Assessing The Role Of The Capital Markets As An Engine For Economic Growth In Kenya

Abstract

The study assesses Kenya's capital market as an engine for economic growth. Generally, capital markets facilitate mobilization of capital for development and provide savers with an alternative saving tool. Funds that would otherwise have been consumed or deposited in bank accounts are re-directed to promote growth in various sectors of the economy as people invest in securities. Economic growth is promoted through improved efficiency in mobilization of savings as capital is allocated to investments that bring the most value to the economy. Long term savings are, therefore, mobilized for financing long term ventures through competitive pricing mechanisms. Kenya's capital market, just like any other capital market in the world, provides enterprises with a non-bank source of financing through the sale of shares to the public. It provides not only the substitution but also diversification of risk to entrepreneurs as they raise capital through equity. The Kenyan government and local authorities use the capital markets as an alternative source of funds to increase taxes in order to finance development projects. Through the issue of bonds to the public, funds are raised for different types of projects. As an instrument of privatization, the capital markets has provided an avenue of liberalization of sectors previously dominated by the government and facilitated public divestiture of its shares in public enterprises such as Kenya Commercial Bank, Kenya Airways, Mumias Sugar Company, among others. The capital markets encourage broader ownership of firms. The general public is accorded an opportunity to have ownership rights over listed enterprises thus helps to reduce large income inequalities through the sharing of profits made by the enterprises resulting in wealth re-distribution. In addition, the capital market facilitates improved corporate governance. Public companies tend to have better management records than private companies because of the improvement of management standards and efficiency to meet the demands of shareholders and the capital markets authority (CMA) under its corporate governance rules. Investors are accorded the opportunity to buy the number of securities affordable to them, thereby facilitating the small investor's source of extra v income. This is in contrast to other means of investments that require large capital outlays that are not within the reach of small investors be they individual or institutions. The activity in the capital market serves as a 'barometer' for the performance of the economy. The movement of shares is an indicator of the general trend in the economy because share prices tend to rise or be stable when the economy and the relevant companies are stable and growing. The Kenyan capital market however faces impediments in its development. These include weak macro-economic environment, lack of awareness, state of market infrastructure, legal framework and limited scope of products and services. The prevalence of such impediments among others may explain why companies have continued to prefer using retained earnings, family savings and bank loans (overdrafts) to finance their operations