The impact of financial sector deepening on economic growth in Kenya

Abstract

The depth of the financial sector has generally been found to promote economic growth by increasing economic efficiency, investment and growth. Financial sector deepening enable the financial intermediaries perform their functions of mobilizing, pooling and channeling domestic savings into productive capital more effectively thereby contributing to economic growth of a country. This study set to establish the impact of financial sector deepening on economic development in Kenya. The study adopted a Quantitative comparative design. The target population for this study was: 44 banking institutions (43 commercial banks and 1 mortgage finance company MFC), operating in Kenya as at 31 st December 2011. The study used secondary data collected from the Central Bank of Kenya and Deloite reports. Since the data used was secondary data, the study conducted a census of the Banking sector where all the 44 commercial banks were included. The use of secondary data was justified on the basis that some of these sources have information that was very pivotal to this study and has been vetted and accepted. This study established that the financial sector was stable during the study period as witnessed by the stable number of banking institutions following stringent regulations by the Central bank of Kenya which had reduced the frequency of commercial banks becoming bankruptcy. During the period of the study (2007-2011), financial sector deepening was high as the commercial banks strived to leverage their operations through adoption of new technologies including automation of bank process and adoption of Automated Teller Machines as opposed to offering their services only through physical brick and mortar branches. The economic growth started at a high of 7.1 then fluctuated to a low of 1.5 in 2008. This study therefore recommends that the Government of Kenya ensure efficiency in its regulation and supervision of all financial institutions in allowing more private banks and non-bank financial institutions to broaden their financial market to accelerate financial development and improve the financial structure that leads to increase economic growth of Kenya. The study further recommends that the Government through its relevant offices promote the development of Microfinance institutions as they play a key role in deepening financial services in Kenya and in the alleviation of poverty especially in the rural areas.

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