BFLOATING

BANK

FIXED

8.65% 8.50%

8.50%

NET: LIBOR + 0.70%

LIBOR + 0.55%

LIBOR + 0.70%LIBOR + 1.50%

NET: 9.60%

A B

FLOATING FIXED

8.65%

8.50%

LIBOR + 0.70%

LIBOR + 1.50%

NET: 9.45% NET: LIBOR + 0.55%

Anatomy of a SwapHere’s a simplified example of how a fund could use a swap to get exposure to a security that is difficult to buy directly

The fund deposits a portion of that $1 million - say, 20% - as collateral at a third party and segregates the remainder as cash in its portfolio.

If the security rises in value, the bank sends money to the collateral manager and ultimately to the fund.

COLLATERAL MANAGER

To replicate a $1 million investment in the security, the fund enters into a swap agreement for that “notional” amount with a bank.

Fund investors get returns, for good or bad, as if the fund had owned the security directly.

If the security falls in value, the bank bank is paid and the fund posts more collateral to get back to 20%.

1

3

4

2

5

DERIVATIVES

KASNEB NEWSLINE, Issue No. 1, January - March 2016 19

the option holder elects to exercise.

The value of put options increases

as the underlying shares price falls.

EXAMPLE

A put becomes more valuable as

the price of the underlying stock

depreciates relative to the strike price.

For example, if you have one Mar 12

Safcom 10 put, you have the right to

sell 100 shares of Safcom at $ 10 until

March 2012 (usually the third Friday

of the month). If shares of Safcom fall

to $5 and you exercise the option, you

can purchase 100 shares of Safcom for

$ 5 in the market and sell the shares to

the option’s writer for $ 10 each, which

means you make $ 500 (100 x ($10-$5))

on the put option. Note that the

maximum amount of potential profit

in this example ignores the premium

paid to obtain the put option.

Call Options

Call options give the option holder

the right to buy the underlying stock

at the strike price. The option buyer

can exercise the option at any time

and the option seller must deliver

the stock at the strike price of the

contract. Call options increase in

value as the underlying stock

increases in price.

PUT CALL PARITY

This is the relationship between

the price of call and the price

of a put for an option with the

same characteristics (strike price,

expiration date, underlying). It is

used in arbitrage theory. If different

portfolios comprised of calls and

puts have same value at expiration,

it is implied that they will have

the same value leading up to the

expiration point. Thus, the values

of the portfolios move in lock step.

Portfolio price equality is calculated

as c+ PV(x)=p+s, where c is the

market value of the call, PV(x) is the

present value of the strike price, p is

the market value of the put, and s is

the market value of the underlying

security. If the two sides of the

equation are not equal, arbitrage

profit could be gained by investing in

the less expensive portfolio. Analysis

of the parity relationship assumes

that other factors such as a dividend

are not taken into account.

This can be summarised as follows;

Po= Co – So + Xo e – rft

Where;

Co – Call price

Po – put price

Xo – Exercise price

So – Current Stock price

r – Risk free rate

t – Time to expiration

e-Exponential component

Buying a CALL gives a purchaser the RIGHT to buy stock from the

seller of option

Buying PUTS gives a purchaser the RIGHT to sell stock to the put

seller at predetermined price.

Selling CALLS forces seller to sell stock to buyer at

predetermined price

Selling PUTS forces seller to buy stock if put buyer

exercises option

PUT SELLER

CALL SELLER

PUT BUYER

CALL BUYER

CALLS

PUTS

The RIGHT (but not the obligation to buy)

The RIGHT (but not the obligation to sell)

The potential OBLIGATION to sell

The potential OBLIGATION to buy

CALL PUTBUYER

SELLER

TYPES OF OPTIONS PUT OPTION EXAMPLE

Buy ABC 930 put option when share price is at Kshs 930

Pay premium of Shs 6,000(Shs 10 x 600 units)

If ABC share price remains above Shs 930, ignore option. Loss of Shs 6,000.

If ABC share price falls below Shs 920, exercise option. No profit at this level due to premium cost.

Profit increases if share price falls below Shs 920.

EXAMPLE

Call Option on stocks

A person purchases a call option on shares of company X.

Strike price of Shs 40Expriration date: 31 July

Option contract: right to purchase 100 shares at price of Shs 40 on 31 July.

When will this right become valuable to exercise?

Only valuable if shares of company X are trading above Shs 40 per share on 31 July.

DERIVATIVES

Max loss at expiration ifstock is = strike price or higher

Ksh 0.00

Stock price

PUT OPTION

Profit increases the lowerthe stock price drops

Break even point is strike price - single option cost

(not contract price)

KASNEB NEWSLINE, Issue No. 1, January - March 201620

Put/Call parity and synthetic position

Option traders should have a

good understanding of one of the

foundations of opinion pricing, the

theory of Put / Call Parity. Put/Call

parity means that the value of call

option implies a certain fair value

for the corresponding put, and vice

versa. To explain why this pricing

relationship always holds, the

entire argument relies on arbitrage.

If the value of puts and calls were

to diverge, arbitrageurs would step

in to eliminate any departure from

put call parity by making a profit on

risk-free traders.

The relationship is strict only for

European–style options but the

concept works for American–style

options after adjusting for dividends

and interest rates. Dividend increases

put values and decreases call values.

If the dividend is increased, the puts

expiring after the ex-dividend date

will rise in value, while the calls

will decrease by a similar amount.

Changes in interest rates have the

opposite effect on put and the calls

will decrease by a similar amount.

Changes in interest rates have the opposite

effect on put and call values. Rising interest

rates increase call values and decrease put

values.

So what happens if the puts and calls for an

asset are not in parity? There are a number

of strategies that can be used for option

pricing arbitrage. The most common are

the conversion and reverse conversion. The

conversion involves having a long position

in the stock while simultaneously buying

a put and selling a call (at the same strike

price). A reverse conversion (often called a

reversal) means you short the stock while

simultaneously selling a put and buying a

call.

Synthetic put option

This is a transaction involving the purchase

of call option on a stock that has already

been shorted. This enables the holder to

protect against an increase in the price

of the underlying stock. If the stock price

decreases, the call is not exercised and the

investor profits minus the premium. If the

stock price increases, the call is exercised and

the investor breaks even minus the premium

and short interest.

Rise in future price?

Buy call option

Fall in future price?

Buy put option

WHEN TO BUY PUT OPTIONS

The long synthetic (left) and short synthetic stock positions are mirror images of each other, created by combining offsetting positions in a call and put option. By establishing these positions, we can take advantage of early exercise.

UNDERLYING PRICE

Long syntheticStock for $ 636.35

Long 635 Call for $2,50

Short 635 Put @ $1.15

630625 635 640 645 650

$15

$10

$5

-$5

-$10

-$15

0

Short syntheticStock @ $ 636.35

Long 635 Put for $1.15

Short 635 Call @ $2.50

UNDERLYING PRICE

630625 635 640 645 650

$15

$10

$5

-$5

-$10

-$15

0

SYNTHETIC POSITIONS

DERIVATIVES

KASNEB NEWSLINE, Issue No. 1, January - March 2016 21

Synthetic call

This is an investment strategy that

mimics the payoff of a call option. A

synthetic call is created by purchasing

the underlying asset, selling a bond

and purchasing a put option. The

strike price on the put option is

equal to the face value of the bond,

which serves as the exercise price of

the synthetic call. A synthetic call

produces the same overall payoff as

a call option. The synthetic call will

finish in the money when the price

of the underlying asset is greater

than the face of the sold bond at

the time of expiration. It will be out

of the money when the value of

the bond is greater than that of the

underlying asset. When the synthetic

call is in the money, the profit is the

difference between the price of the

underlying asset and the face value of

the bond. If the call finishes out of the

money, the put option absorbs the

loss from the underlying assent, with

the exercise price of the put paying

for the bond.

The way it works

Let’s have a look at a real-life example

to get a better handle on the nuts

and bolts of the thing.

Here’s a six-month chart of an actual

stock A: Stock A synthethic long put

straddle.

At the end of July your research tells

you that a long position in stock A

will pay off nicely – and a better than

3% dividend yield never hurt, either.

You buy 100 shares at exactly Shs 114

(red circle) and watch the stock rise

through the beginning of August.

But then the news starts to sour,

and you wonder if you should bail

out. The stock drifts sideways and

rumors abound regarding product

safety litigation and weak forward

earnings estimates. By the middle of

August the stock has again retraced

to Shs114 and you can’t bear the

anxiety. You immediately buy two

at-the-money November puts for

Shs 2.50 each, creating a synthetic

straddle, and breathe a long sigh of

relief (blue circle).

The Breakdown

Should the stock rise to Shs 119 by the

third week in November, the puts will

expire worthless, but you’ll break even

([114 + 2.50 + 2.50] x 100). Anywhere

above that level and you’ll have a profit.

Should the stock remain at 114 or drop,

the maximum loss you’ll sustain is Shs

500 – the initial cost of the two long puts

(2.50 x 2 x 100).

To wit: At the 114 mark, the puts expire

worthless, the stock is worth the same,

and you’re out your initial premium of

Shs 500. Below that – at, say, 104 – the

stock is down Shs1,000, the puts are in

the money Shs10 each (for a gain of Shs

2,000) and the initial cost of the puts is

Shs 500.

Final tally: Shs 2,000 – Shs1,000 – Shs500

= Shs 500 profit.

In the Stock A example above, the stock

closes just a trace above Shs119 (black

circle), putting you in a marginally

profitable position, having weathered

the storm safely and ready to move

forward with confidence.

This nearly risk-free trading system has

been able to turn Shs 330 into Shs3,300.

OPTIONEXPIRES;YOU’VE

WEATHEREDTHE STORM

AND GO “SYNTHETIC”

HERE

YOU MAKE YOUR BULLISH

PURCHASE HERE

122

121

120

119

118

117

116

115

114

113

112

111

110

100

Jun Jul Aug Sept Oct Nov Dec

EXAMPLE OF A SYNTHETIC CALL

DERIVATIVES

KASNEB NEWSLINE, Issue No. 1, January - March 2016 23

WHAT IS AUDIT SAMPLING?

As per ISA 530, audit sampling is

defined as “the application of audit

procedures to less than 100% of

items within a population of audit

relevance such that all sampling

units have a chance of selection in

order to provide the auditor with

a reasonable basis on which to

draw conclusions about the entire

population.”

The standard recognises that

auditors will not ordinarily test all

the information available to them

because this would be impractical

as well as uneconomical. Instead,

the auditor can use sampling as an

audit technique in order to form their

conclusions.

Sampling involves selecting

representative items from a

population (the entire set of data

to be audited), examining those

selected items and drawing conclu-

sions about the population based

on the results derived from the

examination of the selected items.

Auditors must draw conclusions

about populations that are numerous

for every item to be tested. This can

be done by applying the principles

of statistics in selecting a sample that

is a representative of the population.

Sampling is a data collection technique that is used when you want to create a statistically sound conclusion from a subset of a population of data.

SAMPLING TECHNIQUES

Techniques in audit sampling are varied as per Practice Advisory 2320-3. However,

they can be categorised into two main groups;

(i) Judgemental (non-statistical) sampling

(i) Statistical sampling

IN AUDITING

CHOOSING THE BEST

AMPLING METHOD

SAMPLING TECHNIQUES

Non-probability

Convenience Judgment

Simple Random Stratified Cluster MultistageSystematic

SnowballQuota

Probability

Unrestricted Restricted

By ABDHALLAH M. DALLU, Internal Auditor, Guardian Bank Ltd.

KASNEB NEWSLINE, Issue No. 1, January - March 201624

NON-STATISTICAL (JUDGEMENTAL) SAMPLING

Judgemental sampling uses the

auditor’s objective judgement to

determine the sample size and

sample selection. The auditor,

based on his/her experience, is able

to select and test only the items he

considers to be the most important.

It may not be based objectively and,

thus, results of a sample may not be

mathematically supportable when

extrapolated over the population.

The purpose of the test, efficiency,

business characteristics, inherent

risks, and impacts of the output are

common considerations the auditor

will use to guide the sampling

approach.

Advantages of non-statistical (judgemental) sampling

(i) The process can be less

expensive and less time

consuming.

(ii) No special knowledge of

statistics and no statistics

software are required.

(iii) The auditor has greater

discretion to use his/her

judgement and expertise. Thus

if the auditor has substantial

experience, no time is wasted

on testing immaterial items.

Disadvantages of non-statistical (judgemental) sampling

(i) It does not provide a

quantitative measure of

sampling risk, confidence

levels and precision.

(ii) It does not provide a

quantitative expression of

sampled results.

(iii) If the auditor is not proficient,

the sample may not be

effective.

NON-STATISTICAL (JUDGEMENTAL) SAMPLE SELECTION TECHNIQUES

A non-statistical selection technique

includes:

(a) Haphazard selection.

(b) Block selection.

(c) Judgement selection

Haphazard selection

Haphazard selection is “false

random” selection, in the sense of

an individual “randomly” selecting

the items, implying an unmeasured

bias in the selection (e.g. items easier

to analyse, items easily accessed,

items picked from a list displayed

particularly on the screen, and so

on).

Block selection

This method of sampling involves

selecting a block (or blocks) of

contiguous items from within a

population. Block selection is rarely

used in modern auditing merely

because valid references cannot be

made beyond the period or block

examined. In situations when the

auditor uses block selection as a

sampling technique, many blocks

should be selected to help minimise

sampling risk.

An example of block selection is

where the auditor may examine all

the remittances from customers in

the month of January. Similarly, the

auditor may only examine remittance

advices that are numbered 300 to

340.

Judgement selection

Judgement selection is purely based

on the auditor’s discretion, whatever

the rationale (e.g. items with similar

names or all operations related to

a specific domain of research, and

so on.)

STATISTICAL SAMPLING

This involves the use of techniques

from which mathematically

c o n s t r u c t e d c o n c l u s i o n s

SAMPLING METHODS

KASNEB NEWSLINE, Issue No. 1, January - March 2016 25

regarding the population can be

drawn. It allows the auditor to

draw conclusions supported by

confidence levels (the percentage

of times the sample will adequately

represent the population) regarding

population of data output. It provides

an objective method of determining

sample size and selecting the items

to be examined. It also provides

means of quantitatively assessing

precision (how closely the sample

represents the population) and

confidence levels.

Statistical sampling helps the auditor

design an efficient sample; measure

the sufficiency of evidence obtained,

and evaluate the sample results on

quantified data.

