The relationship between financial market development and economic growth in east African community
Abstract
Financial market development can be defined as the policies, factors, and the institutions
that lead to the efficient intermediation and effective financial markets. A strong financial
system offers risk diversification and effective capital allocation. The greater the financial
development, the higher would be the mobilization of savings and its allocation to high
return projects. Levine, (1993) emphasized to consider the importance of financial sector
in economic growth. Economic growth is the sustained increase in welfare of an economy
nation, region, city together with the ongoing changes in that economy's industrial (Ray
1998). Economists and many other social scientists have focused, primarily although not
exclusively, on growth in per capita income as the preferred measure of economic growth.
Economic growth is conventionally measured as the percent rate of increase in Gross
domestic product (GDP). Economic growth will be dependent variable in the study, while
Financial market development being independent variable and is analyzed through
indicators such as; interest rate spread, nonperforming loans in financial institutions,
broad money growth, domestic credit to private sectors and market capitalization. This
study will tend to answer how financial market indicators relate to economic growth in
East African Countries. The population of study focuses on the five official EAC member
countries namely: Kenya, Uganda, Tanzania, Rwanda and Burundi for a six year period
between the years 2008 to 2013.Secondary data was collected for the study for a period of
6 years 2008 to 2013.Data analysis was done using SPSS Version 20 whereby multiple
regressions were employed; the findings suggest that 19.4% of variations in economic
growth in EAC are explained by variations in the five financial development indicators
under study. The study establishes positive relationships between market capitalization,
money growth and economic growth and negative relationships between ratio of credit to
private sector to GDP levels, levels of nonperforming loans and interest rate spreads to
GDP