Capital market, financial deepening and economic growth in Kenya

Abstract

Financial sector plays a crucial role in economic development. The depth of the financial sector has generally been found to promote economic growth. It has been observed that well functioning capital markets increases economic efficiency, investment and growth. Kenya’s capital market has been described as narrow and shallow. The stock market and private bond market have been raising less than 1% of growth financing. The vision 2030 development plan aims to achieve an annual economic growth of 10% with an investment rate of 30% to be financed mainly from mobilization of domestic resources. There has been significant focus on the capital market with for example the institutional development of the stock market and introduction of new instruments in the bonds market. It has been assumed that these efforts will facilitate mobilization of adequate resources and allocation of these resources efficiently to achieve growth objectives. This study therefore aims at answering the question on whether capital market deepening facilitates economic growth. This is analyzed by studying the contribution of the capital market in financing investment, the relationship between capital market deepening and productivity and finally, the relationship between capital market deepening and economic growth.