Effect Of Financial Deepening On Economic Growth In Kenya

Abstract

In the contemporary financial sector, financial deepening has become a critical issue especially in stimulation of economic growth of a country. Kenya has been developing its financial sector particularly through financial deepening to achieve its economic growth aspirations. The study sought to establish the effect of financial deepening on economic growth of Kenya. The research design adopted for this study was descriptive design. Secondary data used in this study was sourced from Nairobi Securities Exchange, Central Bank of Kenya websites and Kenya National Bureau of Statistics (KNBS) as well as World Bank development indicators. The study population was quarterly data for 11 years giving a total of 44 observations per variable. The study used both descriptive and inferential statistics in analyzing the data. First, data collected was sorted, classified and collated. Descriptive statistics such as mean and standard deviation for each variable were calculated and tabulated using tables and inferential statistics. The STATA computer software was used in the analysis of data. Data was analysed using inferential statistics inform of regression and correlation analysis. To measure the effect of financial deepening on economic growth of Kenya the researcher used regression analysis. The effect was examined at 95% confidence level while employing student t test. The data was subjected to diagnostic tests to evaluate conformity with multiple regression model assumptions. This would ensure validity of the results. The study employed normality, heteroscedasticity, multicollinearity, serial correlation and unit root diagnostic tests. The study results established that banking deposits had a statistically insignificant effect on economic growth measured, Capital market capitalization had a statistically significant effect on economic growth, Mobile banking had a statistically significant effect on economic growth and that direct capital Inflows had a statistically significant effect on economic growth. The study concludes that financial deepening has a significant effect on economic growth of Kenya. The study recommends that government should not just focus on savings mobilization in the economy rather they should focus on policies and strategies that translate savings to investments. The study also recommends that the government should continue strengthening the capital market by putting in place supportive business environment that encourages the setup of companies that may list their shares at the Nairobi securities exchange. The government of Kenya through the central bank and communication authority should continue strengthening mobile banking. Finally, government to continue putting in place policies that encourage improved capital inflows from abroad