Advantages of statistical sampling

(i) It provides a quantitative

measure of sampling risk,

confidence levels and

precision.

(ii) It provides a quantitative

expression of sampled results.

(iii) It helps the auditor to design

an efficient sample.

(iv) It provides sample results that

are objective and defensible.

Disadvantages of statistical sampling

(i) It can be more expensive

and time consuming than

non-statistical sampling.

(ii) It requires special statistical

knowledge and training.

(iii) It requires statistical software

l ike Audit Command

Language (ACL) analytics,

Spreadsheets, PSPP, AdamSoft

and so on, which may be

expensive to install for small

business enterprises.

STATISTICAL SAMPLE SELECTION TECHNIQUES

The key element common to all tests

to be evaluated statistically is that

the items to be included in the test

must be chosen at random. There

are several acceptable methods for

selecting a statistical sample;

(a) Unrestricted random sampling.

(b) Random sampling.

(c) Systematic sampling.

(d) Monetary unit sampling.

Unrestricted Random Sampling

The unrestricted random sample is

obtained by the use of a random

number table or computer generated

random numbers. This method is

used to draw individual sample

items from the entire population

without segregating or separating

any portion of the population. By this

method, each and every item in the

population has an equal chance of

being selected as a sample unit. This

is one of the most commonly used

sample selection techniques.

Stratified Random Sampling

Stratified random sampling is

where all items in the population

are divided into sub-populations,

ideally according to similar types

of characteristics (homogeneous

groups); for example, periods,

product lines, customer types,

sales locations, dollar ranges and

so on. Each sub-population is then

sampled independently. After the

results of the individual samples

have been completed, they are

generally combined into one overall

population estimate in terms of a

confidence interval and confidence

level.

An essential concept to understand is

that accounting populations are not

typically evenly distributed; rather,

accounting populations normally

have a skewed distribution. It is also

important to understand that the

purpose of an audit is to cover as

much of the population dollars as

possible in an efficient manner, not

necessarily a certain percentage of

the population invoices. Stratification

is the methodology that allows this

goal to be achieved and is the key to

effectively and efficiently conducting

an examination.

If each member of a population has an equal chance of inclusion into a sample, it is called a random sample (unbiased). If the survey sample is biased, its results are not valid.

The fastest way to know about the marble colour ratio is to blindly transfer a few into a smaller jar and count them.

SURVEYRandom sampling

SAMPLING METHODS

KASNEB NEWSLINE, Issue No. 1, January - March 201626

Systematic Sampling

Systematic sampling involves

selecting samples at a given interval

after establishing a random starting

place. The random start is essential

to ensure each unit in the population

has an equal chance to be included

in the sample. This method of

sampling can be the most efficient if

the documents in the population are

not numbered. For instance, invoices

can be selected by physical count

rather than by invoice number.

Systematic sampling is the selection

of every ‘’nth” item following a

random start. In this type of sample,

the size of the interval directly affects

the size of the sample. As a result,

the population and required sample

size should be estimated in order to

determine the interval necessary.

Interval = Population ÷ sample size

Although this method is indeed a

simple method of selecting samples,

the method must be used with

caution since bias can be introduced

into the sample. In general, if there

is any periodic or cyclic arrangement

of the items in the population, a bias

can result. Further, it may not be

apparent from the sample that the

bias exists.

Monetary Unit Sampling

Monetary unit sampling (MUS) is a

value-weighted selection whereby

sample size, selection and evaluation

will result in a conclusion in

monetary amounts. Its objective is to

determine the accuracy of financial

accounts. The steps involved in

monetary unit sampling are to:

(i) Determine a sample size.

(ii) Select the sample.

(iii) Perform the audit procedures .

(iv) Evaluate the results and arrive

at a conclusion about the

population.

MUS is based on attribute sampling

techniques and is often used in test

of controls and appropriate when

each sample can be placed into one

of two classifications – “exception/

Yes” or “No Exception/No”. It turns

monetary amounts into units - for

example; a receivable balance

of Kshs. 50 contains 50 sampling

units. Monetary balances can also

be subject to varying degrees of

exception - for example; a payables

balance of Kshs. 7,000 can be

understated by Kshs. 7, Kshs. 70

or Kshs. 700 and the auditor will

clearly be interested in the larger

misstatements.

1 2 3 4 5

6 7 8 9 10

11 12 13 14 15

16 17 18 19 20

21 22 23 24 25

Each member of the population has equal chance of being selected

Selection by random numbersMembers can be identified uniquely by a number

SAMPLE METHODPOPULATION RESULTING SAMPLE

Put numbers 1-30 in a hat or use technology

Sample of 10

Simple Random Sampling (SRS)

h=10 System start with end

Systematic Sampling

Same street

W street

K street

L street

Cluster Sampling

Sample size of 12“Strata”

Stratified Sampling

SAMPLING METHODS

KASNEB NEWSLINE, Issue No. 1, January - March 2016 27

METHODS OF STATISTICAL SAMPLING

There are two main methods used

for statistical sampling:

(a) Attribute sampling.

(b) Variable sampling.

Attribute sampling

In attribute sampling each item in

the population has an attribute of

interest to the auditor, for example,

evidence of proper authorisation.

Thus, attribute sampling is

appropriate for test of controls, that

is, when two outcomes are possible,

(compliance or non-compliance).

attribute sampling is used to

determine the characteristics of a

population being evaluated.

Factors to consider when determining the sample size in attribute sampling

The confidence level

This refers to the percentage of times

that a sample is expected to be a

representative of the population.

The greater the desired confidence

levels, the larger the sample size.

Population size

This refers to the sum of items to be

considered for testing. The larger

the population size, the larger the

sample size should be. However,

for a very large population, the

population size has a small effect

on the sample size. Above a certain

population size, the sample size

generally does not increase.

The expected rate of deviation (Rate of occurrences)

This is an estimate of the deviation

rate in the population. The greater

the population deviation (variability

in the population), the larger the

sample size should be.

Tolerable deviation rate (desired precision)

This is the highest allowable

percentage of the population that

can be in error (noncompliance

rate) and still allow the auditor to

rely on the tested control. The lower

the tolerable error, the larger the

sample size.

As parameter increases Sample must

Confidence levels Increase

Expected deviation rate Increase

Tolerable deviation rate Decrease

Planned precision for an attribute sample

Planned/desired precis ion

(confidence interval) is the range

around a sample value that is

expected to contain the true

population value. It is determined

by subtracting the expected

deviation rate from the tolerable

deviation rate i.e.

Precision = Tolerable Deviation Rate

– Expected Deviation Rate

The population is the entire group being studied. A sample is part of the population being surveyed.

Inference means using observed sample characteristics to estimate population characteristics.Target population

Random samples

Inferences

Calculations

ParametersShapeSpread

Location

StatisticsShapeSpread

Location

Study/research population

Frame error

Chance error

Response error

Response

Sample

Population

Sampling frame

ATTRIBUTIVE SAMPLING

The statistical sampling method most commonly used for tests of controls and substantive tests of transactions is attributive sampling. Used to estimate the extent to which a characteristic exists within a populationGoal: Estimate the rate at which the client’s internal control is failing to function effectively and compare to an allowable level (tolerable rate of deviation)

SAMPLING METHODS

KASNEB NEWSLINE, Issue No. 1, January - March 201628

Planned precision and sample size are

inversely related. As the required precision

decreases (tightens), the sample size must

increase.

As precision increases

Sample size decreases

Attribute Sampling Methods

Majorly there are two methods used in

attribute sampling

(a) Discovery sampling

(b) Stop-or-go sampling

Discovery sampling

Discovery sampling aims at auditing cases

where a single error would be critical; it is

therefore particularly geared towards the

detection of cases of fraud or avoidance of

controls. Based on attribute sampling, this

method assumes a zero (or at least very

low) rate of error and is not well suited for

projecting the results to the population,

should errors be found in the sample.

Discovery sampling allows the auditor to

conclude, based on a sample, whether the

assumed very low or zero error rate in the

population is a valid assumption.

Stop-or-go sampling

Stop-or-go sampling comes out of the

frequent need to reduce the sample size

as much as possible. This method aims

at concluding that the error rate of the

population is below a predefined level at

a given confidence level by examining

as few sample items as possible – the

sampling stops as soon as the expected

result is reached. The chief advantage

(objective) of stop-or-go sampling is to

reduce the sample size when the auditor

believes that the error rate in the population

is low. Thus, it may reduce the sample size

because sample items are examined only

until enough evidence has been gathered

to reach the desired conclusion.

Variable sampling

Variable sampling is used for

continuous variables, such as

weights or monetary amounts.

It provides information about

whether a stated amount (e.g.

balances of accounts receivables) is

materially misstated. Thus variable

sampling is useful for substantive

tests. The auditor can determine,

at a specified confidence level, a

range that includes the true value.

In variable sampling, both the upper

and lower limits are relevant (a

balance, such as accounts receivable,

can be either under or over-stated).

It is used to determine the monetary

impact of characteristics of a

population.

Factors to consider when determining the sample size in attribute sampling

The confidence level

The greater the desired confidence

levels, the larger the sample size

should be. If the auditor needs a

more precise estimate of the tested

amounts, he must increase the

confidence level and the sample size.

Population size

This refers to the sum of items to be

considered for testing. The larger

the population size, the larger the

sample size should be.

Tolerable misstatement (precision)

This refers to an interval around the

sample statistic that is expected

to include the true balance of the

population at the specific confidence

level.

For example, an auditor has tested

a variables sample with precision

of + 4% and a confidence level of

90%. The conclusion is that the

true balance of accounts is Kshs.

1,000,000. The precision of + 4%

gives boundaries of computed

ranges. Thus;

Lower limit = 1,000,000 – (4% X

1,000,000)

= 960,000.

Upper Limit = 1,000,000 + (4% X

1,000,000)

= 1, 040, 0000

The auditor can conclude that the

probability is only 10% that the true

balance lies outside this range.

Sampling when used in an audit is to provide a reasonable basis for the auditor to draw conclusions about the population from which the sample is selected.The reason to use sampling is because testing of 100% of population, although would provide most assurance, sometimes it would be impossible to perform, or the cost of testing would likely exceed the expected benefit.

SAMPLING METHODS

KASNEB NEWSLINE, Issue No. 1, January - March 2016 29

Therefore the narrower the precision,

the larger the sample should be.

Standard deviation (dispersion/variability).

This refers to the extent to which the

values of items are spread about the

mean. An increase in the estimated

standard deviation increases the

sample size.

As parameter increases Sample must

Confidence levels Increase

Population size Increase

Estimated standard Deviation

Increase

Tolerable misstatement Decrease

Variable sampling methods

Auditors may employ the following

variable sampling techniques:

(i) Mean per Unit (MPU)

(ii) Difference estimation

(iii) Ratio estimation

Mean per Unit (MPU)

This method averages the audited

amounts of sample items. It

multiplies the average by the

number of items in the population

to estimate the population amount.

An achieved precision at the desired

level of confidence is then calculated.

Difference estimation

This method estimates the

misstatement of an amount by

calculating the difference between

the observed and recorded amounts

for items in the sample. This method

is appropriate only when per-item

recorded amounts and their total

are known. Therefore, difference

estimation:

(i) Determines di f ferences

between the audited and

recorded amounts of items in

the sample.

(ii) Adds the difference.

(iii) Calculates the mean difference

(iv) Multiplies the mean by

the number of items in the

population.

(v) Calculates an achieved precision

at the desired level of precision.

Ratio estimation

This method estimates the population

misstatement by multiplying the recorded

amount of the population by the ratio of the

total audited amount of the sample items to

their recorded amount.

Conclusion

While auditors receive training and gain

expertise in applying sampling concepts

and specific sampling methods, they many

times fail to adequately consider whether

a non-statistical or statistical test is most

appropriate for a particular test. When

planning the procedures to be performed

in an audit area, the professional must

first determine whether sampling is

appropriate at all, and then whether to apply

non-statistical or statistical techniques.

Which sampling approach is best, statistical

or non statistical? It depends! It depends

on the type of results required and on

the capabilities of the auditing firm. If an

objectively determined measure of risk is

needed, a statistical approach is obvious.

The professional who prefers to rely on

Judgement would use a non-statistical

method. If the upper error rate or a range

of the dollar amount of error is desired,

the auditor most utilises a statistical

method. A statistical sample is more

appropriate than a non-statistical one if the

population is composed of a large number

of homogeneous transactions generated

under a system of good control. Auditors

not trained in statistical techniques should

use a non-statistical approach. Firms with

computer access and sampling software

would tend to employ statistical methods.

If the population is made up of dissimilar

members or errors are difficult to define in

advance, non-statistical sampling should

be utilised.

AUDIT SAMPLING

Statistical sampling Non-statistical sampling

Non-statistical sampling(Test of controls)

Variable Sampling (Audits of operations)

MUS (PPS)

Difference estimation Ratio estimation Mean per unit

Discovery - Stop or go

SAMPLING METHODS

KASNEB NEWSLINE, Issue No. 1, January - March 2016 31

Intellectual property rights are

aimed at protecting the creativity,

inventiveness and the results of

the human intellect. The primary

function of intellectual property

right under the law is to protect the

creator or owner from any form of

exploitation.

Elements of intellectual property rights

Virtually every company has

intellectual property in the form

of brand names, publications or

literature, unique product designs,

symbols, phrases, music and other

artistic works.

Under the intellectual property

laws, the owners of such property

are granted certain exclusive rights.

The most common intellectual

properties include the following:

• Patents

• Trademarks

• Copyrights

• Registered industrial

design rights

• Trade dress

• Trade secrets or

protection of

undisclosed

information

(a) Patents

This is a form of right granted by

the government to an inventor,

giving the owner rights to exclude

others from making, using, selling,

offering for sale and importing an

invention for a limited period of time,

in exchange for a public disclosure of

the invention.

The patent may be given where one

discovers a new and useful process

or useful improvements in a process,

machine or composition of matter.

(b) Trademarks

A trademark is a word, symbol, name

or a device used in trade with goods

to indicate the source of the goods

and to distinguish them from the

goods of other competitors.

It is a distinguishing sign which

identifies certain good or services

as those produced or provided by a

Intellectual property (IP) refers to creations of the mind, such as inventions;

literary and artistic works; designs; and symbols, names and images used

in commerce.

IntellectualTHE IMPORTANCE OF

IN VALUE CREATION FOR A BUSINESS

Property

INTELLECTUALPROPERTY

INDUSTRIALPROPERTY

LITERARY AND ARTISTIC

PROPERTY

Related rightsCopyrightDesignsTrademarksPatents

By FREDERICK NYUNJA, Enterprise Risk Department, Sidian Bank Ltd.

