Effects of Operating Environment Factors on Infrastructure Finance Flows in the Capital Markets in Kenya

Abstract

Capital markets play a very important role in mobilization of financial resources to meet various investment needs in both public and private sectors. Financing of infrastructure investments remains a big challenge in Kenya due to limited sources of funds mainly from tax revenues and foreign borrowing. This means that more infrastructure financing has to come from the private sector than it is currently available. Policy framework, legal environment, regulations and institutions are the operating environment factors which influence the infrastructure finance flows through the capital markets. This study sought to establish whether these operating environment factors affect development of infrastructure finance in the Kenyan capital markets. The study sought to answer the following research questions: Are policy, legal, regulatory and institutional arrangements adequate? Does policy, legal, regulatory and institutional settings affect financing of infrastructure projects? Is there a need to review the existing policy, legal, regulatory and institutional frameworks? Empirical studies have shown that political and business leaders design policies, laws, regulations and institutions to cater for self-interests other than the wider public interest. The study was undertaken using descriptive research design where a questionnaire was used. Data was collected from a population of 100 infrastructure related institutions. Descriptive and regression analysis were conducted on the data to show how each independent variable of the operating environment factors influences the infrastructure finance flows. The study found that majority of respondents think that there are inadequate policies, laws and regulations while half of these respondents believe that the institutions lack the necessary capacity to operate efficiently and effectively. The study also found that majority of respondents agreed that there is need for an urgent review of the existing financial sector policies and institutions. Half of the respondents want the regulations revised but majority of the respondents believe that the existing laws do not require review. From the study, ANOVA results show that the operating environment factors are good predictors of infrastructure finance flows which means that using the model is better than guessing the predicted values. From these findings, it can be concluded that there are no adequate policy, legal, regulatory and institutional arrangements to facilitate the uptake of infrastructure finance in the capital markets. The study recommends that financial sector policies, laws, regulations and institutions need to be reviewed in order to create a conducive environment for financing of infrastructure investments. Further research is recommended on effects of operating environment factors on infrastructure finance flows in the capital markets in Kenya.