Finance-growth nexus in Kenya

Abstract

Financial institutions by collecting and analyzing information from many potential Investors, channel invertible funds to the investment activities that yield the highest returns and this allows the projects to be undertaken more efficiently: hence stimulating investment and growth. Oil the other hand, the process of growth has feedback effects on financial institutions, since by stimulating higher participation in the financial markets: this facilitates the creation and expansion of financial institutions.

This paper presents an empirical analysis of the finance- growth nexus between financial deepening; as measured by percentage of private credit to CDP and percentage of private credit to total domestic credit; and economic growth for the period 1970- 2002. Granger causality lest then suggest demand following prevailed, deduced from the bi-variate granger rests and the VAR decomposition. Both show a uni-directional causality running from real per capita income to the ratio of private credit to CDP. The financial depth equation specified as a demand junction jar credit to the private sector, shows a negative and significant coefficient of income and a positive insignificant coefficient of real savings rates.