KASNEB NEWSLINE, Issue No. 1, January - March 201632

specific person or enterprise. It may

be a combination of words, letters

or numerals. They may also consist

of symbols, drawings, shapes and

packaging of goods or colours used

as distinguishing features.

A collective mark may be used by

members a given association to

identify themselves with a certain

level of quality.

Certification marks are given for

compliance with defined standards.

(c) Copyrights

This is a legally protected property

right in the original work which

a person creates. It may subsist in

the form of literature, musical or

other artistic works, whether in

sound recordings, films, broadcast

and publications. The creator of the

work is called the copyright owner.

The copyright owner has the right to

control and exploit the use of their

creation.

These rights give protection for the

expression of an idea and not for the

idea itself.

Example:

An author may write a book on a

certain subject (say about personal

finance), a subject which many

authors have written about. Each

author is however given a copyright

on the book written by him or her,

provided the book is not a copy of

some other book published earlier by

other authors.

It is always important to incorporate

copyright notice for the protection

of literary or artistic works.

(d) Industrial design rights

This is a legal protection of the visual design

of objects that are not purely utilitarian.

It consists of the creation of a shape,

configuration or composition of pattern

or colour or combination of above, which

contain artistic value.

It can be a pattern used to produce a product,

industrial product or handicraft.

Today, we have varieties and brands of the

same product in the market which look quite

different from each other.

A client has a choice to make based on the

price tag or the visual appeal, even though

the products have similar functional features,

for instance, bread, soap or furniture.

(e) Trade secrets or protection of undisclosed information

This is also referred to as confidential

information, that is, keeping important

information secret.

It includes information on formula,

compilation, pattern, device, method,

technique or process.

This form of protection is very important for

industrial works, research and development

companies and other organisations dealing

with intellectual property rights.

The trade secrets may also include a

company’s customer list, complex formula

for a product or process manual.

INTELLECTUAL PROPERTY

A copyright symbol signifies that a creator has the right to make copies,

license and otherwise exploit a literary, musical or artistic work, whether printed, audio, video and so on.

KASNEB NEWSLINE, Issue No. 1, January - March 2016 33

Management of intellectual property

The arrival of the knowledge economy

has created urgency in understanding and

managing knowledge-based assets such as

inventions and other artistic works.

The current economy is being wheeled

by institutions which spearhead in

value creation which leads to customer

satisfaction. Customer satisfaction comes

from value addition generated from

simplifying processes or coming up with new

products to fill gaps in the chain of value

creation or solve problems in the society.

Products or services that solve problems

in the society will generate more revenue

for the firm depending on the extent to

which the problem affects the majority of

the population. A good business product

is one which focuses results on numbers.

Benefits of intellectual property

Intellectual property right is important

in shaping the success of an enterprise,

institution and the government. This is very

important especially in the contemporary

world where the trade environment has

been changing rapidly. These changes

are characterised by global competition

brought about by economic integration,

short product life cycle, rapid technological

changes, high innovation risks and the need

for highly skilled labour. The key benefits of

intellectual property include:

(a) Intellectual property can be used as

a key selling point or competitive

differentiator, giving market advantage

on the basis of a unique product, brand

name or service such as Coca Cola.

(b) Patents can be used as a powerful source

of revenue. This is achieved through

issuing license agreements at a fee.

Many companies around the globe have

enjoyed a significant amount of revenue

from patenting business. Research

indicates that a profit margin

from patenting is estimated at

90%. This is because the costs

associated are minimal.

(c) A company may patent its

business processes. This has

been well demonstrated by Dell

Company as a strategy to retain

a niche of clientele. From their

website, a customer is able to

keep track of the manufacturing

process, testing and shipping

details.

(d) The registration of copyright

helps in the identification of the

ownership of the work.

(e) One can use copyright as a

source of passive income e.g.

one can write a book and sell

his/her books. However, the

author is not protected unless

his/her artistic work is protected.

Only copyrights will act as his/

her insurance. Copyright gives

the creator of the work the right

to reproduce the work, make

copies, translate, sell or give on

hire and communicate the work

to the general public.

(f ) Trademarks provide the owner

exclusive rights to use it to

identify goods or services or

authorise others to use it in

return for some consideration.

Challenges facing intellectual property rights

(i) A number of people have

resorted to infringing the

works of others and reap where

they have not sown, therefore

the owners effort, time and

expenses incurred go in vain.

(ii) Piracy and hacking have

e n c r o a c h e d i n d u s t r i e s

INTELLECTUAL PROPERTY

Intellectual property is just like any other property

PROPERTY VALUE CREATION ACTIVITY RESULTS

Real Product creation Revenue/profits

Personal Investment Employment

Capital Improvement Appreciation

Intellectual Sale Solution of needs

Rent or licensing

KASNEB NEWSLINE, Issue No. 1, January - March 201634

throughout the world. When you

mention the term ‘pirate’ the first thing

that comes to your mind is Somali

pirates. However, the deadliest pirates

are those that kill the human intellectual

development. You may be a pirate but

live in denial of it. They include students

who photocopy entire books, individuals

who engage in film and music piracy

and importers of fake products which

are branded and sold as local products.

This not only kills our industries and

opportunities for job creation but also

leads to unfair competition and poor

standard goods. Today, drugs and

foodstuff have been counterfeited to

such a big extent. Consumer protection

organisations need and must move a

notch higher to curbing this spiralling

menace.

(iii) The emergence and evolution of

complex information technology

around the globe has brought about

the challenge of data protection. No one

is safe from hackers and pirates. This is

because the world has become a ‘global

village’ connected through the internet.

It is this selfsame internet that hackers

use via computers and phones to access

other peoples’ or organisations’ private

databases. The hackers use ‘reverse

engineering’, to analyse and program

these computers or phones to

counter their defense software.

Lawyers have been having

challenges protecting these

intellectual properties.Lack of

moral standards and job scarcity

has pushed many learned

youths, especially from the I.T.

sector, to be involved in illegal

activities - the so called ‘get rich

quick scams’. They will hack into

your computer, steal data and

sell it to the highest bidder or

hack into your account and wire

funds.

(iv) Many products and technologies

are being marketed and utilised

simultaneously across the globe

hence intellectual property has

become vulnerable to violations

leading to loss by the creators

of the ideas.

(v) The infringement of intellectual

properties has led to reduction

in the pace of development

in Kenya. This is because most

of the affected innovators

and inventors whose ideas

have been leaked to social

media and used freely feel

demoralised. Our farmers and

manufacturing industries are

killed by the smuggling of fake

and substandard products

which are eventually sold at

very low prices.

(vi) The dichotomy of the legal systems

across borders has greatly affected

protection of intellectual property rights

as well as the growth of international

trade.

(vii) Poor governance and corruption.

This has seen institutions and leaders

refusing to take responsibility and

accountability for their failure to protect

intellectual property infringements

across the globe. Our leaders who are

being emulated by many youths across

the globe have set a bad example

by being at the forefront of corrupt

dealings. This has been spurred by

extensive greed for wealth among our

leaders.

(viii) Sabotage of the legal system. Lack of

respect to the legal system has caused

the uprising of questionable property

rights and transfer of ownership rights.

In some streets and bus stages, people

are illegally vending products without

permits. Some even vend fake drugs,

yet they are not qualified physicians.

The general society and our institutions

have sabotaged the legal system and

accepted such to be the norm.

(ix) Lack of awareness. There is low

awareness of intellectual property

rights among the majority of the

population. Therefore the perpetrators

take advantage of this to manipulate

the public and earn them stupendous

wealth.

INTELLECTUAL PROPERTY

FORMS AND DURATION OF INTELLECTUAL PROPERTY PROTECTION

PATENT COPYRIGHT TRADEMARK

A set of exclusive rights granted to an inventor by the government in exchange for a public disclosure of the invention. The invention must be useful, novel and non-obvious

A set of legal rights designated by the government to the creator of an original work. Allows creator to use, reproduce and display work and receive compensation

A word, name, symbol or device used with a good or brand to distinguish from other goods or brands

Length of protection: 15-20 years Length of protection: Life of creator + 70 years

Length of protection: Indefinite as long as mark is still in use and owner renews mark every 10 years

Conclusion

Everyday, we wake up to challenges that

require creative genius to solve. These

challenges present numerous opportunities

for inventions and innovations. This is not to

say that these are in short supply. But on the

opposite side, exploiters, hackers and pirates

have been perfecting their games therefore

stifling creativity. Thus, there is growing need

to enlighten the society on intellectual

property rights so as to encourage respect

for these rights and to deter violators.

Whether in business security or privacy of

government, it is of paramount importance

that we pick from where the great inventors

left and push inventions and innovations to

higher levels. Without past inventions, we

would not be enjoying benefits of

convenience, ease of doing things,

faster information processing by

computers, communicating via

phones, better health, faster travel,

cleaner energy sources and many

other important utilities in our daily

lives. Every business challenge

brings about an opportunity to

invent and innovate. The solutions

to these challenges will shape our

future and the society at large.

The human brain has unlimited

power, the power to think and come

up with unprecedented ideas that

will add value and create abundant

job opportunities for generations to

come.

It is therefore important to ensure that

creating, protecting and managing

intellectual property becomes an important

corporate activity just like other vital

business ingredients.

INTELLECTUAL PROPERTY

PATH Institute of Technology and EntrepreneurshipP.O. Box 799 - 00241 Kitengela

Mobile: 0700392770Email: pathinsttech@gmail.com

Website: www.pathinstitute.ac.ke

Path Institute of Technology and EntrepreneurshipKITENGELA

COURSES OFFERED:

Hostels available at reasonable rates

KASNEB

KASNEB• Accounting Technicians Diploma (ATD)• Certified Public Accountants (CPA) Parts I - III • Certified Secretaries (CS) Sections 1 and 2• Diploma in Information Communication Technology (DICT)• Certified Information Communication Technologists (CICT)

KNEC/ICM • Certificate/ Diploma in Business Management• Certificate/ Diploma in Sales and Marketing• Certificate/ Diploma in Supply Chain Management• Certificate/Diploma in Information Communication Technology• Certificate/Diploma in Human resources management• Certificate/Diploma in Financial management• Certificate/Diploma in Marketing management• Certificate/Diploma in Business Start-up and Entrepreneurship• Certificate/Diploma in Community Development and Social Work

PITE • Certificate in MS Office, • Certificate in Computerised Accounting, • Certificate in Web Design, • Certificate in Computer Programming, • Entrepreneurship short courses and seminars• Production skills in soap-making, cosmetics, exercise books, paints

and dyes, animal feeds, cakes, juices, yoghurt e.t.c• Languages: Kiswahili, French and English

INTERNATIONAL COMPUTER DRIVING LICENCE (ICDL)ICDL registration every Monday

How will the youth benefit by promoting national cohesion and integration?

THE ROLE OF THE YOUTH

IN NATIONAL COHESION AND INTEGRATION

• Promotion of national cohesion and integration will enable the youth to have equal opportunities in accessing education and training.

• National cohesion and integration will allow the youth to productively participate in socio-economic activities for self advancement.

• The Promotion of national cohesion and integration enables the youth to exercise their freedom of associa-tion and rights of representation.• By promoting national cohesion and integration, youths will be able to participate in decision-making and hold leadership positions.

• The promotion of national cohesion and integration will provide a conducive environment for youths to effectively discuss and explore opportunities and challenges affecting them.

• Promotion of national cohesion and integration will enable youths to successfully initiate interactions and strengthen socio-economic networks that can help them overcome challenges like unemployment and exploit existing opportunities.

• The promotion of national cohesion will encourage the youth to play an active role in conflict prevention.

• National cohesion and integration will facilitate engage-ment of youths in income generating activities across ethnic groups that improve their wellbeing and contribute to the productivity of the country.

• National cohesion and integration will promote understanding and creativity that arise from the interac-tion between youths of different ethnic communities.

• National cohesion and integration facilitates creativity and innovation, hence enhancing the overall economic wellbeing of the youth.

• National cohesion and integration enables the youth to play their roles effectively in national building.

• National cohesion and integration will facilitate improvement of social, economic and political status of the youth which is key to the promotion of national cohesio0n and integration.

• Achievement of sustainable socio-economic and political development which will contribute to renewed hope and assurance for the next generation.

CONTACTS

Ministry of Interior and Coordination of National Government,

Directorate of National Cohesion and National Values

Extelcoms House, 9th & 10th floors

Haile Selassie Avenue

P.O Box 30510-00100 Nairobi

Telephone: 020-2224029 ext 200

Facebook: cohesion.go.ke

Twitter: @CohesionKe

Conclusion

The Kenyan youth cannot be ignored in any endeavor that aims at enhancing or promoting national cohesion and integration in the country. When the young people are empowered and involved, today will be safe and tomorrow will be assured.

KASNEB NEWSLINE, Issue No. 1, January - March 2016 39

Definition of marketing

The word marketing has been

defined in different ways by

several authors and scholars.

Below are some of the definitions.

Marketing is the performance of

business activities that direct the flow

of goods and services from producers

to consumers or users - American

Marketing Association – A.M.A.

(1964).

Marketing is the creation and the

delivery of a standard of living. It

involves finding out what consumers

want, planning and developing a

product or service that will satisfy

these wants and finally determining

the best way to price, promote and

distribute the products or services.

Thus marketing is a total system

of business activities designed to

plan, price, promote and distribute

want-satisfying goods and services

to present and potential customers -

Stanton William J. (7th Edition 1984).

Marketing is a social and a managerial

process by which individuals and

groups obtain what they need and

want through creating, offering and

exchanging products of value with

others. - Kotler Philip (1997).

All the above definitions are

underpinned by one common

denominator: the concept of

exchange. This concept leads to

the need for a space, physical or

otherwise, where this exchange

takes place. This space is called the

market.

Within the market are, on one hand,

those who have (demand) needs and

wants (customers) and on the other

are the providers (companies) of

products (goods and services) that

seek to meet or satisfy these needs

and wants.

Because there are many providers

for each need or want, competition

amongst themselves for customers

invariably arises. Conversely, because

products to satisfy a particular need

or want are many, customers have

to make a choice based on which

product best meets their need or

want.

In this kind of scenario, companies

cannot just sit and wait for customers

to come to them. They have to make

a conscious effort to promote the

exchange. Those who have high

levels of exchange will be the

most profitable. This promotion of

exchange is what you call marketing.

