Factors Influencing the Development of Capital Markets in a Developing Economy: A Case Study of Nairobi Securities Exchange in Kenya

Abstract

The study examined the factors influencing the growth and development of capital markets in an emerging economy.  The study focused on the factors that influence the growth and development of the Nairobi Securities Exchange in Kenya (N.S.E.). This study sought to survey the factors that impinge on the growth and development of the stock market. The Nairobi Securities Exchange has experienced lack luster performance over its entire existence since it was founded in 1954. Over the years the number of stocks traded has stagnated at around 53 quoted companies. Ordinarily one would expect to find a significant degree of correlation between economic growth and the growth of the stock exchange. The former has averaged 3.8% p.a. in the period 1985-1996 while the latter averaged only 0.6% as measured by the number of quoted companies.

To achieve the study objectives both primary and secondary data was used. Primary data was generated through the administration of questionnaires to the stakeholders of the NSE. Key informants were drawn from managers of investment banks; staff of the NSE, capital markets Authorities, Ministry of finance, Economic planning and the Central Bureau of statistics. The target population were all the 53 firms listed at N.S.E.  Stratified random sampling based on the segmentation of the trading counters was used for sampling the population of the study.  A sample of 30 firms was selected. Data was summarized using the inferential statistical methods. Descriptive research design was adopted and used for the study.

The findings of the study indicated that the government policy reforms were viewed as having major influence on the growth and development of capital markets in Kenya. The NSE has experienced growth over the previous years, however the rate of growth has been dismal. The key factors that influence the growth and development of NSE include the strong regulatory and legal framework, good macroeconomic environment, investor education and awareness, improved market infrastructure, and increased participation by foreign investors.

Keywords: Capital Markets, Nairobi Securities Exchange