Relationship between financial deepening and economic growth in Kenya

Abstract

Financial deepening has been found to promote economic growth by its ability to mobilize more investments thereby making financial resources readily available, and hence raises productivity. They are found important as they play intermediation role, by channeling funds from surplus units (savers) to deficit units (investors). The aim of this study investigated the relationship between financial deepening and economic growth from 1994 to 2015. The objectives of the study were to determine the relationship between commercial banks liquid liabilities and the economic growth in Kenya, establish the relationship between credit tothe private sector by commercial banks and the economic growth in Kenya, establish the relationship between commercial and central banks‟ asset ratio and the economic growth in Kenya, determine the relationship between commercial bank deposits and the growth of economy in Kenya and to determine the causal linkage between financial deepening and economic growth in Kenya. The research design was a causal and longitudinal research designs. The target population was all the 44 commercial banks in Kenya excluding bank under receivership. Due to the manageability of the population, the researcher did a census study. The study used secondary data collected from published documents of the Kenya Bureau of Statistics and Central Bank of Kenya. The study employed co integration test to determine the long run relationship between the variables and the study established that there was co integrating relationship between the financial deepening indicators and economic growth, meaning there was a significant relationship between the financial deepening on economic growth in the longrun. The study concluded that financial deepening propels economic growth because the variables of financial deepening were more significant in explaining economic growth, therefore supporting the supply leading hypothesis. The study recommended that the monetary authorities to bridge the gap existing between lending rate and deposit rate, foster a moderate rise in nominal rates and stabilize inflationary pressures, need to sustain a higher level of macroeconomic stability in Kenya, reduce the high incidence of non performing credits ensure that private sector credits are channeled to the real sector of the economy and the monetary authorities should continue with the policy reforms to consolidate the emerging confidence in the financial system.