The impact of financial liberalization on selected financial sector development indicators in Kenya

Abstract

This paper highlights issues of financial sector reform and its impact on financial sector development. The paper first gives a brief background on economic liberalization which encompasses financial liberalization. It then outlines the perceived benefits of financial liberalization to the financial sector from a theoretical standpoint and assesses whether these have actually been realized in Kenya. Financial liberalization is a broad topic and its total impact to the financial sector cannot be exhaustively covered in this paper. Various studies have been conducted in sub-Saharan countries to assessthe impact of financial liberalization on the financial sector. Such studies have concentrated on only a few selected financial sector development indicators and this paper therefore seeks to replicate the same for the Kenyan financial sector. The results of these comparative studies have been summarised in the literature review. The study focuses on three indicators of financial sector development which have been used in similar studies on Sub-Saharan-e.conomies. These indicators are the degree of financial deepening as peroxide by the ratio of broad money (M2) to Gross Domestic Product (GDP), the spread between commercial banks' lending and deposit rates and the real interest rate. The results of the data analysis on financial liberalization have been dismal; despite a modest increase in financial depth in the financial sector, the spread between deposit and lending rates has widened whilst the real interest rates increased but savings remained low. The results from this study on Kenya are therefore mixed and have not conclusively confirmed the theoretical postulates.