Relationship Between Financial Deepening And Poverty Level In Kenya

Abstract

Poverty is one of the major macroeconomic problems of most economies including Kenya. The study was conducted with the purpose of determining the existence of a relationship between financial deepening and poverty level in Kenya. Time series data was used to examine the relationship between financial deepening and poverty level for the period 1997 to 2012. Broad money supply (M2/GDP), domestic credit to the private sector (DCP/GDP) and domestic financial savings (DFS/GDP) are used as proxies for financial deepening and private per capita consumption as a proxy for poverty level. The study reveals the existence of a long run relationship between financial deepening (money supply, domestic credit to private sector and domestic financial savings) and poverty (private per capita consumption). Results from error correction mechanism show the existence of both short run and long run relation between private per capita consumption and ratio of broad money supply to GDP (M2/GDP). All the three proxies for financial deepening are positively correlated with private per capita consumption. The research project concludes that financial deepening reduces poverty level. The global microfinance movement which promotes direct access to finance services can improve individual livelihoods amongst the poor in Kenya by enabling them to manage scarce resources more efficiently smoothing consumption. This follows also the establishment of the Kenya Financial Sector Deepening Programme in 2005 to help stimulate wealth creation and reduce poverty by expanding access to financial services for lower income households and smaller scale enterprises.