The Effect of Financial Structure on Economic Growth: The Case of Kenya

Naomi Mathenge and Eftychia Nikolaidou
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Naomi Mathenge: School of Economics, University of Cape Town

No 2018-06, School of Economics Macroeconomic Discussion Paper Series from School of Economics, University of Cape Town

Abstract: his study examines the effect of financial structure on economic growth in Kenya. Kenya is an interesting case study, as it has experienced a number of financial innovations and has a relatively well-developed financial system, but still faces low levels of economic development. The study employs the Autoregressive Distributed Lag approach to cointegration, and considers the independent role of banks and of stock markets, along with the role of financial structure. The results show that the financial structure is not significant in influencing growth in Kenya. Stock market development is, however, found to have a significantly positive effect on the country’s economic growth. This is possibly because Kenya was one of the first SSA countries to develop an alternative investment market aimed at small and young firms. The role of banking sector development has a negative effect. This finding can be partly explained by the large proportion of non-performing loans accumulated by Kenyan banks in the 1980’s and the 1990’s, along with a weak legal and regulatory framework.

Date: 2018
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