Assessing the impact of private sector credit on economic performance: evidence from sectoral panel data for Kenya

Abstract

Despite the growing literature on financial development-economic growth nexus, there is paucity of empirical studies that explore the impact of access to credit and economic performance at the sectoral country level, as an increasing number of studies largely focus on cross-country analyses. This paper investigates the impact of access to bank credit on the economic performance of key economic sectors using sectoral panel data for Kenya. We find a positive and significant impact of credit on sectoral gross domestic product measured as real value added. However, the magnitude of the impact is smaller once factors such as the labour employed and past economic performance of the sectors are taken into account. Policies aimed at financial sector deepening and increasing access to credit are of essence to enhancing economic performance. Such policies should, however, be complemented with strategies that enhance efficiency of the key sectors of economy.