Causal Effect Relationship between Financial Deepening and Economic Growth in Kenya

Abstract

The study sought to establish the effect of financial deepening on the economic growth of Kenya. The research design adopted for this study was descriptive. Secondary data used in this study was sourced from the Nairobi Securities Exchange, Central Bank of Kenya websites and Kenya National Bureau of Statistics as well as World Bank development indicators. The study population was quarterly data for 11 years giving a total of 44 observations per variable. The study used both descriptive and inferential statistics in analyzing the data. First, the data collected was sorted, classified and collated. Descriptive statistics such as mean and standard deviation for each variable were calculated and tabulated using tables and inferential statistics. The STATA computer software was used in the analysis of data. Data was analysed using inferential statistics informed by regression and correlation analysis. To measure the effect of financial deepening on the economic growth of Kenya the researcher used regression analysis. The effect was examined at a 95% confidence level while employing a student t-test. The data was subjected to diagnostic tests to evaluate conformity with multiple regression model assumptions.  The study employed normality, heteroscedasticity, multicollinearity, serial correlation and unit root diagnostic tests. The study results established that banking deposits had a statistically insignificant effect on economic growth measured, capital market capitalization had a statistically significant effect on economic growth, Mobile banking had a statistically significant effect on economic growth and that direct capital inflows had a statistically significant effect on economic growth. The study concludes that financial deepening has a significant effect on the economic growth of Kenya.