Determinants of Financial Development in Kenya

Abstract

The purpose of the study was to establish the determinants of financial development in Kenya. The study specifically focused on the effects of: Firm-specific institutional quality, financial openness, economic growth and trade openness on financial development of financial institutions. The study also assessed the moderating effect government policies on the relationship between financial development and its determinants in Kenya. The study employed descriptive research design for a selected period of seven years covering 2010 to 2015 with a target population of the 236 financial institutions. Stratified sampling was adopted which was appropriate for getting a sample from the heterogeneous population given that the financial sector had different institutions offering different financial services. Primary data was collected through self-administered questionnaires send to the managers of the various financial institutions. Also secondary data was collected from Kenya National Bureau of Statistics, Central Bank of Kenya, Insurance Regulatory Authority and Capital Market Authority. Data analysis was done using statistical package for social science (SSPS). Descriptive statistic were used to present the findings of the study supported by Analysis of Variance (ANOVA), Multiple Regression and Correlation Analyses being undertaken to test the hypotheses and provide inference. The variables namely institutional quality, financial openness, economic growth and trade openness were found to determine the financial development in Kenya. However, trade openness was not statistically significant. Further, the effects of the determinants on financial development were seen to be heavily moderated by government policies. The study recommended strengthening of institutions (in terms of credit risk management, financial structure and corporate governance/management efficiency), pursuance of expansionary policies by government to spur economic growth, attracting foreign investment in financial institutions and increasing external trade volumes by opening up more of the Kenyan economy.