The Relationship Between Financial Deepening and Economic Growth in Kenya

Abstract

This study is an attempt to contribute to knowledge concerning to relationship between financial development and economic growth in literature. Based on the theory of financial deepening from the perspectives of monetization ratio we analyzed the relationship between financial development and economic growth in Kenya using the Johansen Cointegration analysis. The paper examines empirically the causal link between financial deepening and economic growth in Kenya. The Johansen Co-integration techniques within a bi-variate vectorauto-regressive framework were used for the regression. Using annual time series set of data on Kenya over a period of twenty one year (19912012), the result of the study shows that, there is a statistically significant positive relationship between the Financial Deepening and Economic Growth in Kenya. Despite the financial liberalization, the crafting of Vision 2030 blue print and the promulgation of the new Constitution over the period, the outcome is in line with the results found for most of the literatures reviewed. In this regard, it is recommended that the Government should encourage competition in the financial sector, technology, small and medium enterprises and micro finance development as these will improve and increase outreach and access to credit at a lower cost. It will also boost private sector development and investments which is the engine of growth and development. This study will help policy makers in decision making as well as serve as a source of reference for further studies. Further studies are recommended to increase the frontiers of this study particularly on the role of financial sector development in order to gain a more conc1usiveunderstanding of the finance-growth nexus in a transitional country like Kenya.