Macroeconomic Variables Diaspora Remittances and the Growth of Bond Markets in Kenya

Abstract

The growth of the bond market is critical to the economy and the development of financial systems in various countries, and it has continued to rise across borders. Bond market growth contributes to the economy by attracting foreign investors, providing an efficient economic system, offering greater investment opportunities and deepening of the financial markets. A country with a macro-economic environment that is stable results in vigorous bond markets. The general objective of the study was to examine the effects of macroeconomic variables on the growth of bond markets in Kenya. This study specifically focused on the influence of inflation rate, interest rate, exchange rate and gross domestic product on the growth of bond markets in Kenya. In addition, the study evaluated the diaspora's remittance as a moderating variable on the relationship between macro-economic variables and the growth of bond market. The population of the study consists of 240 monthly market observations. For this study, a census survey was carried out. To achieve the study's objectives, four theories were used; inflation and money illusion theory, liquidity preference theory, purchasing power parity theory, pure self-interest theory and endogenous growth theory. Secondary data was gathered from the Kenya National Bureau of Statistics, the Nairobi Securities Exchange, and the Central Bank of Kenya. The research design used in this study was descriptive casual survey. Using a secondary data collection sheet, a twenty-year period from 2001 to 2020 was covered. Diagnostic tests were conducted to prevent adverse effects caused by wrong measurements in the regression model. Time series regression analysis was used to determine the relationship between the independent variables, moderating variable, and dependent variable. Tables, figures, and graphs were used to present the data. The findings revealed that there was a positive significant influence of the inflation rate, interest rate, exchange rate, and GDP on the growth of bond market. As a result, it was concluded that the inflation rate, interest rate, exchange rate, and GDP have an influence on bond market growth. The moderating variable of diaspora remittance also had a significant moderating effect on the relationship between macroeconomic variables and the growth of bond market. The study recommended that the government and its fiscal agents to review policy on monetary issues to regulate inflation levels in the economy, control interest rate charged thus stabilizing them to encourage investment, apply monetary policies and regulations to monitor exchange rate fluctuations in the market and come up with policies and measures that improves the productivity in the country. The national assembly needs to provide a conducive environment for diaspora investors through the formulation of favorable investment policies, ensuring political stability, minimizing bureaucracy, managing corruption and educate them on the importance of investing back home. Further research should also be done, taking into account additional macroeconomic variables not covered in the study.