The Effect of Banking Sector Development on the Economic Growth in Kenya

Abstract

The synergy between banking sector development and economic growth creates a seamless flow of mutual influence, resembling a harmonious dance of progress. Central to this relationship is the pivotal concept of capital formation and investment. As the banking sector expands, it effectively collects savings from individuals and businesses, channeling these funds into investments that support economic growth. This study aimed to examine the effect of banking sector development on the economic growth of Kenya. To achieve this, the researcher adopted a quantitative descriptive research design, analyzing a dataset that spans an extensive time frame of ten years, covering the period from 2014 to 2023. The data was collected quarterly from the CBK, the KNBS and the KBA. The compiled data underwent a meticulous sequence of essential steps, beginning with editing and coding, followed by analysis using SPSS. Multiple regression models proved invaluable in this context, rigorously analyzing the data. R-Square value of 0.807 demonstrates that 80.7% of the variation in GDP can be accounted for by the predictor variables in the model, highlighting its substantial explanatory power. The outcomes unveiled that an increase of one unit in the size of the banking industry outcomes in a 0.001 unit increase in GDP, significant when all elements are held constant (B = 0.004, p = 0.000 < 0.05). Additionally, an increase of one unit in banking sector stability corresponds to a GDP increase of 0.247, also significant (B = 0.247, p = 0.03 < 0.05). In contrast, an increase in lending rates leads to 0.169 units increase in GDP; however, this effect is not statistically significant when all variables are controlled (B = 0.169, p = 0.078 > 0.05). Nonetheless, lending rates act vital position in determining economic growth. Furthermore, an increase of one unit in the banking sector efficiency results in 0.014 unit increase in GDP, which is significant (B = 0.014, p = 0.007 < 0.05), indicating that the efficacy of the banking sector significantly influences economic growth. Moreover, an increase of one unit in inflation results in 0.273 units increase in GDP, significant as well (B = 0.273, p = 0.006 < 0.01). This outcomes illustrates the link amid inflation, measured by the Consumer Price Index (CPI), and economic growth. Tomorrow research should consider incorporating additional variables that influence economic growth, such as foreign direct investment, government spending, and consumer confidence. Moreover, integrating qualitative methods, such as interviews or surveys, could provide de