Factors influencing the demand for credit by the private sector in Kenya

Abstract

The main objective of this study was to determine the effects of selected macroeconomic variables on the demand for credit by the private sector in Kenya. The study used annual time series data for the period 1980-2012. This was obtained from Kenya National Bureau of Statistics, World Development Indicators and supplemented by Central Bank data. The study used OLS method. The findings were as follows; public investment, short term interest rate, long term interest rate, employment and domestic debt have a positive effect on demand for credit by the private sector, whereas per capita GDP and exchange rate have a negative effect on demand for credit by the private sector. The policy implication of these results is that the government should consider reducing taxes and cost of borrowing in order to improve productivity. In addition, the government should devise strategies aimed at improving the competitiveness of her currency. The choice of monetary policy should consider the impact on exchange rate in order to ensure stability in the interest rate. Finally the policy makers should create fiscal space in the government budget to finance greater public investments. This can be achieved by broadening the tax base, reducing exemptions and simplifying the tax system so as to include elements in the informal sector not currently captured by the tax system. They should also strengthen and give a face-lift the strategies to improve efficiency and quality of public investment management processes.