Effect of Financial Liberalization on Stock Market Development in Kenya

Abstract

Neoclassical theory asserts that via financial liberalization, developing nations can improve growth and savings, and cause a reduction on overdependence on foreign capital. The theorists behind financial liberalization make an argument that it should improve savings and investment in developing nations thereby resulting in higher growth. However, Keynesian economists argue that positive impacts of liberalization on savings and investment are doubtful. The objective of this research was to determine the effect of financial liberalization on Kenya’s stock market development. The study was based on financial liberalization theory, neoclassical theory and efficient market hypothesis. The independent variable was financial liberalization while the control variables were; interest rate, inflation and public debt. The dependent variable that the research attempted to explain was stock market development in Kenya. The data was obtained on a quarterly basis for a duration of twenty years (from January 2002 to December 2021). A descriptive research approach being utilized in the research, with a multivariate regression model utilized in examining the link between the research variables. The research conclusion depicted a 0.172 R-square value, signifying that the selected independent variables can describe 17.2 percent of the variance in Kenya’s stock market development, whereas the other 82.8 percent was attributable to other factors not surveyed in this research. The F statistic was significant at a 5% level with a p=0.006. This proposes that the model was satisfactory for explain stock market development in Kenya. Further, the results demonstrated that financial liberalization had a positive and significant influence on Kenya’s stock market development. Interest rate and inflation had no significant influence on Kenya’s stock market development. Public debt had a significant negative influence on stock market development in Kenya. The study recommends the need for practitioners and policy makers to ensure that the level of financial liberalization keeps on improving as this will enhance stock market development in the country. Policy makers should also aim at developing policies aimed at ensuring sustainable public debt as this is an important determiner of stock market development. Future studies can focus on other determinants of stock market development in Kenya.