Effect of Foreign Portfolio Flows on the Growth of Capital Market in Kenya

Abstract

This comprehensive study investigates the intricate relationship between foreign portfolio flows and the growth of Kenya's capital market. Employing a robust descriptive research design, the investigation methodically evaluates the negative relationship between FPFs and the growth of the capital market, leveraging a blend of qualitative and quantitative data. Secondary data sources, including market data, scholarly papers, and government publications, were collected over the period from 2013 to 2022. The analysis, encompassing diagnostic test applying ADF test for stationarity and significance tests using the coefficient of determination (R-squared), provided a comprehensive understanding of the examined variables. The findings unearth a statistically significant negative correlation between FPFs and the growth of Kenya's capital market, challenging assumptions of a straightforward association. This finding prompts a paradigm shift in policymaking, urging authorities and market players to acknowledge and navigate the complexities of this relationship. Furthermore, the study recommends the integration of macroeconomic stability factors with FPFs, such as foreign exchange rates and the CBR, as a strategic approach to mitigate adverse effects and foster favorable relationship that lead to capital market expansion. In recognizing the multifaceted nature of the financial markets, the study highlights the influence of microeconomic factors, such as the CBR and foreign exchange rates, in mediating the negative impact of FPFs. It underscores the importance of a comprehensive awareness of these factors for informed decision-making. The implications of this research extend to the policymaking arena and market strategies, emphasizing the need for a holistic understanding that surpasses the variables considered in this study. As a contribution to existing literature, this study sheds light on the intricate association between FPFs and the growth of Kenya's capital market. However, it also underscores the existence of unidentified determinants influencing the dynamics of the capital market, highlighting the need for ongoing research to explore these complexities further. Future studies in this field are encouraged to refine the treatment of FPF data, differentiate between inflows and outflows, and extend the temporal scope to encompass longer-term trends and sudden changes in the dynamic characteristics of financial markets. In navigating Kenya's financial landscape, such insights are essential for making informed decisions and fostering sustainable capital market growth.