NEEDS WANTSMUST HAVE

WHY WE BUYWHY WE BUY ONE BRAND INSTEAD

OF ANOTHER

NICE TO HAVE

VERSUS

Theoretically, people buy to satisfy certain

needs. But why do we prefer one brand

instead of other brands?

Marketing tells the product’s or

service’s story

Marketing creates connections in people’s brains

Marketing must work with others to define and deliver a

great product or service

CONSUMER

COMPANY

Marketing must deliver profit in the process of satisfying customer needs

C NCEPTSOF MARKETING

By RAYMOND KIAMBATI, Management Consultant

KASNEB NEWSLINE, Issue No. 1, January - March 201640

Concepts of marketing

In the process of marketing, conflicts

are bound to arise between the

needs of the company, the customer

and the community at large. Thus

marketers need guidance regarding

their conduct in the market place.

The need for guidance is what has

spawned different philosophies or

concepts of marketing.

Guidance in marketing revolves

around five competing concepts,

namely;

(a) The production concept.

(b) The product concept.

(c) The selling concept.

(d) The marketing concept.

(e) The societal marketing concept.

How a company manages its

marketing activities depends on

which concept they decide to be

their main focus.

The production concept

This concept holds that “consumers

will favour those products that are

widely available and low in cost.”

Management focuses on high

production efficiency and wider

distribution coverage.

This concept makes sense under the

following circumstances;

• When the product is a basic

necessity.

• The customers are low income

earners.

• When the production costs are

high and have to be brought

down through high production

efficiency.

• When the market is highly price

sensitive.

• When demand for the product

exceeds the supply and some

other means have to be used

to allocate the products to the

customers.

Examples of companies guided by

this concept include:

• City Council primary schools.

• Unilever - for its basic foodstuff.

• City Council health services.

This concept ensures product

availability to the consumers.

However, product quality is

compromised.

MARKETING CONCEPTS

Production conceptConsumers favour products that are available and highly affordable. Minimise costs to lower prices, keep quality high. Improve production and distribution efficiency

Product concept

Consumers favour products that offer the most quality, performance and innovative featuresFocus on making superior products and improving them overtime. Better mousetrap fallacy. This will lead to increased sales and profits

Selling conceptConsumers will buy products only if the company promotes/sells these products

Marketing conceptFocuses on needs/wants of target markets and delivering satisfaction better than competitors

Societal marketing concept

Focuses on needs/wants of target markets and delivering superior value

MARKETING AND EXCHANGE

Marketing is a human activity directed at satisfying needs and wants through exchange processes.Exchange is the core concept of marketing.Exchange is a value-creating process because it leaves both parties better off. There are at least two parties.Each party has something that might be of value to the other party.Each party is capable of communication and delivery.Each party believes it is appropriate or desirable to deal with the other party.The focal point in an exchange is marketing offer combination of products, services, information or experience that satisfy a need or want.

CONCEPTS OF MARKETING

Marketing of a commodity like sugar requires production efficiency and wider distribution coverage

KASNEB NEWSLINE, Issue No. 1, January - March 2016 41

The product concept

The product concept holds that

“consumers favor those products that

offer the most quality, performance

and features. Marketers assume that

consumers will buy those products

of high quality and shun those

products of inferior quality.”

Management focuses on producing

high quality products and improves

on them over time. This concept

may apply under the following

conditions:

• When the market is not price

sensitive.

• In the case of conspicuous

goods.

• Where the customers are

well-off financially.

The concept has been criticised on

the following grounds:

• The idea of a good product is

defined from the company’s

end but not the consumer’s. The

concept thus leads to marketing

myopia [short-sightedness].

There is undue concentration

on the product rather than the

needs of the consumer.

• A company may end up

producing goods that may not

have demand.

• The concept ignores the needs

of the society

Examples of firms practicing this

concept are:

• Those selling jewelleries,

• Private schools and

• Private hospitals

The selling concept

This concept holds that consumers,

if left alone, will ordinarily not buy

a lot of a company’s products.

The organisation must therefore

undertake aggressive selling and

promotion effort. That is, a company

must focus on hard selling. Under

hard selling, consumers are not

willing to buy such products easily.

Examples of products sold under this

concept are:

• Life insurance policies.

• Political campaigns.

• Fund raisings.

• New products.

• Encyclopedias.

• Funeral plots.

• Coffins.

The concept may work under the

following circumstances;

• Where the company is

operating under excess capacity

and wishes to fully utilize its

resources with no regard to the

product’s demand.

• Where the product is new in the

market.

• Where the firm has adequate

machinery for effective

promotion.

• where the products are

obsolete or are slow moving.

The selling concept has some

limitations, namely:

• Consumers may be forced to

buy products that they do not

have real need for.

• It is an expensive concept as it

requires a lot of resources, both

human and financial.

Starting point Focus Means Ends

Factory ProductsSelling and promoting

profits through sales volume

The selling concept

The total product

Packaging Quality

Credit

After sales

service

Delivery

WarrantyIntangible associations

StylingFeatures

Brand name

The essential benefit

The actual product

The core product

The potential product

THE TOTAL PRODUCT CONCEPT

“This is the sixth time you have come here in the last three days. I need to report this as a case of disturbance”

CONCEPTS OF MARKETING

KASNEB NEWSLINE, Issue No. 1, January - March 201642

The marketing concept

The marketing concept holds that

“the key to achieving organisational

goals lies in determining the needs

and wants of the target market and

delivering the desired satisfaction

more effectively and efficiently than

competitors This concept has been

expressed in many colourful ways

such as:

• Find needs and meet them.

• The customer is always right.

• The customer is the king.

• At your service.

• Your problem is our business.

• Have it your way.

• You are the Boss, and so on.

The concept rests on the following

five main pillars:

(a) Market focus: The company

must define the boundaries of

its market. It should know those

customers that are members of

their market. This can be done

through a process known as

segmentation.

(b) Customer focus: The company

should determine the needs

and wants of the customers

from the customers’ point of

view but not the company’s.

Customers’ needs must be

identified and satisfied as this

result into customer loyalty

which is a source of goodwill.

(c) Integrated or coordinated

marketing: When all company

departments work together

to achieve the consumers’

interest, the result is integrated

marketing. It takes place at

two levels, the marketing

function and company-wide

orientation. In the former, the

various marketing functions –

advertising, marketing research,

sales, branding, e.t.c. must work

together. They must be well

coordinated from the customers’

point of view. In the latter,

marketing must be embraced

by other departments. They

must think customer. Marketing

is not a department but much

of a co-wide orientation.

Teamwork must be fostered

among all departments. This

requires the practice of internal

as well as external marketing.

Whereas the latter is directed

at people outside the firm, the

former is the task of hiring,

training and motivating

employees to serve customers

well. Internal marketing must

external marketing. Managers

must consider customers as the

true profit centers hence adopt

a modern organisational chart.

(d) Profitability: The ultimate

purpose of the marketing

concept is to help organisations

achieve their objectives. In the

case of private firms, the major

one is profit. However, they

should aim for profits through

customer satisfaction.

(e) Competition: The concept

recognises the existence

of competition. However a

company should offer superior

customer value. It should

serve customers better than

competitors.

Most companies do not embrace the

marketing concept until driven to

it by circumstances. Various events

MARKETING CONCEPT

EXTERNAL ANALYSIS

POSSIBLE SOLUTIONSPOSS

IBLE

PRO

BLEM

S

Product improvement

Price pressure

Turnover

Process

adjustment

Customer Advertising

INTERNAL ANALYSIS

Starting point Focus Means Ends

Target market

Customer needs

Integrated marketing

Profits through customer

satisfaction

The marketing concept

CONCEPTS OF MARKETING

Customer is king

KASNEB NEWSLINE, Issue No. 1, January - March 2016 43

forcing companies to adopt the

marketing concept include:

• Sales decline: - when sales fall,

companies panic and look for

ways of increasing sales.

• Slow growth in sales forces

some companies to search for

new markets. They realise they

need marketing skills to identify

new opportunities.

• Changing buying patterns –

• Most companies operate in

markets characterised by

rapidly changing customer

preferences. Such companies

need more mar ket ing

know-how if they are to track

buyers’ changing values.

• Increasing competition.

• Complacent companies may

suddenly be attacked by

powerful competitors, e.g.

Kenya Breweries

• Increased market expenditures.

Reasons to embrace the marketing concept

Marketers’ arguments:

• The company assets have little

value without the existence of

customers.

• The key company task

therefore is to attract and retain

customers.

• Customers are attracted

through competitive superior

offerings and retained through

satisfaction.

• Marketing’s task is to develop

a superior offering and deliver

customer satisfaction.

Societal marketing concept

Some people have questioned

whether the marketing concept is

an appropriate philosophy in the

age of environmental deterioration,

resource shortages, explosive

population growth, world hunger

and poverty, neglected social

services among others. The question

now is: are operations of companies

that do the excellent job of satisfying

customer needs also impacting

negatively the long-run interest of

consumers and society at large?

The marketing concept sidesteps

the potential conflicts among

consumers:

• Wants

• Interests

• Long-run societal welfare

Societal marketing

concept

Ethics, environment, do

good, stop doing badMaintai

n and

impro

ve

long-t

erm w

ell-be

ing,

social

resp

onsib

ility

Society (Societal and customer well-being)

Company

(Profi

ts)

Consumers

(Short-term wants)

Product orientation vs. Market orientationCompany Product Market

Kenya Railways We run rail services We move people and goods

Xerox We make copying equipment We improve office productivity

National Oil We sell petrol We supply energy

Columbia Pictures

We make movies We entertain people

The societal marketing concept holds that

“an organisation’s task is to determine the

needs wants and interests of the target markets

and to deliver the desired satisfactions, more

effectively and efficiently than competitors in a

way that preserves or enhances the consumers’

and the society’s well being.”

The societal marketing concept calls

upon marketers to build social and ethical

considerations into their marketing practices.

Ultimately, companies must balance the

conflict criteria of company profits, consumer

needs and public interests.

Differences between the selling and marketing concepts

Selling Concept Marketing concept

Starting Point Factory Market

Focus Products Customer needs

Means Selling and promotion Coordinated marketing

Ends Profits through sales volumes Profits through customer satisfaction

Time horizon (Oriental) Short term Long term

From the definitions and concepts that have been

expounded, several conclusions can be made:

(i) Marketing is a managerial process - a system’s

definition.

(ii) The entire systems of business activities must

be market-oriented or customer-oriented.

Customers’ needs and wants must be recognised

and satisfied effectively.

CONCEPTS OF MARKETING

KASNEB NEWSLINE, Issue No. 1, January - March 201644

(iii) Marketing, as the definitions

suggests, is a dynamic process

– a total integrated process

rather than a fragmented

assortment of institutions or

functions. Marketing is not any

one activity, nor is it exactly the

sum of several, rather, it is the

result of the interaction of many

activities.

(iv) The marketing programme

starts with the product idea

and does not end until the

customers’ needs and wants are

completely satisfied. This may

be some time after the sales are

made.

(v) Customers must be satisfied in

order for a company to make

repeat business. This implies

that the success of a firm is

not profitability per se but

profitability through customer

satisfaction.

(vi) Marketing is not limited to

business. Whenever you are

trying to:

• persuade somebody to do

something;

• donate to the Red Cross;

• save energy;

• vote for your candidate;

• reform from littering the

streets of Nairobi,

you are engaging in business. Marketing has a broad societal meaning. Modern

business marketing activities are, to a large extent, a consequence of societal

marketing.

Relationship marketing

Performance/societal marketing

Internal marketing

Integrated marketing

HOLISTIC MARKETING

Channel Customers Partners

Sales revenue Brand and customer equity

Ethics, Environment Legal, Community

Senior management Marketing department

Other departments

Product and services Communications

Channels

“Can I stress that this method must only be used as a last resort.” “NOT INTERESTED? You answered the door, didn’t you?”

CONCEPTS OF MARKETING

EXAMPLES OF SOCIETAL MARKETING

Body Shop: Body Shop is a cosmetic company found by Anita Roddick. The company uses only vegetable based materials for its products. It is also against animal testing, supports community trade, activates self esteem, defends human rights and overall protection of the planet. Thus it is completely following the concept of Societal Marketing.

Ariel: Ariel is a detergent manufactured by Procter and Gamble. Ariel runs special fund raising campaigns for deprived classes of the world specifically in the developing countries. It also contributes part of its profits from every bag sold to the development of the society.

British American Tobacco Company: BAT is a British based tobacco company. It was found in the year 1902. BAT is involved in working for the society in every part of the world. It conducts tree plantation drives as part of its societal marketing strategy.

KASNEB NEWSLINE, Issue No. 1, January - March 2016 45

does not depend on disposable

personal income, and

(b) Induced consumption which

changes with change in income.

Consumption function is expressed

as follows:

C = α+βy

where

c = Consumption

α = Autonomous consumption

β = Marginal propensity to consume

Y = Disposable personal income

The slope (MPC) of consumption function

is positive indication that as the level

of national income increases, so does

the disposable personal income. The

consumption expenditure also increases.

ANALYSIS OF CONSUMPTION AND SAVINGS

A higher disposable income leads to higher spending and saving

BEFORE AFTER

Consumption function

Consumption is a function of

income, as income increases,

consumption increases and

vice versa. However, the marginal

increase in consumption will be

less than the marginal increase in

income. The marginal increase in

consumption arising from changes in

income is called marginal propensity

to consume represented by

MPC = ∆c

∆y

Consumption function is composed

of two parts:

(a) Autonomous consumption, that

is, the part of consumption that

Disposable income is what is left after tax deduction

CONSUMPTION AND SAVINGS FUNCTION

The level of private disposable income is the chief determinant of private consumption and saving, which in the absence of government is equal to total income,that is, at higher levels of income, the private sectors will both consume more and save more and vice versa. But consumption and saving are determined by many factors in addition to the level of disposable income.

Other important factors that influence the consumption and savings function are stock of wealth, expectations, taxation policy, distribution of income and age composition.

By PAUL M. MWANGI (CPA K, B.Com), Lecturer, Brightstar Institute of Business Studies

KASNEB NEWSLINE, Issue No. 1, January - March 201646

Consumption function can be

illustrated graphically as follows:

When income is 0 i.e. y = 0, there

has to be some consumption that

can be explained by the fact that

consumption does not only depend

on income (y) but also on:

• Transfer payments.

• Savings.

• Unemployment benefits.

• Windfall gains and so on.

