The Effects of Global Financial Crisis on Asset Allocation: An analysis of the priorities of East African Central Banks reserves management objectives

Abstract

The Global Financial Crisis (GFC) of 2008 had a significant impact on the financial landscape that has led to changes in reserve management practices. Central Banks in particular, have to choose an appropriate asset allocation of the foreign reserves in agreement with policy objectives which are safety, liquidity and returns. Asset allocation is a high level decision which reflects the institution’s overall risk tolerance and investment objectives and constraints over the planning horizon. This underlined the need to carry out the study on the effects of Global Financial Crisis on Asset Allocation based on data from East African Central Banks. The major problem that guided this study was to explore the ways in which priorities of East African Central Banks’ objectives changed during the GFC and thus sought to answer the following question: to what extent are the priorities of East African Central Banks’ reserves management objectives changed during the Global Financial Crisis?

Both qualitative and quantitative approaches have been deployed and findings are based on the data derived from East African Central Banks. Primary data was collected through the use of a questionnaire and an experience survey to a clustered sample of Central Bank officers in the Directorates of Financial Markets. The study also utilized secondary data, which was gathered through literature search and document analysis. Likewise, conclusions have been drawn from both theoretical and quantitative analysis of data. The Chi square analysis and hypotheses testing were also applied to the responses received from the respondents.

This way, the analysis led to the conclusion that, given the effects of the global financial crisis of 2008; all East African Central Banks did not change priorities of the key reserves management objectives. Instead, they re-allocated financial assets by investing a portion of their reserves in non-traditional currencies as a way of diversifying from developed economies and to enhance return. On the other hand, the study suggests that Central Banks risk management practices and procedures need to be improved because many of the disastrous losses would have been avoided if proper risk management practices were in place. Also, it emphasizes on the need to take good care when diversification of assets to non-traditional countries and currencies with high credit ratings is made.

Key subjects: Global Financial Crisis, East African Central Banks, Asset Allocation, Reserves management objectives.