The Relationship Between Financial Development and Economic Growth in Kenya

Abstract

Economic growth of a country is determined by its prosperity and other sectors such as agriculture, education, financing, infrastructure and standards of living. In this regard, the researcher established need to educate and create awareness of existence of a relationship between the components of economic growth in a developing economy. This project therefore, examines the causal relationship between financial development and economic growth in Kenya. The data of the project was collected from published secondary sources from KNBS, CMA, CBK and NSE. The data was analysed using SPSS version 17.The empirical results shown that the direction of causality between financial development and economic growth in Kenya is sensitive to the choice of proxy used for financial development. For example, when financial development is measured by the money to income ratio the direction of causality runs from financial development to economic growth, but when the bank deposits rates, lending rates are alternatively used to proxy financial development, growth is found to lead financial development. On balance, however, for Kenya, the economic growth seems to lead financial development. In order to stimulate economic growth in Kenya, the Government could take several moves especially in bank supervision, monitor lending and borrowing rates and regularly review' the inflation rate to promote development of financial institutions. The strengthening of above elements can boost financial development and accelerate economic growth. For instance, transparent rules and encouragement should be given.