THE EFFECTIVENESS OF A RISK BASED SUPERVISION MODEL AS ADOPTED BY THE KENYAN CAPITAL MARKET

Abstract

Risk based supervision (RBS) is a structured approach that concentrates on the identification of potential risks faced by firms and the assessment of the financial and operational factors in place to minimize and mitigate those risks. Risk Based Supervision aims at promoting transparency, providing early warning signals and encouraging the regulated entities to self-evaluate their position at regular intervals. Little research has been done on the effect of RBS as adopted by the capital market so far. It was with this background that this study tried to cover the effectiveness of a risk-based approach model as adopted by the capital markets of Kenya. This study adopted descriptive research design. A census was conducted on all compliance officers at the Capital Market Authority and all the compliance and risk managers of 17 Stock brokerage firms in Nairobi, Kenya. This translated to a total of 38 respondents. A self-administered semi-structured questionnaire was administered to the respondents, thereafter data capture, cleaning and analysis was done using SPSS-V19 and Microsoft Excel. Reporting of the study findings was done in form of tables, graphs, pie charts and narrative texts. The findings of the study concluded that despite independence of RBS successes from the level of its implementation at 95% precision, the impact of RBS on various aspects including risk profiling, corporate governance, inspections, success of identification and model identification was noted and appreciated by the respondents’ firms. Further, it was established that the number of days and staff needed for inspections are dependent on Risk Based Approach (RBA) at 95% level of precision with a positive correlation. The findings also revealed that there exists a general dissatisfaction with the impact of RBS on the training cost of the supervisors at the Capital Market Authority. It was recommended that there’s need to associate the implementation RBS and its successes by committing firms towards implementation of RBS; exploring further the potentiality of RBA towards reducing the number of days and staff needed for inspections and need for more efforts to ensure that the training cost for the supervisors is made as lean as possible through the implementation of the RBA.