Effect of Government Domestic Borrowing on Financial Development in Kenya

Abstract

Many researchers are becoming are becoming more agitated to conduct studies on the determinants of financial development. The role of government domestic borrowing on financial development has both proponents and opponents. Proponents argue that the government bond sector plays a vital role in the development of local securities markets. Namely, the government bond is a safe asset for banks in many developing and transition countries which have observed low financial intermediation. The safety of government bonds facilitates financial development by serving to reduce risk for domestic banks. Opponents on the other hand argue that government debt could have negative effects on the development of financial markets. This study sought to determine the effect of government domestic borrowing on financial development in Kenya. The independent variable was government domestic borrowing as measured by quarterly government domestic borrowing in natural logarithm form. The control variables were interest rates as measured by central bank lending rate on a quarterly basis, economic growth as measured by quarterly GDP, trade openness as measured by percentage change in the difference between exports and imports and inflation rates as measured by quarterly CPI. Financial development in Kenya was the dependent variable which the study sought to explain and it was measured by the ratio of total credit to the private sector as a percentage of 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 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 0.590 which means that about 59 percent of the variation in financial development in Kenya can be explained by the five selected independent variables while 41 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=0.768). ANOVA results show that the F statistic was significant at 5% level with an F statistic of 9.798. Therefore the model was fit to explain financial development in Kenya. The results further revealed that individually, interest rates, economic growth, trade openness and inflation rates are not significant determiners of financial development in Kenya while government domestic borrowing has a significant effect on financial development. This study recommends that there is need for policy makers to manage government domestic borrowing levels prevailing in the country bearing in mind that they significantly influence financial development in the country.