Role of Investment Banking in Financial Development in Kenya

Abstract

The study on determinants of financial development has become a subject of interest to many researchers. The motivation of this is the mounting evidence that financial development leads to economic growth. The main rationale for linking financial development to economic growth is that developed financial systems perform critical functions that enhance the efficiency of intermediation through reduction of information, transaction and monitoring costs. The general consensus among many scholars is that investment banking helps reduce agency costs, facilitate risk sharing, complete the market, and ultimately improve allocative efficiency and financial development. This study explored the role of investment banking on financial development in Kenya. The population for the study was all the 21 investment banks in Kenya. The independent variable was investment banking as measured by corporate finance services, corporate restructuring services, mergers and acquisition services, public private partnership and underwriting services. The control variables were economic growths as measured by quarterly GDP growth rate, trade openness as measured by the ratio of balance of payments to GDP on a quarterly basis and financial openness as measured by foreign financial assets plus liabilities as a percentage of GDP on a quarterly basis. Financial development was the dependent variable which the study sought to explain and it was measured by total credit to the private sector divided by GDP on a quarterly basis. Secondary data was collected for a period of 10 years (January 2008 to December 2017) on a quarterly basis. The study employed a descriptive cross-sectional research design and a multiple linear regression model was used to analyze the relationship between the variables. Statistical package for social sciences version 21 was used for data analysis purposes. The results of the study produced R-square value of 0.619 which means that about 61.9 percent of the changes in financial development in Kenya can be explained by the eight selected independent variables while 38.1 percent in the variation was associated with other factors not covered in this research. The study also found that the independent variables had a strong correlation with financial development (R=0.787). ANOVA results show that the F statistic was significant at 5% level with a p=0.000. Therefore the model was fit to explain financial development in Kenya. The results further revealed that individually only corporate finance service is a statistically significant determinant of financial development in Kenya. This study recommended that adequate measures should be put into place to improve and grow financial development in Kenya by boosting investment banking and specifically their corporate finance function.