The Relationship Between Selected Macroeconomic Variables and Private Sector Credit in Kenya

Abstract

The main purpose of the study was to evaluate the relationship between selected macroeconomic variables and private sector credit in Kenya. The study was guided by the following specific objectives: to evaluate the effect of GDP per capital; interest rate; inflation rates and exchange rate on private sector credit in Kenya. The study employed an explanatory research design. The target population of the study comprised of time series data for Kenya on Gross Domestic Product (GDP), aggregate private sector credit (CR), inflation (IFLN) and interest rate (IR). The study used time series data from 1990 to 2011. There were 120 observations that were sampled for the purpose of the study. The study made use of secondary data. The main source of the main data was the World Bank data base through the official World Bank website and supported by data from the Central Bank of Kenya data base at the research department. The study used Autoregressive Distributed Lag (ARDL) model to establish the long run relationship between aggregate private sector credit and GDP in Kenya. The study established that inflation exceeds some critical level then it hampers economic growth, otherwise inflation has a favorable impact on growth. The relationship between selected macroeconomic variables and the private sector credit in Kenya. The dependent variable was private sector credit while inflations, interest rates and the gross domestic product were independent variables. The independent variables were found to be statistically significant in explaining the level of credit in the private sector. The study concludes that emerging market credit booms have not, on average, resulted in higher inflation partly reflecting the high degree of trade openness in these economies but rather have led to a deterioration of the current accounted nominal exchange rate appreciation. The study recommends that a further in-depth study on the effect of other macroeconomic variables that were not taken into account in this study. A similar study should be conducted over a longer period of time for example twenty years to try and see the behaviour of the selected macro -economic variables and private sector credit over such a longer period in the private sector.