The Mpc (B) is the slope of the

consumption function by definition.

It lies between 0 and 1, that is,

0<B<1.

Given the above consumption

function, we can show the

c

c = α+βy

c =α

α

Y

Cons

umpt

ion (C

)

Disposable income (Y)

C=Y

Slope = MPC

Consumption functionC = α + β y

The slope of the consumption function is the MPC or β

Consumption function intersects the vertical axis at the level of

autonomous consumption

450

α

equilibrium income diagrammati-

cally as follows.

The diagram shows that at low levels

of income, to the left of y*, savings

are negative since consumption is

greater than income. At higher levels

of income, to the right of y*, there is

positive saving since consumption

is less than income.

Average propensity to consume

refers to the proportion of disposable

income that is spent on consumption.

Therefore given the consumption

function above, average to consume

can be computed as:

APC =c

=α+βy

=α+β

Y y y

c

y

I = s

C = + α +By

Y*

Saving function

It describes the total amount of

saving at each level of disposable

personal income.

Keynes argued that saving is a

function of income and not interest

rate. He therefore defined saving as

the difference between disposable

income and consumption function

and expressed it as follows.

C =Y-CY-α-βYS = -α+ (1-β)Y= This is the saving function

Illustration

If the consumption function is given

by C = 50-0.4y

Then the saving function can be

derived as follows:

S=Y-C = Y-50-0.4Y = -50 +Y-0.4Y = -50 +0.6Y

This implies that the saving function

is upward sloping which means that

when income increases saving also

increases.

The slope of the saving function

equals the change in savings divided

by the change in personal disposable

income i.e.

CONSUMPTION AND SAVINGS

KASNEB NEWSLINE, Issue No. 1, January - March 2016 47

MPC = ∆c

∆y

(Marginal propensity to save)

Marginal propensity to save is

defined as the change in saving as

a result of a unit change in personal

disposable income.

Average propensity to save APS on

the other hand is the proportion of

disposable personal income that is

saved and represented by S/Y

The mathematical relationship

between the marginal propensity

to save and marginal propensity to

consume can be shown as follows.

MPS + MPC = 1

Income as a determinant of consumption

Income is the major determinant

of consumption. The changes in

income can be analysed through

MPC. Keynesian consumption

theory suggests that consumption

is linearly dependent on income.

Therefore in the short run,

C = α+βy

Cons

umpti

on

Disposable income

SAVING

Consumption schedule

Consumption=Disposable income

Consumption

Break-even point

450

In Keynesian theory saving is

assumed to be a function of income

and investment a function of interest

rate (r).

In the long run consumption will

be wholly dependent on income.

This can be shown in the following

diagram.

Short run consumption function

figure

The autonomous part of the

consumption disappears with

time because its source of funding

becomes scarce e.g. nobody can

dis-save forever nor borrow forever.

In classical economics savings is a

function of interest rate i.e. s=f(r) and

c

c = α+βy

Y

Disappears with time

not a function of income, that is

S = F(r)

If interest rates were high in

commercial banks and other

investment opportunities, people

would save more after deciding on

how much to save the rest will be

available for consumption therefore:

C = Y - S and S = F(r)

In this case, saving is assumed to

be a positive function of interest

rate. Consequently consumption is

a negative function of interest rate.

Whereas in classical theory emphasis

is on consumption as a function of

interest rate. Keynes emphasis on

income as the major determinant

of consumption therefore:

• Consumption is a stable

function of real income.

• On average people increase

their consumption as income

increases, but not as much as

increase in income.

• Short run marginal propensity

to consume is less than long

run marginal propensity to

consume. Once somebody

makes a habit of consumption,

this will always take his first

claim on his/her income,

hence the person will save an

income over and above his or

her habitual expenses.

• In the long run a greater

proportion of income will be

saved as real income increases

hence in the long run the

average propensity to consume

falls with income.

CONSUMPTION AND SAVINGS

KASNEB NEWSLINE, Issue No. 1, January - March 201648

Reconciling the discrepancy between short and long run function

The following hypothesis have been

proposed.

(1) Relative income hypothesis

This was suggested by James Duesenberry

(1949) and assume the following.

(i) Consumption behavior of individual is

interdependent. This implies that the

ratio of income consumed depend on

the individuals absolute income as

well as his relative income. This means

that consumption will depend on his

percentile position in the total Income

distribution within the community.

In any given year an individual will

consume a smaller percentage of his/

her income as his/her absolute income

increases if his percentile position in

the income distribution improves and

vice versa. If is percentile position in

the income distribution remains over

time, he will continue to spend on

consumption the same percentage

of his income as his absolute income

increases.

(ii) Consumption relations are irreversible

overtime. This implies that given a fall

in income during a cyclical downswing

will cause a less than proportionate

fall in consumption patterns

on previous levels of income.

This is sometimes called

previous peak theory in

which people will adjust

their spending. If income

increases consumption will

increase accordingly but if it

falls below the previous peak,

consumption does not fall

proportionately.

(2) Permanent income hypothesis

Friedman suggested this in 1957.

It states that consumption depend

on permanent income which is the

present value of the expected flow

of long term income.

Permanent consumption (CP), that is

(CP = f(yp)

where Cp = Consumption

Yp = permanent income

The ratio of consumption (cp)

to consumption that depend on

income (βYp) is constant regardless

of the level of permanent namely

permanent income (Yp) and

transitory (windfall) income (Yy)

Transitory income refers to a

temporary unexpected rise or fall in

income. This can be represented as

Y=Yp + YT

Measured consumption (c) has two

parts permanent consumption (Cp)

which is planned levels of spending

out of permanent income and

transitory consumption which is the

unplanned, temporary increases or

decreases in consumption spending

represented by

C = CP +CT

(3) Absolute Income Hypothesis

Keynes suggested that consumption

is a function of current level of

disposable personal income. The

aggregate consumption function

is directly but non-proportion-

ately related to the current level

of aggregate disposable income

in both short run and long run.

Therefore, the ratio decreases with

income. The non proportionality

of consumption and income rests

upon the basis that habits are not

persistent among consumers. A full

reaction of consumers to change in

income does not occur immediately

but changes gradually since change

in income may not be permanent.

Thus Ct = α+βYt + dCt-1

This implies that consumption over

time (Ct) is not only dependent

on income overtime (Yt) but also

previous level of consumption

(dCt-1)

(4) Life Cycle Income Hypothesis

Formulated by Modigil iani,

Brumberg and Ando. It is also known

as the MBA hypothesis. It states

that consumption is a function of

the expected stream of disposable

income over a long period of time

“Just this one and then am done!”

CONSUMPTION AND SAVINGS

KASNEB NEWSLINE, Issue No. 1, January - March 2016 49

as well as the present value of wealth. Individuals will therefore spread out the

present value of all future income streams of consumption throughout their

lifetime. Hence consumption is a function of lifespan’s income. This is presented

in the diagram below.

C,Y

Sy>c

C

c > y

Y

c > y

Net saver

Net borrowed

inheritedTime in years

Other determinants of consumption

(1) Rate of interest

This is derived from the classical

economist ’s argument that

consumers will save more and spend

less when interest rates are high.

(2) Relative prices

This will influence consumption

behavior since people will shift from

the relatively expensive commod-

ities to less expensive ones.

(3) Capital gains

Keyness suggested that there is a

possibility of windfall gains or losses

influencing consumption. He argued

that consumption of the wealth

owning group might be extremely

susceptible to unforeseen changes

in the money value of the wealth.

This is true where stock exchange is

composed of speculators.

(4) Wealth

The larger the stock of wealth,

the lower its marginal utility and

consequently the weaker the desire

to add future wealth by curtailing

current consumption. The more

savings an individual has, the weaker

will be the desire to accumulate

more savings at that particular time.

Greater wealth therefore increases

the ability to consume more.

(5) Money Stock (liquid assets)

The possession of liquid assets

influences the amount of savings and

consumption. This is because liquid

assets can be changed into cash very

quickly and used to purchase goods

and services.

CONSUMPTION AND SAVINGS

Where:

C = Consumptin

Y = Income

S = Savings

When:

• C > Y, the individual resources

in order to consume and build

up human capital

• Y >C, the individual is

paying loans and saving for

consumption in the future, for

bequests and for investment.

• C > Y, the individual is

consuming out of savings,

pension and social security

fund.

The implication of the Life Cycle

income hypothesis is that the

average propensity to consume

(APC) is high in the early and later

years. This explains the non-pro-

portionality in consumption and

income relationship in the short

run or across families. However, in

long run, consumption and income

relationship will be proportional.

KASNEB NEWSLINE, Issue No. 1, January - March 201650

(6) The availability of consumer

credit

If credit is more readily available,

and/or its cost is low, consumers are

more likely to borrow and thereby in

the aggregate save less at all levels

of aggregate disposable income.

Therefore, increased consumer

borrowing, holding other factors

constant, causes and upward shift

in of the aggregate consumption

function.

(7) Attitudes and expectations of

consumers

A change in consumer attitudes

will cause a change in behavior.

Expectation about income and

price in future will also affect

consumption. For example in the

face of a price rise, they might expect

further price increases in future and

so they will increase their current

purchases.

(8) Money illusion

Consumption will be affected if

consumers are subject to much

illusion. The phenomenon of money

illusion occurs when despite equal

proportional change in price of

goods and services and their money

incomes, which keeps their real

income unchanged, consumers make

a change in their real consumption.

This is also called pigou or real cash

balance effect. With a change in

nominal money income, people

behave in a way to indicate that

their real income has gone up. If for

example, the price level and money

income increases by 10 per cent, the

families that regard their real income

unchanged and therefore do not

suffer from money illusion will not

change their consumption. While

those consumers that are subject

to money illusion will increase their

spending and consumption will rise.

CONSUMPTION AND SAVINGS

“Do not save what is left after spending but spend what is left after saving”. Warren Buffet

(9) Distribution of income

A change in income distribution affects the

level of aggregate consumption if income

recipients do not have the same average

propensity to consume and marginal

propensity to consume. If, for example, the

marginal propensity to consume among the

poor is high, then redistribution of wealth

from the rich to the poor will lead to high

consumption. Therefore redistribution of

income may cause a shift in the aggregate

consumption function or a combined shift

and change in the slope of the function.

(10) Composition of population

The composition of the population in

terms of sex, age and class will determine

consumption. If, for example, there are more

children, then consumption of children

related items, holding other factors constant,

might be high.

Money illusion affects many different aspects of the economy, especially wage contracts, debt contracts and accounting. According to natural rate theory, all labour contracts should contain cost-of-living adjustments (COLAs) while in reality only 19% of all labour contracts do, and for that 19%, the COLAs only kick in after a specific amount of inflation has occurred, with no adjustments to wages before that point. Individuals also resist having their wages cut, even if the inflation rate is negative, because of money illusion. It does not matter that they can buy more with their money; it is the actual nominal dollar amount that matters to them.

KASNEB NEWSLINE, Issue No. 1, January - March 2016 51

CICT: NO REGRETS

It’s a bright morning as I proudly sit

in my office and start reminiscing

about my journey to here; a

self-employed CICT graduate.

In this fast lane of information

communication technology, where

things change at the twinkle of

an eye, one may easily forget

the humble beginnings and the

challenges that lined the path to

here. How did it all begin? Could my

story be an inspiration to someone

out there who is at the beginning?

You never know!

“Now that you have successfully

finished high school, what are your

plans? What do you want to do or

what do you want to be in future?”

Those are the questions that my

father asked me countless times.

To be honest, I had no clear-cut

idea of what I really wanted. I

had postponed answering those

nagging questions all along. But

now, fourth form was behind me

and the moment of truth was before

me. I was sure I wanted to take a

professional course that could put

me into the job market, but which

one, I didn’t know. My dad had

tossed up ideas for me to toy with,

as any parent would do, but none

seemed to excite me.

One day, my elder sister came home

with some brochures which she had

picked at an event. She asked me to

carefully look at them. They had

descriptions of an array of courses

that she wanted me to consider. One

common thing with the brochures

As there were not many colleges

offering KASNEB courses back then,

especially upcountry, my sister

suggested that I look for one in

Nairobi. I could stay with her as I

attended the college. I was doubly

excited because apart from coming

to a new environment, an interesting

course was lined up ahead of me.

“This bus stop is called Kencom“ said

my sister as we hurried to catch a

number 7C bus that would take us

was a big word on all of them:

KASNEB. Perhaps this was a college

that I had not heard of. Innocently,

I asked her if KASNEB was a school

she wished me to attend. “Don’t be

silly”, she answered while laughing

amusedly.

” KASNEB is an examinations body

that offers quality professional

examinations in accounting,

finance, credit, management

and information communication

technology”, she explained.

Before this moment, I had never

heard of KASNEB. From her

explanation, I sort of got interested

and decided to seriously go through

the brochures to see what they had

to offer. I had always trusted my

sister and knew that she meant

well for me. Because she demanded

that I choose at least one course,

I gravitated towards CICT. It had

something to do with computers

and these machines fascinated me.

Back then, the word “computer”

was a big name. I decided to

give it a shot.

By CAROLINE NGUGI, CICT GRADUATE

KASNEB NEWSLINE, Issue No. 1, January - March 201652

to the offices of KASNEB. Our mission

was for me to go and register for the

CICT course and formally start my

relationship with KASNEB. I was very

anxious and though the ride from

the city centre to KASNEB is not long,

it seemed like eternity.

“Karibieni mlango,” shouted the

conductor as we neared KASNEB.

We alighted right at the entrance.

I first soaked in the sight of the

brick-red building called KASNEB

TOWERS. This is the building, my

sister had told me, that had produced

some of the best corporate brains

in Kenya. Could I also become one

of them? “Who knows? Perhaps,” I

thought to myself as we walked

down towards the building.

As we were about halfway, a long

queue came into view. It was snaking

its way around a parking area in front

of the building and continued along

the right side of the building down

towards a second parking area.

Current students are indeed lucky as

they don’t have to queue at KASNEB

to register or pay for examinations.

I realised right then that I was not

alone in this quest for a professional

course. The queue was jammed with

eager-looking youth, thirsty for

professional careers.

We went direct to the reception to

enquire about the requirements and

the procedure. We were received

by a very kind lady who was very

willing to help. She gave me all the

paperwork I needed and directed

me to a small hall where I could

complete the forms.

As I joined the long queue thereafter,

I was not concerned about its length.

What mattered is that I was here

and I was embarking on a life-long

journey. Nothing else mattered.

