Part A: Business and its markets
Introduction to the business environment
Key takeaways
- The business operating environment is the sum of internal and external factors, economic, social, political, technological, legal and competitive, that shape how an organisation operates, and most of them lie outside any single business's control.
- Kenya runs a mixed, market-based economy built on agriculture, a growing manufacturing base and a services sector that has increasingly become the largest contributor to output.
- Each part of the Kenyan financial system answers to its own regulator: CBK for banks and mortgage finance companies, SASRA for deposit-taking SACCOs, IRA for insurance, CMA for capital markets and RBA for pension funds.
- The primary sector extracts raw materials from nature, the secondary sector turns them into finished or semi-finished goods, and the tertiary sector provides services.
- Population size, geographical distribution, gender, ethnicity and age composition shape demand and labour supply, and through them the demand for credit and the risk of default across the market.
Every credit decision is made inside a wider environment the business, and the credit officer assessing it, does not control. This opening chapter maps that environment, starting with Kenya's own economy and financial system.
What the business environment is
The business operating environment is the sum of internal and external factors, economic, social, political, technological, legal and competitive, that influence how an organisation operates and performs, most of which lie outside any single business's direct control.
The Kenyan economy
Kenya runs a mixed, market-based economy, the East African region's largest, built on agriculture (still the leading employer and export earner: tea, coffee, horticulture), a growing manufacturing base, and a services sector, financial services, telecommunications and tourism prominent among them, that has increasingly become the economy's largest contributor to output.
The Kenyan financial system
Types of industry
Population change and the economy
- Size: a growing population expands the labour force and the domestic market, but also strains infrastructure and public services
- Geographical distribution: urbanisation concentrates demand and labour supply in cities, changing where businesses locate
- Gender: shifts in workforce participation and income by gender change consumption patterns and labour markets
- Ethnicity: influences regional economic patterns and, in some markets, product and service preferences
- Age composition: a young population (Kenya's demographic profile) means a growing labour force and consumer base, but also rising demand for education, jobs and eventually pensions as it ages
The link to credit management
Every element of this chapter feeds directly into credit decisions: the financial system shapes which institutions can lend and on what terms, the sector a borrower operates in shapes its risk profile (CCP Credit Risk Management, in the chapter on industry risks), and the demographic and economic conditions of the country shape overall demand for credit and the risk of default across the whole market (CCP Credit Risk Management, in the chapter on external risks).
Exam tip
The institutional map above (which regulator oversees which type of institution) is tested repeatedly across CCP papers, know CBK/SASRA/IRA/CMA/RBA cold, since a scenario naming an institution is often really asking which regulator applies.
Self-check
(a) Match each institution type to its Kenyan regulator: deposit-taking SACCO, insurance company, listed company, pension fund. (4 marks)
(b) Distinguish the primary, secondary and tertiary economic sectors, with one Kenyan example of each. (3 marks)
(c) Explain how a growing but ageing population affects credit demand over time. (3 marks)
Show worked answer
(a) Deposit-taking SACCO, SASRA; insurance company, IRA; listed company, CMA; pension fund, RBA (4 marks).
(b) Primary sector extracts or produces raw materials directly from nature, for example agriculture; secondary sector transforms raw materials into finished goods, for example manufacturing; tertiary sector provides services rather than physical goods, for example banking (3 marks).
(c) A young, growing population expands the labour force and consumer base, supporting rising demand for credit to fund consumption, housing and business growth; as that population ages, demand shifts toward different products, for example retirement savings and healthcare-related credit, while the working-age share funding overall economic activity gradually shrinks (3 marks).