Effect of Public Debt on Financial Development in Kenya
Abstract
Safe asset view and lazy bank view have been suggested for the interaction between
public debt and financial development. Lazy bank view suggests that banks with
greater public debt instruments increase their profitability but decrease their efficiency
and in turn lowers financial depth in time. On the other side, safe asset view
asserts that limited amount of public borrowing supports financial development. So,
the net influence of public borrowing on financial sector development depends on
public borrowing level and country specific characteristics. The objective of this
research was to determine the effect of public debt on Kenya’s financial development.
The study was anchored on debt overhang theory and supported by crowding out effect
theory and functional finance theory. The independent variable was public debt
operationalized using debt service to revenue ratio and debt service to export ratio while
the control variables were; interest rate and inflation. The dependent variable that the
research attempted to explain was the financial development in Kenya. The data was
collected on a quarterly basis over a period of twenty years (from January 2002 to
December 2021). A descriptive research approach was employed in the research, with a
multivariate regression model used to examine the connection between the study
variables. The study's findings yielded an R-square value of 0.282, indicating that the
chosen independent variables could explain 28.2 percent of the variance in Kenya’s
financial development, while the other 71.8 percent was due to other factors not
investigated in this study. The F statistic was significant at a 5% level with a p=0.000.
This suggests that the model was adequate for explaining financial development in
Kenya. Further, the findings demonstrated that debt service to revenue ratio, debt service
to export ratio and interest rate had a positive and significant influence on Kenya’s
financial development. Inflation had no significant influence on Kenya’s financial
development. The study recommends the need for practitioners and policy makers to
ensure to develop target debt service to revenue ratio and debt service to export ratio that
will promote financial development. The policy makers should also ensure that both the
government revenue and exports keep increasing with a rise in debt service. Future
studies can focus on other determinants of financial development in Kenya such as
financial literacy, unemployment among others. Future studies can also focus on a longer
study period to confirm the findings.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
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