After spending almost two and half

hours on the queue, I was attended

to and issued with my registration

number. The journey had begun in

earnest.

There was no time to waste. I

registered for classes at a college

by the name Cornerstone Training

Institute. Perhaps its name was

prophetic. As days went by, the

more I understood what CICT was

all about, and the more I became

fascinated with it.

Five months later, I received my

examination timetable. The time to

prove what had stuck in my head

from the many lessons was nigh.

I stepped up the gear in revision,

sacrificing all the time I could. I didn’t

intend to be caught by surprise by

any exam question or develop any

butterflies in the stomach when the

time came.

“God, please help me to remember

everything I have learnt,” I whispered

to myself as the invigilator

distributed the question papers

in what was to be my first KASNEB

examination sitting. The first paper

was “Introduction to Computing”,

comprising five questions. Three

days later, the examination period

was over. I had overcome the first hurdle

of the many that were to come. I waited

anxiously for the results.

After about a month, a friend of mine

informed me that the results were out. Those

days, we had to go to the post office to get

the transcripts containing the results unlike

today. Thanks to technology. Students can

now conveniently check their results on a

mobile phone or simply log onto the KASNEB

website from the comfort of their homes.

My whole body was shaking as I opened the

brown envelop. REFERRAL AND FAIL were

the most feared words, and I hoped that I

would not be a recipient of any. As fate would

have it, I had passed in two papers and had

a referral in one. I was disappointed but not

deterred.

One of my philosophies in life was never to

give up. I resolved to try again. It wasn’t until

the third examination sitting that I crossed

the Section One barrier. I could not hide my

elation.

KASNEB examinations, I realised, required

good and adequate preparation for one to

pass. If they were just a walkover, I reasoned,

we would have graduates with substandard

skills and who would be unable to compete

on a global job market. The import of the

motto “Providing globally competitive

professionals” now made sense to me. I had

to up my game if I had to pass the remaining

sections. And oh boy, that I did!

From where I stand now, I can confidently

say it was worth it. The relevance of CICT in

today’s world cannot be overstated. Almost

every facet of life is slowly falling into the

internet of things and God only knows what

lies ahead given the rapid pace of innovation.

As a result of the increasing application of

ICT in education, for instance, new ways of

learning have emerged. Words like E-books,

E-learning, virtual schools and so on are no

longer strange words.

KASNEB exams, I realised, required good and adequate preparation for one to pass. If they were just a walkover, I reasoned, we would have

graduates with substandard skills and who would be unable

to compete on a global job market.

KASNEB EXPERIENCE

KASNEB NEWSLINE, Issue No. 1, January - March 2016 53

Keen to keep its examinations in

tune with new developments in

the market, KASNEB called for a

breakfast meeting with the CICT

graduates towards the end of 2015

to deliberate on how to improve

on the curriculum issues affecting

students at college level.

Issues on how to provide students

with requisite skills to pursue

life-long learning with the support

of ICT were discussed. Students

were also encouraged to engage in

collaborative learning.

At the meeting, hastening of

issuance of certificates, among

others, was raised. KASNEB assured

that it was one of the key areas that

was being looked into.

Some graduates raised concern

that CICT as a course was not

well marketed and that one had a

difficult time trying to explain to

employers what CICT is all about.

That is however no longer the case

as KASNEB had risen up to the

challenge. While KASNEB cannot

sit on its laurels, there is no doubt

that awareness on its examinations

and related careers has grown

tremendously.

The most thrilling part of the

meeting was the coming up with a

resolution to establish a CICT body

similar to ICPAK. The association will

form a region-wide network and

promote the role of the profession

in the fields of information

communication technology. This will

definitely enhance the goodwill and

recognition of CICT graduates.

From my exper ience and

observations, CICT gives one

a platform with many career

paths, such as web developers,

techpreneurs, system analysts,

programmers and so on.

After my last paper in Section Six,

I undertook a project to develop

a fully functional database

system called SCHOOL KITCHEN

MANAGEMENT SYSTEM using

different programming languages.

This served as my launching pad into

self employment.

As I go about serving my clients now,

I can look back and proudly say: CICT,

NO REGRETS. To others who may

be where I was at the beginning,

I encourage you to take your pick

from KASNEB’s menu of professional

courses and run the full course. As

Zig Ziglar would say, “let us meet at

the top”.

KASNEB EXPERIENCE

KASNEB

Examination Syllabus Commencement date: July 2015

Certified Information Communication Technologists

Providing globally competitive professionals

CICT

Providing globally competitive professionals

KASNEB Towers, Hospital Road, Upper HillP.O. Box 41362 - 00100, Nairobi - Kenya

Tel: 254(020) 4923000 Cellphone: 0722-201214/0734-600624 Fax: 254(020) 2712915E-mail: info@kasneb.or.ke Website: www.kasneb.or.ke

KASNEB is ISO 9001:2008 certified

ISBN: 978-9966-1878-2-6KASNEB

Examination Syllabus Commencement date: July 2015

Diploma in Information Communication Technology

Providing globally competitive professionals

DICT

Providing globally competitive professionals

KASNEB Towers, Hospital Road, Upper HillP.O. Box 41362 - 00100, Nairobi - Kenya

Tel: 254(020) 4923000 Cellphone: 0722-201214/0734-600624 Fax: 254(020) 2712915E-mail: info@kasneb.or.ke Website: www.kasneb.or.ke

KASNEB is ISO 9001:2008 certified

ISBN: 978-9966-1878-6-4

The Diploma in Information Communication

Technology equips the candidates with the technical

know-how and skills necessary to work in the dynamic

ICT industry as technicians in systems development,

systems programming, internet and networking,

administration and maintenance.

Certified Information Communication Technologists

are skilled and competent system developers and

programmers, network administrators, system

engineers, ICT consultants and practitioners.

KASNEB NEWSLINE, Issue No. 1, January - March 201654

The Institute of Certified Investment and Financial Analysts (ICIFA) was started

in 1997 with the specific mandate of spearheading the development of the

requisite institutional and operational framework for the promotion and

enhancement of professionalism in the regional financial markets.

Institute of Certified Investment and Financial Analysts (ICIFA)

The Institute of Certified Investment

and Financial Analysts (ICIFA), formerly

the Institute of Certified Securities

and Investment Analysts (ICSIA), is the

professional body for holders of the Certified

Investment and Financial Analysts (CIFA)

qualification which is offered by KASNEB.

The CIFA qualification is benchmarked

with similar qualifications offered by other

international examination bodies of repute.

ICIFA is an affiliate member of the Association

of Certified International Investment

Analysts (ACIIA), which is based in Zurich,

Switzerland and is the international umbrella

body for national and regional associations

of investment professionals representing

over 100,000 portfolio managers, investment

analysts and advisers, asset managers, fund

managers, pension scheme managers and

related professionals. These professionals

are spread throughout Asia, Europe, Central

and South America, the Middle East and

Africa and encompass a wide variety of

languages, cultures and business customs.

ICIFA is the regional resource and advocacy

body for the finance and investment

profession, providing regional wide network

and promoting the role of the profession in

the fields of securities analysis, investment,

pension funds, asset management, corporate

finance, financial planning and financial

application development. ICIFA provides

highly skilled professionals that are rated

highly within the finance and investment

sector.

INVESTMENT AND FINANCIAL ANALYSTS (IFA) ACT (NO. 13 OF 2015)

The Institute’s secretariat was initially set

up at Nairobi Securities Exchange (NSE)

offices and was then known as Association

of Financial Analysts (AFA). The Institute

then moved to Red Cross offices next to

Professional Centre building and changed its

name from Association of Financial Analysts

(AFA) to Institute of Investment Professionals

(IIP) E.A. and in 2009 to the Institute of

Certified Securities and Investment Analysts

(ICSIA), a process which was made necessary

due to the major review of syllabuses that

was done by KASNEB in 2009.

The Institute at the time was run by a

Governing Council made up of a Chairman,

Vice-chairman, Secretary, Vice-secretary,

Treasurer, Vice-treasurer and five committee

members. The Institute’s committees

comprised of the Membership and

Publicity Committee, Education and

Training Committee, Finance and Strategy

Committee, Champions Committee and

Advocacy and Development Committee.

A stakeholders workshop that was held

in 2013 necessitated the need to change

the name of the Institute as well as the

examination. A Council meeting was held

early in 2014 to approve the proposed

changes which would later be read in

a report by the Chairman at the

Annual General Meeting (AGM) that

was held on 13 May 2014. During

the AGM, the following resolutions

relating to the change of name of

the Institute and examination were

passed by members:

(1) “that the name of the Institute

be changed from Institute

of Certified Securities and

Investment Analysts (ICSIA)

to Institute of Certified

Investment and Financial

Analysts (ICIFA) with effect from

15 May 2014.”

(2) “that in consultation with

K A S N E B ( t h e I n s t i t u t e’s

examinations board), the name

of the examination be changed

from Certified Securities and

Investment Analysts (CSIA)

examinations to Certified

Investment and Financial

Analysts (CIFA) examination

with effect from 1 July 2015.”

Following the approval of the above

resolutions, the Institute’s offices

moved to KASNEB Towers at Upper

Hill where it is currently situated.

By EMLYN JAMES NGWIRI

RESEARCH ANALYST, SUNTRA INVESTMENT BANK

KASNEB NEWSLINE, Issue No. 1, January - March 2016 55

The Investment and Financial Analysts (IFA) Act 2015

The Institute’s agenda was informed by the

desire to have a professional qualification

for the Finance and investment industry

that was recognised and appreciated by

all stakeholders. The regulation of finance

and investment professionals who engage

in financial and capital market operations,

financial analysis, financial modeling,

real estate investments, pension funds

management, investment, securities analysis

and investment banking, and other related

industries in the investment sector arose

from the need to have a legislative backing

so as to ensure that the professionals within

the finance and investment profession are

bound by a code of ethical principles. A

further expectation was to ensure strong

enforcement of Continuous Professional

Development (CPD) and professional ethics

among financial and investment analysts.

The search for the IFA Act has been on for

close to seven years with the collaborative

efforts from KASNEB, ICIFA Council and

Members of the Institute producing the

first draft in 2009. Later, three stakeholder

engagements were done in order to seek

views from the public which were considered

and adopted. The Bill was then presented to

the Finance, Planning and Trade Committee

of the National Assembly and the first

reading was done on 3rd June 2014. The

subsequent readings (second and third) were

done towards the end of 2014 and mid 2015

respectively with the president assenting to

the Bill on 11August 2015. The Act came into

operation on 8 December 2015.

The Act has six parts as follows:

Part I – Covers preliminary issues such as

short title and interpretations.

Part II – Is concerned with the

establishment of the Institute as

well as membership, Chairperson,

committees of the institute and

composition of the Registration

Committee.

Part III – Spells out registration,

licensing, qualification, issuance of

practicing certificates and annual

licenses to practicing investment

analysts.

Part IV – Relates to disciplinary

provisions, professional misconduct,

the disciplinary committee, appeals

procedures on registered members

under this Act .

Part V – Addresses the financial

provisions, financial year, annual

estimates and audit of the accounts.

Part VI – Deals with miscellaneous

issues relating to staff, offences

appointment of interim managers

and other regulations.

Supporting the above parts are

various schedules;

First Schedule -Provisions relating

to the Institute.

Second Schedule - Provisions

relating to the Council.

Third Schedule – Provisions relating

to the Registration Committee.

Fourth Schedule – Provisions

relating to the Disciplinary

Committee Proceedings on Inquiry.

Fifth Schedule – provisions relating

to the Interim Manager.

CIFA QUALIFICATION

The CIFA qualification comprises 18

papers structured in 3 parts as follows:

PART I

SECTION 1

No. Paper

CF11 Financial Accounting

CF12 Financial Management

CF13 Entrepreneurship and Communication

SECTION 2

No. Paper

CF21 Economics

CF22 Financial Institutions and Markets

CF23 Public Finance and Taxation

PART II

SECTION 3

No. Paper

CF31 Regulation of Financial Markets

CF32 Corporate Finance

CF33 Financial Statements Analysis

SECTION 4

No. Paper

CF41 Equity Investments Analysis

CF42 Portfolio Management

CF43 Quantitative Analysis

PART III

SECTION 5

No. Paper

CF51 Strategy Governance and Ethics

CF52 Fixed Income Investments Analysis

CF53 Alternative Investments Analysis

SECTION 6

No. Paper

CF61 Advanced Portfolio Management

CF62 International Finance

CF63 Derivatives Analysis

For more details please visit www.icifa.co.ke and download the IFA Act.

IFA ACT

NOTICE TO THE PUBLIC AND ALL AFFECTED PARTIES

We wish to notify the public

and players in the finance and

investments sector that the

Investment and Financial Analysts

Act (No 13. of 2015) came into

operation on 8 December 2015.

This is an “Act of Parliament to provide

for the establishment, powers and

functions of the Institute of Certified

Investment and Financial Analysts;

to provide for the examination and

registration of Certified Investment

and Financial Analysts and for

connected purposes”.

We therefore wish to advise

members of the public, employers,

all players and regulators in the

financial markets in Kenya to take

note of the following provisions in

the Act:

(1) Section 20: No person

shall practice as a Certified

Investment and Financial

Analyst unless the person is

registered by the Institute;

(2) Section 21: Any person

practicing as an Investment and

Financial Analyst in Kenya must

register with the Institute and

pass the fit and proper test as

per section 8 of the Act;

(3) Section 16 (1-3): A person is

qualified to be registered if:

(a) The person has sat and

passed the final part of the

Certified Investment and

Financial Analysts (CIFA)

examination, including its

earlier designations, examined

by KASNEB;

(b) Holds a qualification approved

before the commencement of

this Act and was registered at

the time of commencement of

the Act to act as an investment

and financial analyst or be

deemed to be registrable by

the Institute’s Registration

Committee. To this end the

Council will publish rules for

registration of persons who

are not registrable under (a)

above.

(c) The person has satisfied the

requirements of Chapter Six

of the Constitution

(4) Any person who does not

qualify under item 3(a) and (b)

above and has other qualifi-

cations that the person would

like to be recognized by the

Institute is advised to apply to

the Institute pursuant to Section

15 and 16 of the Act.

Interested parties are requested

to familiarise themselves with

all provisions of the Act and any

subsequent rules and guidelines as

may be published by the Institute.

All queries and clarifications about

the Act should be addressed to the

Institute.

