The Effect Of Financial Deepening On Economic Growth In The East Africa Community Bloc

Abstract

Extensive research has been conducted by different scholars to show the relationship between Financial Deepening and economic growth in different countries. A better understanding of this relationship has a significant implication for policy makers, scholars and financial sector players. Financial systems serve to mobilize pooling of funds that are channeled towards productive capital which stimulates economic growth. Additionally, financial deepening plays a critical role in broadening its financial resource base, credit creation and increasing velocity of money supply, this, in turn, enhances investment and consequently boosts productivity and growth. Consequently, economic growth ensure that financial instruments like the credit facilities are available to consumers. The significance of this study is to evaluate and provide evidence of correlation between financial deepening and economic growth within East African Community. To achieve this objective, the paper derives three key objectives as: Establish the effect of broad money on economic growth, Establish the effects of credits facilities to the private sector on economic growth, and Establish the effects of rate of value of the traded stock on economic growth. Broad money was used to denote the amount of money supply in the economy, credit facilities to the private sector denote loans offered to the private sector, while the volume of the traded stock was used as a measure for financial market investment. The study used descriptive research design and employed the fixed effect model in regression analysis. The findings of the study established that the three indicators of financial deepening namely; credit facilities, amount of money supply in the economy, and amount of stock traded have a positive correlation with economic growth in East African Community bloc. The coefficient for amount of money in the economy was 0.4410, amount of stocks traded 0.1367 while credit facilities was 0.4022. Additionally, the model had a an F statistic of 103.50, confiring its suitability. The study recommends that the East Africa Community governments should place more emphasis on the efficiency and of money supply, investment and distribution by commercial banks, the study also recommends that the governments of East Africa Community countries should continue pursuing policies that promote access to credit such as ensuring that interest rates are low. Consequently, Capital Markets Authorities present in all East African Coutries should organize public sensitization campeigns to increase public participation in the stock market.