Effect of Financial Liberalization on the Liquidity of Securities Exchange Market in Kenya

Abstract

Financial experts have always considered capital market as the central element of the economies financial success, the Kenyan stock market is still small compared to the stock markets in other emerging markets, it is largely dominated by some few large firms that representing a high proportion of total market capitalization. The number of listed firms is also small, Kenyan stock market just as many African stock markets are illiquid, Shares are rarely traded and there are large gaps between buy and sell orders. Usually, trading occurs in only a few stocks, those that represent the majority of market capitalization, Low liquidity implies that there is difficulty in supporting a local market with its own trading systems, market analysis, and brokers because business volume is too low. The finance experts’ view that foreign investment benefits to developing economies by increasing the availability of capital, based on this view, the capital deficient countries heavily resort to foreign financing as the primary source to achieve rapid economic growth and through their positive impact on productivity and the general economic well-being of the host country. The study aimed to establish the effects of financial liberalization on the liquidity of securities exchange market in Kenya. The study identifies the position of stock market liquidity at Nairobi security exchange during the period from 2000 to 2015. For measurements of liquidity at NSE the study used four measuring tools: foreign exchange variability, liberalization index, market volatility, and capital inflow. Also, the study aimed at establishing the moderating effect of market risk on the stock market liquidity. The model adopted for testing the relationship in a simple regression model. It was established that foreign exchange variability, liberalization index, market volatility, and capital inflow did have significant effect upon the securities exchange market in Kenya. This study was motivated by the assumption that this discussion ignored the experiences of developing countries in their early phase of industrialization. In addition, there is a lack of proper attention on the analysis of the issue of capital inflow in the context of neo-liberal economic reforms and financial deregulation. Large swings in capital flows into and out of emerging markets can potentially lead to excessive volatility in asset pricing and supply of credit in the economy. The study adopted a mixed research design approach guided by a complex factorial and analysis research design and a purposive sampling technique. This study reviews Kenya’s experience with large capital inflow over 15 years (2000-2015). The findings of the study revealed that the moderating effect of market risk on the foreign exchange variability, liberalization index, market volatility, and capital inflow was valid on individual case analysis and not in a joint case analysis. Setting of consistent interest rates suitable for Kenya’s economic growth, implementation of open market operation to keep track of the evolving monetary aggregates, management of stable and competitive exchange rates and implementation of proper economic policies relating to the exchange rate regime are the recommendations that the study made.