The relationship between financial market development and economic growth in east African community

Abstract

Financial market development can be defined as the policies, factors, and the institutions that lead to the efficient intermediation and effective financial markets. A strong financial system offers risk diversification and effective capital allocation. The greater the financial development, the higher would be the mobilization of savings and its allocation to high return projects. Levine, (1993) emphasized to consider the importance of financial sector in economic growth. Economic growth is the sustained increase in welfare of an economy nation, region, city together with the ongoing changes in that economy's industrial (Ray 1998). Economists and many other social scientists have focused, primarily although not exclusively, on growth in per capita income as the preferred measure of economic growth. Economic growth is conventionally measured as the percent rate of increase in Gross domestic product (GDP). Economic growth will be dependent variable in the study, while Financial market development being independent variable and is analyzed through indicators such as; interest rate spread, nonperforming loans in financial institutions, broad money growth, domestic credit to private sectors and market capitalization. This study will tend to answer how financial market indicators relate to economic growth in East African Countries. The population of study focuses on the five official EAC member countries namely: Kenya, Uganda, Tanzania, Rwanda and Burundi for a six year period between the years 2008 to 2013.Secondary data was collected for the study for a period of 6 years 2008 to 2013.Data analysis was done using SPSS Version 20 whereby multiple regressions were employed; the findings suggest that 19.4% of variations in economic growth in EAC are explained by variations in the five financial development indicators under study. The study establishes positive relationships between market capitalization, money growth and economic growth and negative relationships between ratio of credit to private sector to GDP levels, levels of nonperforming loans and interest rate spreads to GDP