Effect of Financial Regulations on Capital Markets Development in Kenya

Abstract

Capital markets are critical for economic growth and economies with efficient capital markets have the capacity to thrive. Financial regulations, on the other hand, have an impact on the growth of capital markets. Well-regulated capital markets are often considered a requirement for efficient resource allocation and can encourage long-term economic growth. Investors' portfolios may appear to be less secure when financial rules are weak and ineffective, which can result in confidence erosion, capital flight, and panic financial assets selling. Insufficient regulation is a concession to market abuse and a setback for market growth. Economic policies have limited influence in stabilizing economies, where there is a weak regulatory framework. The objective of this research was to determine the effect of financial regulations on the development of capital markets in Kenya. The study was based on capture theory of regulations, normative theory of regulation and agency theory. The independent variable was financial regulations while the control variables were; interest rate, inflation and unemployment rate. The dependent variable that the research attempted to explain was capital markets development in Kenya. The data was obtained on a quarterly basis for a duration of ten years (from January 2012 to December 2021). A descriptive research approach was relied on for the research, with a multivariate regression model utilized in examining the link between the research variables. The research conclusion depicted a 0.406 R-square value, signifying that the selected independent variables can describe 40.6 percent of the variance in Kenya’s capital markets development, whereas the other 59.4 percent was attributable to other factors not surveyed in this research. The F statistic was significant at a 5% level with a p=0.001. This proposes that the model was satisfactory for explaining capital markets development in Kenya. Further, the results demonstrated that financial regulations had a positive and significant influence on Kenya’s capital markets development. Interest rate and inflation had no significant influence on Kenya’s capital markets development. Unemployment rate had a significant negative influence on capital markets development in Kenya. The study recommends the need for practitioners and policy makers to ensure that the level of financial regulations quality keeps on improving as this will enhance capital markets development in the country. Policy makers should also work towards developing policies aimed at reducing unemployment rate as this is an important determiner of capital markets development. Future studies can focus on other determinants of capital markets development in Kenya and other countries or regions.