The Role of Commercial Banks in Economic Development in Kenya

Abstract

The purpose of the study was to assess roles of commercial banks and economic development. To fulfil this purpose, the objective of the study was to examine the relationship between the role of commercial banks on the economic development in Kenya. Descriptive research design was adopted to achieve the study objective. The research focused on 42 CBS and 1 Mortgage finance bank in Kenya. Secondary data collection method was adopted, whereby data on GDP growth rate was sourced from CBK website, while data on annual Short-Term loan, annual Long-term loans, account deposits and annual market capitalization was sourced from the annual financial reports of the 42 CBS and 1 Mortgage finance bank in Kenya. The data encompassed a 10 year period (2009-2019). Data analysis was via descriptive statistics and inferential statistics. Information analyzed via descriptive statistics was presented via standard deviation and mean. Inferential statistics was carried out via multiple linear regression. Findings from the regression analysis determined that coefficient of correlation 0.81 and R2 66.3%. R of 0.81 shows that there was a strong linear relationship between long and Short term loans, account deposits and economic development. In addition, 66.3% of the variation in economic development could be explained by the model. This implied that they were still other factors that could help explain economic development in Kenya but where not captured in the study. The Anova revealed that the model was statistically fit and thus it would be accurate to predict economic development on the basis of short term loans, long term loans and account deposits. Findings from the coefficients table showed that each variable had a different strength in predicting economic development. Short term loans and account deposits were positive predictors of economic development while long term loans were a negative predictor of economic development. It was established that for every unit increase in short term loans economic development went up by a value of 1.424. For every additional account deposit that was made economic development went up by 1.039. Further for every unit increase in long term loans given economic development went down by a value of -0.578.The study recommends that CBK implement strategies that are effective in dealing with bad loans. Adaptation of better strategies to deal with such loans once adopted by commercial banks they can be able to recover bad loans and thus help turn long term loans to stimulate economic development. The study also recommends that commercial banks should invest more money in handing out short term loans that have proved to have a positive impact on economic development. The study also recommends that commercial banks continue upholding their banking policies that encourages account deposits. The study also recommends that the CBK provides a friendly environment that would continue to encourage commercial banks to give out loans to the people.