The Causality Between Financial Development and Energy Consumption in Kenya

Abstract

Despite the high demand for energy in Kenya, the Kenyan financial sector has very little to gain from it. Moreover, the financial sector has rarely participated in the energy industry in Kenya. Therefore, the study sought to examine the causal relationship between financial development and energy consumption in Kenya. The study employs the Engle-Granger Cointegration test, Augmented Dickey Fuller unit root test, and the Granger causality test to investigate the nature of relationship between energy consumption and financial development in Kenya for the 1970-2014 period. The results indicate that energy consumption Granger-causes financial development and not vice-versa (financial development does not Granger-cause energy consumption). Based on this, the study recommends policies that focus on improving and encouraging energy consumption by households and firms as energy consumption has been seen to drive financial development.