The relationship between capital market development and economic growth in Kenya

Abstract

This study examines the relationship between capital market development and economic growth in Kenya. Capital markets in the world individually and collectively play a critical role in the national economies. However, controversies do exist on the role of capital markets in an economy. For instance, Singh (1997) argued that stock market might not be important in attaining higher economic growth while Levine and Zervos (1998) find that stock market development plays an important role in predicting future economic growth. This study has used data from 1990 - 2012 and has employed a multiple regression model technique. The objective was to establish the relationship between capital market development and economic growth in Kenya. From the results, it was revealed that there was a negative relationship between stock market development indicators and economic growth in Kenya. The data collected for the study was analyzed using a multivariate regression model. Statistical package for social sciences (SPSS) version 21 was used to aid in analysis of the data. The independent variables of this study are market capitalization ratio, stock traded total value ratio, turnover ratio and number of listed companies at the NSE. Where y was economic growth indicated by GDP annual growth rate, xl was MCAR,x2 was TTVR, x3 was TOR and x4was NC. This study finds that turnover ratio and number of listed companies rarely affects the growth of the economic sector. This study also revealed that market capitalization ratio and stock traded total value ratio have a positive relationship with economic growth. The study recommends that NSE needs to be developed further to enhance domestic resource mobilization. Policymakers should encourage stock market development.