Does Kenya agree with the world on the Finance-Growth nexus? A review of the empirical studies

Abstract

Many studies have been done in this area of financial economics. Various parameters have been used to represent finance and economic growth in a bid to provide a link between the two. The importance of the financial intermediaries in influencing the rate of economic development is still under contention. Most modern consensus on the subject refers to Schumpeter’s Theory of economic development as the basis for the growth-enhancing character of improved financial institutions. The Schumpeterian logic of capitalist economic development has been supported with modern analysis. This study seeks to review the empirical studies and otherwise, in a bid to establish the whether there is concurrence on the relationship between the two in Kenya, Africa and globally. Selected studies done in Kenya, Africa and globally are picked from a cross section of the locations in the world. From the review, there is strong indication that there are two perspectives. The first one contends that financial development lead to economic growth whilst the second one asserting that economic growth leads to financial development. In Kenya there is strong indication that finance leads to growth.  Subsequently, these findings vouch for an establishment of a proper financial sector infrastructure and promotion of a stable financial system while on the other hand calling for establishment of sound economic policies that spur growth.

Key Words: Financial development, Economic growth, Financial institutions and Financial System