DOES FINANCIAL SECTOR INFLUENCE LONG-RUN GROWTH IN KENYA: A CAUSALITY TEST

N. V. Zacchaeus; v Kanali

N. V. Zacchaeus School of Business and Economics, Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya
v Kanali School of Engineering, Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya

Keywords: Financial sector development, economic growth; Vector autoregressive (VAR; Granger causality test, Kenya

Abstract

The study examined the relationship between financial sector development and economic growth in Kenya using quarterly data from 1996 to 2016 in a Vector Auto Regressive (VAR) framework. The Granger causality test results show unidirectional causality running from money supply (MS3), bank deposit liabilities and private credit to economic growth. The test results also indicate that there is significant and unidirectional causation running from foreign exchange market and stock market to economic growth. The causation between financial sector development and economic growth in Kenya is actually sensitive to the choice of measure for financial depth and, therefore financial development leads to economic growth. In light of the above results, authorities should be concerned with implementation of key reforms which are instrumental to both sectors for a well-developed financial market. In addition, proper utilization of public funds and provision of support theories of growth for a well-functioning financial market (or system) is greatly essential in promoting and accelerating economic development.