Abstract
The relationship between financial sector development and economic growth is a crucial issue for both developing and developed nations. To keep up with the changing world economy, there is need for developing countries like Kenya to develop their financial sectors. Kenya’s financial sector development has had a major role in its economic growth and this study provides a selected review of the literature and the relationship between Kenya’s financial sector and its economic growth. Numerous studies have been done on the effect of the financial sector on economic growth and the general conclusion is that the financial sector plays a central role in economic development and growth of the country. However, there is a limitation of empirical and theoretical work supporting the concept in developing countries. Most of the studies done focus on the direction of causality between finance development and economic growth and their relationship. For this reason, the study set out to analyze the influence of financial sector development on Kenya’s economic growth. The Neo-classical theory of growth was used to inform the study variables; banking sector, export market and economic growth. The study adopted an ex-post facto research design with Ordinary Least Square (OLS) method. The data used was secondary in nature obtained from the Kenya National Bureau of Statistics from the period 2010-2019. The findings revealed that there was a positive influence of financial sector development on economic growth. This implies that financial sector development promotes economic growth in Kenya. In policy terms, the findings, imply that Kenya can accelerate economic growth by improving the financial sector since financial development can be an engine of growth in this country. The study recommended that other major components of the financial sector development apart from the two studied; banking sector and export market, in this paper should be studied and put up in place well -structured policies that will support them and further develop the financial sector with the aspirations under the Kenya Vision 2030. Keywords : Financial sector development, Economic growth DOI: 10.7176/RJFA/12-2-01 Publication date: January 31 st 2021
Highlights
Economic growth is vital to every country across the world
A South African study by (Rangasamy, 2009) on exports and economic growth, The study purported that economic policy has always accorded an important role to export production in the overall growth process in South Africa
The gross domestic product (GDP) accounting identity underestimates the contribution of exports to economic growth
Summary
Economic growth is vital to every country across the world. Financial development includes the expansion of financial services and the growth of financial institutions as well as an increase in per capital amount of financial services and institutions or an increase in the ratio of financial assets to income (Ahmed & Ansari, 1998). It is the process of reducing costs of information acquisition, enforcement of contracts and execution of transactions which results in the emergence of markets and intermediaries and financial contracts. To ensure that a great financial system is in place, there must be financial sector local reforms which is the engine to ensure improvements for the extension of prosperity
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