The Impact of Financial Sector Liberalization on Financial Development and Economic Growth: Evidence from Kenya

Abstract

We examine the impact of financial sector liberalization on the finance – growth nexus in Kenya by comparing a list of selected indicators of financial development using data covering pre - reform and post - reform periods. The hypothesis on the existence of a cointergrated relationship between financial sector liberalization on financial development and economic growth was tested using Engle and Granger (1987) two-step procedure.The study employed a time series analysis to evaluate the impact of financial liberalization in the finance – growth nexus. An Interactive econometric analysis on the data collected was done using Microfit 4.0. The results showed that there is a significant relationship between the size of financial services sector and economic growth. This implies that the comprehensive measure of the size of the financial sector exerts a positive and statistically significant effect on economic growth. However, financial liberalization has been found to have insignificant impact on financial development.

Keywords: Financial sector, financial sector development, economic growth, Kenya