FA. (Dr) Wakah George Odhiambo

Chairperson

NOTICEs

With Kenya, being an investment destination, ICIFA’s mission is to develop a talent pipeline for Investment & Financial Analysts in developing economies within the Sub-Saharan Africa.

Being an ICIFA member provides an opportunity for networking, gaining more knowledge in financial markets, professional growth through trainings and many more.

ICIFA as a professional body is now recognised under the Investment and Financial Analysts Act of 2015 ( No. 13 of 2015) and is dedicated to regulating professionals in financial markets in an effort to protect investors wealth.

We invite eligible members to join our membership under the Full Membership category. Membership is open to all CIFA graduates.

Registration fee is Kshs 6,000.

Yearly subscription is Kshs. 6,000.

Affiliate member of ACIIA and APSEA

INSTITUTE OF CERTIFIED INVESTMENT AND FINANCIAL ANALYSTSP.O. Box 48250-00100 NAIROBI,

KASNEB TOWERS, Hospital Road Upperhill, Nairobi Kenya. Mobile: 0726498698 Email: info@icifa.co.ke Website: www.icifa.co.ke

KASNEB NEWSLINE, Issue No. 1, January - March 2016 57

I. HOW TO CREATE A STUDENT ACCOUNT ON THE KASNEB STUDENT PORTAL

All students are required to open a

student account on the KASNEB website.

To open the account, follow the steps below:

1. Click on the student login link then

choose the student icon or proceed

to click the student icon if you use the

direct link (http://online.kasneb.or.ke )

to the student portal.

2. Click on create account and select

whether you have a Student Registration

Number or not and proceed to provide

names, preferred email address and a

strong password (which will be used

for future access to self information)

and click save.

3. Provide the email address and password

used when creating the account and

click unlock to login in.

4. Select the “Registration Details” tab.

5. Access the “Course Choice” tab.

6. Select the examination from the

dropdown box, click on the “Yes”

checkbox and provide the registration

number without the prefix (e.g. if

your registration number is

NAC/68148, provide 68148 as

the registration number) and

click save.

Benefits

You will be able to:

• Download authority to sit for

examination/timetable

• Result summary.

Once the website upgrade is finalised in the

near future, you will be able to:

• Edit your contact address

• Check payment status

• Book for examinations.

Students are hereby advised to ensure they have active student accounts given that moving forward, timetables, result summaries and other individualised communication will only be channelled through the student accounts.

II. CALLING ON KASNEB STUDENTS WITH DISABILITIES

We are in the process of enhancing disability

mainstreaming at KASNEB. This is in an effort to

improve our service delivery to our students with

disabilities.

In this connection, KASNEB wishes to invite any

student with a disability to forward the following

details to KASNEB:

• Full name and National Identification/Passport

Number.

• KASNEB registration number.

• Current email, telephone number and

postal address.

• Nature of disability.

• Whether registered with the National

Council for Persons with Disability and

if so, details of the registration.

Students with disability are encouraged to

register with the Council. Further details on

the Council are available on the Council’s

website www.ncpwd.go.ke

s

KASNEB NEWSLINE, Issue No. 1, January - March 2016 58

III. KASNEB STUDENT FEE COLLECTION ACCOUNTS WITH BANKS

Students, trainers, parents/guardians/sponsors, employers and other stakeholders

are hereby informed that KASNEB operates student fee collection accounts with the

following banks:

(a) National Bank of Kenya Ltd. (NBK)

Account Number: 01001031572601

(b) Equity Bank Ltd.

Account Number: 0170299238025

(c) Kenya Post Office Savings Bank (Postbank)

Account Number: 0744130009246

(d) Co-operative Bank of Kenya Ltd.

Account Number: 01129128535900

The bank accounts are already operational.

Students are required to complete the appropriate KASNEB forms and relevant fee

deposit slips (except for Postbank which does not use deposit slips). The students will

be issued with one copy of the deposit slip and a computer generated slip for their

records. However, for Postbank only a computer generated receipt will be issued.

Upon payment of the requisite fees to the bank, a cash deposit receipt will be issued

to the payee. The completed KASNEB forms will be left with the bank for onward

transmission to KASNEB together with one copy of the deposit slip.

Students are advised that payment of fees at KASNEB offices will soon be phased

out and therefore they should utilise the available channels through the banks.

Note: Students should ensure that all documents requiring certification, such as copies

of academic and professional certificates and identity card/passport are certified

before being handed over to the bank.

IV. BANNING OF MOBILE PHONES FROM THE EXAMINATIONS ROOM

All students are hereby informed that mobile phones

were banned from the examinations room with effect

from the November/December 2014 sitting.

Students are further required to note that disciplinary

action will be taken against any student found in

possession of a phone in the examination room,

regardless of whether the phone was in use or not at

the time of its detection.

s

KASNEB NEWSLINE, Issue No. 1, January - March 2016 59

s

V. KASNEB SERVICES NOW AVAILABLE AT HUDUMA CENTRES

We are pleased to inform our stakeholders that KASNEB services are now available at the following Huduma Centres:

HUDUMA CENTRE KASNEB OFFICER IN CHARGEKASNEB MOBILE NUMBER

EmailSAFARICOM AIRTEL

Kibera, Nairobi Anne K. Wandeto 0701698149 0737018536 awandeto@kasneb.or.ke

Nyeri Anthony M. Kimani 0701698213 0737256315 akimani@kasneb.or.ke

GPO, Nairobi Caroline M. Makutwa 0701699013 0737315992 cmakutwa@kasneb.or.ke

Meru Christine M. Ndwiga 0701699017 0737422739 cndwiga@kasneb.or.ke

Kisumu Collins M. Okomo 0701699026 0737492586 cokomo@kasneb.or.ke

Mombasa Edith A. Were 0701699078 0737516847 ewere@kasneb.or.ke

Kisii Egrah K. Masese 0701711465 0737543023 emasese@kasneb.or.ke

Makadara, Nairobi Maurice O. Gwaye 0701713039 0737618421 mgwaye@kasneb.or.ke

Eldoret Timothy K. Rotich 0701713366 0737831524 trotich@kasneb.or.ke

Note: KASNEB services will be available at the Nakuru Huduma Centre effective from Monday, 20 June 2016.

The services offered at the KASNEB counters at the Huduma Centres

include:

(a) Inquiries

(b) Fee payment at the Huduma Centre using Post Pay

(c) Student registration

(d) Examination entry

(e) Exemptions

(f ) Registration renewal

VII. KASNEB CONTACTSVI. DEFERMENT OF EXAMINATIONS

Students are reminded that deferment of examinations is

only considered under the following:

• Medical cases.

• Job transfers or postings outside the country where

no examination centres exist.

• Clashing of university examinations and those of

KASNEB.

Students are further required to note that all applications

of deferment:

• MUST be accompanied by supporting evidence.

• MUST be received not later than 30 days before the

examination date, except for medical cases.

All applications for deferment that do not meet the above

conditions will NOT be considered.

+254 - (020) 4923000 www.kasneb.or.ke

072220121407742012140780201214073460062407920006380792002351

KASNEBOfficial

info@kasneb.or.ke @KASNEBOfficial

KASNEB Towers, Hospital Road, Upper Hill

P.O. Box 41362 - 00100 Nairobi - Kenya

KASNEB NEWSLINE, Issue No. 1, January - March 201660

Introduction

This code of conduct

and ethics (herein-

after referred to as “the

Code”) is intended to establish

the minimum standards of

ethical conduct and behaviour

of KASNEB students in different

environments and circum-

stances. The Code is expected

to provide guidance to students

for purposes of adhering to

the fundamental principles

of law, national values and

ethics, while safeguarding the

integrity and dignity of the

student and KASNEB.

The Code further aims at

ensuring that registered

KASNEB students not only

uphold the core values

of KASNEB which include

integrity, professionalism,

equity, teamwork and innova-

tiveness, but are also seen to

actively promote the values.

PART I – PRELIMINARY

Citation

(1) This Code may be cited as the Code

of Conduct and Ethics for KASNEB

Students.

Interpretation

(2) In this Code, unless the

context otherwise requires –

“Board” means the Board of KASNEB.

“Chairman” means the Chairman

of the Board of KASNEB.

“Chief Executive Officer” means the

Chief Executive Officer of KASNEB.

“Country” means the country

in which a student is resident.

“Student” means a person

duly registered by KASNEB to

undertake any of its examinations.

“Trainer” means a person engaged

by a training institution to offer

tuition for any of the examinations

administered by K ASNEB.

“Training institution” means an

institution so registered to offer

tuition for KASNEB examinations.

Application and scope of the Code

(3) This Code shall apply to all registered

KASNEB students. The students will

be required to read, understand and

sign an undertaking to abide by the

Code.

PART II – REQUIREMENTS

General conduct

(4) A student shall observe the principle

of integrity in his/her conduct and

interactions with other persons.

Upholding integrity requires the

student to be honest, trustworthy and

generally conduct himself/herself in a

manner that upholds the dignity of the

student, the examination, the relevant

profession(s) and KASNEB.

(5) A student shall observe the laws of the

country in which he/she is resident.

Submission of documents and other information

(6) A student shall ensure that all documents

and information submitted to KASNEB

including copies of certificates,

transcripts, identity documents,

passport photos, testimonials, receipts

and other documents for purposes of

registration, exemption or any other

purpose are genuine and accurate.

(7) A student shall ensure that any

document or other information that he/

she submits purporting to be issued by

KASNEB; to either a university or other

institution of higher learning, employer/

potential employer, government agency

or any other institution for whatever

purpose, is genuine and originates from

KASNEB.

CODE OF CONDUCT AND ETHICS FOR KASNEB STUDENTS

KASNEB NEWSLINE, Issue No. 1, January - March 2016 61

(8) A student shall ensure that any person

certifying documents to be submitted

to KASNEB is duly authorised to do so

under the guidelines issued by KASNEB

for certification of documents.

Conduct in a training institution

(9) A student attending tuition in a training

institution shall abide by the rules and

regulations issued by the training

institution to govern the conduct of

students.

(10) Notwithstanding Clause 9 above, a

student shall treat fellow students,

trainers and management of a training

institution with courtesy and respect

and shall not engage in any activity

that is likely to bring himself/herself,

the training institution or KASNEB into

disrepute.

Examination rules and regulations

(11) A student shall abide by the KASNEB

examination rules and regulations at

all times whether or not the student is

sitting for the examination.

(12) The examination rules and regulations

shall form part of this Code.

Posting and sharing of information/comments on social and other media

(13) A student shall observe the general rules

of integrity and decorum in posting

information or making comments on

social and other media. In particular:

(i) A student shall not post or circulate

information purported to be from, or

relating to KASNEB on social or any

other media before reliably confirming

the accuracy and completeness of the

information.

(ii) A student shall not make derogatory,

abusive or otherwise offensive

comments against KASNEB, other

students, trainers or any other person

or institution.

(iii) No student shall create any

website, blog or social media

page purporting to be that

of KASNEB for whatever

purpose.

(iv) A student shall not hold

himself or herself as

representing KASNEB in any

capacity unless with the

express authority of the Chief

Executive Officer which shall

be in writing.

PART III: BREACH OF THE CODE

Reporting breaches of the Code

(14) All suspected cases of breach of

the Code should be reported in

writing to the Chief Executive

Officer. The suspected breach

should be reported within

reasonable time to facilitate

ef f ic ient and effec t ive

investigations.

(15) Any available evidence should

be attached when reporting

cases of breach of the Code.

(16) All information received shall be

treated in strict confidentiality.

Action for breach of the Code

(17) All reported cases of breach of

the Code shall be referred to

the Examinations Committee,

or any other Committee that

the Board may decide based

on circumstances of each case.

(18) Action shall be taken in

confirmed cases of breach of

the Code in accordance with

the laid down rules and regula-

tions of KASNEB, the provisions

of Section 42 of the Accountants

Act. No. 15 of 2008 and/or any

other applicable law.

(19) Action for breach of the Code shall

include but not limited to:

(a) Deregistration as a student.

(b) Cancellation of examination results.

(c) Prosecution as provided for under the

Accountants Act. No. 15 of 2008 and/

or any other applicable law.

Appeals

(4) All cases of appeal shall be forwarded in

writing within 30 days of notification of

action for breach to the Chief Executive

Officer.

Enquiries and clarifications

(5) All enquiries or requests for clarification

shall be directed to the Chief Executive

Officer.

Revision of the Code

(6) KASNEB shall review the Code from time

to time as appropriate for relevance and

validity.

(7) The review of the Code shall be

undertaken through a consultative and

participatory process.

KASNEB NEWSLINE, Issue No. 1, January - March 201662

THE INTERNATIONAL ACCOUNTING EDUCATION STANDARDS BOARD – AN OVERVIEW

What is the IAESB?

The International Accounting Education

Standards Board (IAESB) is an independent

standard-setting body that serves the public

interest by strengthening the worldwide

accountancy profession through the

development and enhancement of education.

Through its activities, the IAESB enhances

education by developing and implementing

International Education Standards, which

increases the competence of the global

accountancy profession - contributing to

strengthened public trust.

What Does the IAESB Do?

The offices of the IAESB are based in New York,

United State of America (USA). The vision of the

IAESB is to work in the public interest to develop

high-quality accounting education standards

and guidance that are adopted and applied

internationally.

The IAESB is focused on developing the

professional knowledge, skills, values, ethics,

and attitudes of the accountancy profession.

It develops and issues publications on

pre-qualification education and training of

professional accountants, and on continuing

professional education and development for

members of the accountancy profession. These

publications include: International Education

Standards (IESs), International Education Practice

Statements (IEPSs), International Education

Information Papers (IEIPs), and support material,

such as toolkits or interpretation guidance. The

IAESB also acts as a catalyst in bringing together

the developed and developing nations, as

well as nations in transition, and to assist in

the advancement of accountancy education

programs worldwide, particularly where this

will assist economic development.

Who Comprises the IAESB?

The IAESB consists of a Chairman, a Deputy

Chairman, and 16 members comprising

accounting academics, practitioners in

public practice, accountants in business,

the public, and other individuals with an

interest in its work. These members are

equally balanced between practising

auditors and accountants and those

not in practice, along with three public

members. A complete list of IAESB

members, along with their biographies,

is available on the IAESB website.

Each year, the International Federation

of Accountants (IFAC) issues a call for

nominations to the IAESB as well as the

other boards and committees it supports.

The recruitment process is competitive

with interviews being conducted

by the Nominations Committee. All

appointments are approved by the Public

Interest Oversight Board (PIOB).

Why is Accountancy Education Relevant?

