The Effect of Capital Market Deepening on Economic Growth in Kenya

Abstract

This study examines the effect of Capital Market Deepening on Economic Growth in Kenya. The capital market is important since it connects the financial sector with other non-financial sectors of the economy. Controversy exists among researchers on the role of deep capital markets in growth. The objective of the research was to determine the effect of Capital Market Deepening on Economic Growth. The finance growth nexus forms the basis of the research with the capital market assumed to have a supply leading effect on economic growth. Empirical evidence on the role of capital market has been inconclusive on the effect on economic growth. The study adopted correlational research design to identify the effect of capital market deepening variables on growth. A multi variate regression model was used to regress the independent variables against the dependent variable with the dependent variable being Real GDP of Kenya and the independent variables being Stock Market Turnover Ratio, Bond Market Turnover Ratio, Value Traded Ratio, Market Capitalization Ratio and Stock Market Size. Data from the Nairobi Securities Exchange from 1992-2011 and GDP data from The Kenya National Bureau of Statistics were used in the study. The findings indicate that three out of the five Capital Market Deepening variables have a significant positive effect on GDP, with Value Traded Ratio and Market Capitalization Ratio having significant negative correlation with GDP growth. The study therefore concludes that Capital Market Deepening has a significant positive effect on GDP growth in Kenya and therefore lends support to the finance growth nexus. The study recommends that the government should take policy initiatives to foster growth of the capital market and especially so; the bond market which is instrumental in providing finance for capital intensive infrastructure projects in order to achieve the Vision 2030 socio economic blue print.