The effect of government bonds on capital market growth in Kenya
Interest in the relationship between the real and the financial sector has usually been on the banking sector and the stock markets, thus mostly leaving the Bond Markets out as a third essential source of external finance. The capital markets play important roles in the economic growth of a country. The role of public debt in promoting economic growth in Kenya has been the subject of much debate among economists, development specialists and researchers. In spite of this, there are only few empirical studies that investigate the contributions of public debt and in this case, the issuance of Treasury/ Government bonds to capital market growth in Kenya. This gap is filled by providing empirical evidence to establish the relationship between the capital market growth (represented by market capitalization) and issuance of Government Bonds in Kenya. This study explores the relationship between issuance and performance of Treasury/ Government bonds and capital market growth in Kenya using data that spans from the year 2004 to the year 2014 and establishing through causal study if changes in one variable cause changes in the other. The time series data is on market capitalization, market capitalization of bonds, value of bonds traded and total new issues of bonds. Regression analysis is used to analyze the data used in this study. The results show that the issuance of Government bonds has a positive effect on the level of capital market growth in Kenya. The findings imply that Kenya could enhance its capital market growth by effectively and strategically strengthening the Bonds market and the uptake of Government Bonds. The conclusion of the study is that the supply-leading hypothesis of capital market growth prevailed in Kenya during the period under study from 2004 to 2014. It is recommended therefore that the regulatory authority should initiate policies that would encourage more companies to access the market and also be more proactive in their surveillance role in order to check sharp practices which undermine market integrity and erode investors‟ confidence.