The relationship between financial sector development and economic growth in Kenya

Abstract

Kenya’s financial sector development has had a major role in its economic growth and this study provides a selected review of the literature and the relationship between Kenya’s financial sector and its economic growth. Several studies have been done on the effect of the financial sector on economic growth and the general conclusion is that the financial sector plays a central role in economic development and growth of the Country however; there is a limitation of empirical and theoretical work supporting the concept in developing countries especially in Africa. The research objective is aimed at enhancing the understanding on the relationship of the financial sector development on economic growth in Kenya by studying four major components of the financial sector namely labor, capital stock accumulation, liquid liabilities and exports. This study was carried out using secondary data for a period of 24 years (1990-2013) and was obtained from CBK and the Kenya National Bureau of Statistics. The relationship has been expressed in form of descriptive and regression analysis and it showed that the economic growth can be achieved through a productive labour force, enhanced capital formation, increased exports and a reduction in the liquid liabilities. The study established that indeed the relationship between Kenya’s financial sector development and its economic growth is strong and that the Kenyan economy will grow positively independent of the financial sector development. Therefore this study recommended that the Kenyan Government should identify other major components of the financial sector development apart from the four studied in this paper and put up in place well -structured policies that will support them and further develop the financial sector with the aspirations under the Kenya Vision 2030. The study is however limited in that the findings are only applicable in the Kenya context and this paper has not stated if the findings are similar to other developing African Countries and if the findings can be used beyond 2013. Lastly, the study recommended that further research should include behavioral financial issues other than historical data only as this will explain the variation in economic growth rate beyond historical data on the financial sector development variables. In addition, it recommended that further studies to include both developing and developed Countries in order to enhance the findings and provide more room for generalizability as this will provide more information and variable results