Enhancing education through

developing and implementing IESs

should increase the competence of

the global accountancy profession and

contribute to strengthened public trust.

To meet the continual challenges facing

the global economy, the accountancy

profession needs to ensure that

individuals who become professional

accountants achieve an agreed level of

competence, which is then maintained.

Competence is developed and sustained

through initial education and practical

experience, followed by continuing

professional development. The

profession, therefore, needs to set and

meet high educational standards in these

three areas. Enhancing education serves

the public interest by contributing to the

ability of the accountancy profession to

meet the needs of decision makers.

Why International Education Standards?

The IESs assist professional accountancy

organisations, regulators, employers, academics,

and students by prescribing principles for the

learning and development of professional

accountants. They provide IFAC member bodies

and stakeholders interested in accounting

education with a common reference point

or benchmark. Globally accepted standards

should minimise differences among countries

and jurisdictions, thus reducing international

differences in the requirements to qualify and

work as a professional accountant. In addition,

they should increase the opportunity for

mobility of labour and in doing so, contribute

to the global economy.

How Does the IAESB Set Global Education Standards?

The IAESB follows a rigorous due process,

including an international exposure and

consultation process that ensures that the

views of the public and all those affected by its

standards are considered.

Transparency is an essential component of

the standard-setting process. IAESB’s quarterly

meetings are open to the public. Proposed

standards are also available for public comment

as exposure drafts on the IFAC website.

How is the IAESB Related to IFAC?

The structures and processes that support the

operations of the IAESB are facilitated by IFAC,

the global organisation for the accountancy

profession. IFAC is comprised of 175 members

and associates in over 130 countries and

jurisdictions, representing approximately

2.8 million accountants in public practice,

education, government service, industry and

commerce.

For more information on the IAESB and its

activities, please visit the IFAC website at

www.ifac.org.

By CPA Isaac Muchiri Njuguna: Examinations Director, KASNEB and Board Member, International Accounting Education Standards Board (IAESB)

KASNEB NEWSLINE, Issue No. 1, January - March 2016 63

FULLY ACCREDITED TRAINING INSTITUTIONS AS AT 31 MARCH 2016

1. Achievers College of Professionals - Embu

2. African Institute of Research and Development Studies

- Eldoret

3. African Institute of Research and Development Studies

- Kisumu

4. Alphax College - Eldoret

5. Bartek Institute - Eldama Ravine

6. Bartek Institute - Kabarnet

7. Catholic University of Eastern Africa, Main Campus - Nairobi

8. Century Park College - Machakos

9. College of Human Resource Management - Nairobi

10. Dedan Kimathi University of Technology, Nyeri Town

Campus - Nyeri

11. East Africa School of Management - Nairobi

12. Eldoret Polytechnic - Eldoret

13. Elgon View College, Eldoret Campus - Eldoret

14. Embu College - Embu

15. Excel Institute of Professionals - Thika

16. Fomic Business School, Buea - Cameroon

17. Graffins College - Nairobi

18. Gusii Institute of Technology - Kisii

19. Institut Polytechnique De Byumba, Byumba - Rwanda

20. Institut Professionnel De Certification - Douala,

Cameroon

21. Jaramogi Oginga Odinga University of Science and

Technology - Bondo

22. Jomo Kenyatta University of Agriculture and Technology,

Main Campus - Nairobi

23. Jomo Kenyatta University of Agriculture and Technology,

Nakuru CBD Campus - Nakuru

24. Kabete Technical Training Institute - Nairobi

25. Kaiboi Technical Training Institute - Eldoret

26. KCA University Kisumu Campus - Kisumu

27. KCA University, Main Campus - Nairobi

28. Kenya School of Credit Management - Nairobi

29. Kenya School of Government - Mombasa

30. Kiambu Institute of Science and Technology - Kiambu

31. Kibabii University College - Bungoma

32. Kigali Institute of Management, Kigali - Rwanda

33. Kirinyaga University College - Kerugoya

34. Kisumu Polytechnic - Kisumu

35. Kitale Technical Training Institute - Kitale

36. Maaron Business School, Douala - Cameroon

37. Machakos Institute of Technology - Machakos

38. Machakos University College - Machakos

39. Masai Technical Training Institute - Kajiado

40. Meru Technical Training Institute - Meru

41. Michuki Technical Training Institute - Kangema

42. Mombasa Aviation Training Institute - Mombasa

43. Mombasa Technical Training Institute - Mombasa

44. Mount Kenya University, Nkubu Campus - Nkubu

45. Murang’a University College - Murang’a

46. Mwangaza College - Nakuru

47. Nairobi Institute of Business Studies - Ruiru Campus

48. Nakuru Counseling and Training Institute - Nakuru

49. NEP Technical Training Institute - Garissa

50. Nishkam Saint Puran Singh Institute - Kericho

51. Nkabune Technical Training Institute - Meru

52. Nyandarua Institute of Science and Technology - Nyahururu

53. NYS Technical Training College - Mombasa

54. NYS Technical Training Institute - Naivasha

55. Ol’lessos Technical Training Institute - Lessos

56. PC Kinyanjui Technical Training Institute - Nairobi

57. Pinnacle Business School - Nairobi

58. Ramogi Institute of Advanced Technology - Kisumu

59. Riara University - Nairobi

60. Rift Valley Institute of Science and Technology - Nakuru

61. Rift Valley Technical Training Institute - Eldoret

62. Rongo University College - Rongo

63. Rware College of Accounts - Nyeri

KASNEB NEWSLINE, Issue No. 1, January - March 201664

64. Shamberere Technical Training Institute - Kakamega

65. Sigalagala Technical Training Institute - Kakamega

66. St. Paul’s University, Main Campus - Limuru

67. St. Paul’s University, Nairobi Campus - Nairobi

68. Star College of Management Studies - Nairobi

69. Strathmore University - Nairobi

70. Summit Institute of Professionals - Nairobi

71. Thika Technical Training Institute - Thika

72. Times Training Centre - Mombasa

73. University of Eastern Africa, Baraton - Kapsabet

74. University of Rwanda, College of Business and Economics, Kigali - Rwanda

75. Vision Institute of Professionals, Mombasa Campus - Mombasa

76. Vision Institute of Professionals, Nairobi Campus - Nairobi

you are doubting the quality of training you are getting at your college,

THEN it probably is NOTaccredited by KASNEB

Before you enroll, ask if the college is accredited by KASNEB

IF

NOTE: Information on other training institutions in the process of accreditation is available on the KASNEB website: www.kasneb.or.ke

ACCREDITED TRAINING INSTITUTIONS

KASNEB NEWSLINE, Issue No. 1, January - March 2016 66

Taking services closer to the peopleKASNEB at Huduma Centres

PICTORIAL

Kisii

Universities and Colleges Fair for High School Students at Senior Chief Koinange High School, Kiambu County on Sunday, 6 February 2016 organised by Edu-World Wide

Business talk organised by Chuka University Accounting Students Association, Chuka on Friday, 6 November 2015

Eldoret

GPO, Nairobi

KisumuMakadara, Nairobi Meru Mombasa Nyeri

Kibera, Nairobi

KASNEB NEWSLINE, Issue No. 1, January - March 2016 67

Rewarding excellencePrize Award Ceremony for the May 2015 Examination sitting held on Friday, 8 April 2016 at the Hilton Hotel, Nairobi

KASNEB NEWSLINE, Issue No. 1, January - March 2016 68

Laying of the foundation stone on Tuesday, 12 April 2016 at KASNEB Towers, Nairobi

A milestone of progressKASNEB TOWERS II

PICTORIAL

KASNEB NEWSLINE, Issue No. 1, January - March 2016 69

PICTORIAL

KASNEB NEWSLINE, Issue No. 1, January - March 2016 70

Sensitisation workshops

Sensitisation workshops for KASNEB and Kenya National

Library Services (KNLS) help desk officers held in various parts of the country on Saturday, 2 April 2016

Bontana Hotel, NakuruMombasa Beach Hotel, Mombasa

Green Hills Hotel, Nyeri

Bontana Hotel, Nakuru Mombasa Beach Hotel, Mombasa

Green Hills Hotel, NyeriSunset Hotel, Kisumu

KASNEB held workshops for County Directors of Education, County Education and Examination Officers, Chief Invigilators in various parts of the country on Friday, 1 April 2016

Minimum entry requirements for diploma qualifications:Kenya Certificate of Secondary Education (KCSE) with a mean grade of at least grade C- (C Minus) or equivalent qualifications.

Providing globally competitive professionals

FOR MORE INFORMATION CONTACT:KASNEB Towers, Hospital Road, Upper Hill, P.O. Box 41362 - 00100, Nairobi - Kenya Tel: 254(020) 4923000, Cellphone: 0722-201214/0734-600624, Fax: 254(020) 2712915 E-mail: info@kasneb.or.ke, marketing@kasneb.or.ke , Website: www.kasneb.or.ke

Facebook:KASNEBOfficial, Twitter: @KASNEBOfficialKASNEB IS ISO 9001: 2008 CERTIFIED

DIPLOMA QUALIFICATIONS

Minimum entry requirements for professional qualifications:(a) Kenya Certificate of Secondary Education (KCSE) with a mean grade of at least grade C+ (C plus)

provided the applicant has obtained a minimum of grade C+ (C plus) in both English and Mathematics or equivalent qualifications.

(b) A degree or diploma from a recognised training institution.

PROFESSIONAL QUALIFICATIONS

Accounting Technicians Diploma

(ATD)

Diploma in Credit Management

(DCM)

Diploma in Information Communication

Technology (DICT)

Certified Credit Professionals

(CCP)

Certified Public Accountants (CPA)

Certified Investment and Financial

Analysts (CIFA)

Certified Information Communication

Technologists (CICT)

Certified Secretaries (CS)

The mandate of KASNEB is

the development of syllabuses, conduct of professional, diploma and technician examinations and certification of candidates in accountancy, finance, credit, governance and management, information technology and related disciplines; the promotion of its qualifications nationally and internationally and the accreditation of relevant training institutions.

Why pursue a KASNEB qualification

• Internationally recognised• Highly rated by employers • International mobility• Membership to professional institutes of

repute• Credit transfers with institutions of higher

learning

KASNEB invites eligible applicants to register for the above qualifications. Exemptions will be granted to holders of relevant degrees and diplomas from recognised universities, institutions of higher learning and other examination bodies.

It pays to advertise in the

Contact the Marketing and Corporate Affairs Unit through: P.O. Box 41362 - 00100 Nairobi Tel: 254(020) 4923000 Cellphone: 0722-201214/0734-600624 E-mail: publications@kasneb.or.ke or marketing@kasneb.or.ke

KASNEB NEWSLINE

KASNEB Newsline is one of the most widely read journals in Kenya. It is produced four times in a year. Over 50,000 copies are printed for each issue.

The Newsline is distributed free of charge within and outside Kenya through secondary schools, Kenya National Library Services branches, training institutions, universities, government ministries, Kenyan Embassies and High Commissions.

The Newsline is also available on the KASNEB website.

Grow your business by advertising in the KASNEB Newsline. Call us, book for space and watch your institution or business grow.

KASNEB NEWSLINE, Issue No. 1, January - March 2015 1

KASNEB The Professional Journal of KASNEB Issue No. 1 January - March 2015

KASNEB NEWSLINEEDUCATIVE INFORMATIVE ENTERTAINING

TOPICS FEATURED

ENVIRONMENTAL ANALYSIS IN STRATEGIC

MANAGEMENTCROSS LISTING

DEBTORS TRAITS EXTERNALITIES

CRITICAL SUCCESS FACTORS IN FILE

CONVERSION

EXTRAORDINARY BOSSES

REVISED SYLLABUSES

ENVIRONMENTAL ANALYSIS

KASNEB NEWSLINE, Issue No. 2, April - June 2015 1

KASNEB The Professional Journal of KASNEB Issue No. 2 April - June 2015

KASNEB NEWSLINEEDUCATIVE INFORMATIVE ENTERTAINING

TOPICS FEATURED

BUSINESS VALUATION FOR MERGERS AND

ACQUISITIONS

RISK MANAGEMENT FOR CLOUD

COMPUTING

THE EQUITY VALUATION

PROCESS

IMPLEMENTATION OF TQM IN BUSINESS

PUBLIC FINANCE

THE DIGITAL ECONOMY REVISED SYLLABUSES

KASNEB The Professional Journal of KASNEB Issue No. 3 July - September 2015

KASNEB NEWSLINEEDUCATIVE INFORMATIVE ENTERTAINING

TOPICS FEATURED

INTEGRITYIN LEADERSHIP

TURNAROUND STRATEGIES

INFORMATIONSECURITY

EQUITY VALUATION

BUILDING A TEAM

POWER OF THE TONGUE

STUDENT-CENTERED E-LEARNING

REVISED SYLLABUSES

SPECIMENSPECIMEN

SPECIMEN

INTEGRITY IN LEADERSHIP

?

KASNEB The Professional Journal of KASNEB Issue No. 4 October - December 2015

KASNEB NEWSLINEEDUCATIVE INFORMATIVE ENTERTAINING

TOPICS FEATURED

EFFECTIVE PERFORMANCE APPRAISAL

ISLAMIC FINANCE

INTERNET OF EVERYTHING

PROFESSIONAL SKEPTICISM

STANDING OUT

PERSONAL APPEARANCE

QUALITY ASSURANCE IN INTERNAL AUDITING

TECHNICIAN TO DIPLOMA TRANSITION

PERFORMANCE

APPRAISAL

KASNEB COURSES OFFERED

�Accounting Technicians Diploma (ATD)

�Certified Public Accountants (CPA)

�Certified Investment and Financial

Analysts (CIFA)

�Certified Secretaries (CS)

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KNEC COURSES

Certificate and Diploma in:�Business Management

�Human Resource

�Supply Chain Management

�Sales and Marketing

MODE OF STUDY

Computer Courses�Certificate in Computerized

Accounting (Quickbooks,Sage,

Pastel, etc)

�Certificate in Graphics Design

�Certificate in Web Design

�Certificate in Computer Programming

�Certificate in computerized

Programming

�Certificate in Microsoft Office

�Certificate in Computer Repair (A+)

�Certificate in Networking (N+)

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KISM COURSES

�APS-K

�CPSP-K

�Full Time: (Mon-Fri) 8:30am- 4:00pm�Evening: 5:30pm - 7:30pm�Early Morning: 6:30am - 8:00am�Weekend ONLY Classes: (Sat & Sun) 8:30am - 4:00pm