Moderating Effect of Economic Growth on the Relationship Between Foreign Private Capital Flows and Securities Market Development: Evidence from Kenya

Abstract

Over the last decade, Kenya witnessed a surge in foreign capital flows through Diaspora remittances. Locally, Diaspora remittances attraction is one of the dominant development strategies with the potential of contributing to financial development. The surge in such foreign capital flows raises important questions about their impact on the financial sector, specifically, the securities market. Understanding the linkages between foreign capital flows and the securities market is critical, especially in Kenya where these inflows are rapidly increasing even amidst the global financial crisis and the global economic slowdown which should have contracted them. Available evidence shows that foreign financial flows affects financial development, and that economic growth also influence operations in the financial sector. A research gap still exists as to how the effect of foreign financial flows on securities market development may be influenced by economic growth. Using data collected from the NSE and CBK, this study examined the relationship between foreign financial flows and securities market development, while attempting to answer the critical question of how economic growth influences this relationship in Kenya. The empirical results show that there is a distinct positive relationship between foreign capital flows and securities market development in Kenya. The results further show that this relationship is moderated by the level of economic growth within the economy. This study fronts for policies aimed at promoting cheaper flow of remittances and increasing growth rate of the Kenyan economy.

Keywords: Foreign Private Capital Flows, Diaspora Remittances, Securities Market Development, Nairobi Securitas Exchange, Kenya