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Interest rate reforms, financial deepening and economic growth in Kenya:an empirical investigation

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  • Nicholas M. Odhiambo

    (University of South Africa (UNISA), South Africa)

Abstract

This paper examines the impact of interest rate reforms on financial deepening and economic growth in Kenya, using two models: the financial deepening model and the dynamic Granger causality model. The study attempts to answer two critical questions: Does interest rate liberalization in Kenya have any positive influence on financial deepening? Does the financial depth which results from interest rate liberalization lead to economic growth? Using cointegration and error-correction models, the study finds strong support for the positive impact of interest rate liberalization on financial deepening in Kenya - although the strength and clarity of its efficacy is sensitive to the level of the dependency ratio. The study also finds financial depth to Granger cause economic growth in Kenya. The study, therefore, concludes that the interest rate liberalization in Kenya has succeeded in increasing economic growth through its influence on financial depth. This applies irrespective of whether the models are estimated in a static long-run formulation (cointegration model) or in the dynamic formulation (error-correction model).

Suggested Citation

  • Nicholas M. Odhiambo, 2009. "Interest rate reforms, financial deepening and economic growth in Kenya:an empirical investigation," Journal of Developing Areas, Tennessee State University, College of Business, vol. 43(1), pages 295-313, September.
    • Handle: RePEc:jda:journl:vol.43:year:2009:issue1:pp:295-313
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    Cited by:

    1. Emmanuel, Ongo Nkoa Bruno & Thierry, Mamadou Asngar & Christian, Atangana Zambo Charles & Ludé, Djam'Angai, 2024. "What drives financial market growth in Africa?," International Review of Financial Analysis, Elsevier, vol. 91(C).
    2. Hao Chen & Duncan O. Hongo & Max William Ssali & Maurice Simiyu Nyaranga & Consolata Wairimu Nderitu, 2020. "The Asymmetric Influence of Financial Development on Economic Growth in Kenya: Evidence From NARDL," SAGE Open, , vol. 10(1), pages 21582440198, February.
    3. Abdullahi Ahmed & Andrew Hulten, 2014. "Financial Globalization in Botswana and Nigeria: A Critique of the Thresholds Paradigm," The Review of Black Political Economy, Springer;National Economic Association, vol. 41(2), pages 177-203, June.
    4. Nanda, Kajole, 2019. "Dynamics between Bank-led Financial Inclusion and Economic Growth in Emerging Economies: The Case of India," International Journal of Development and Conflict, Gokhale Institute of Politics and Economics, vol. 9(1), pages 95-121.
    5. Clement Moyo & Pierre Le Roux, 2019. "Interest Rate Reforms and Economic Growth in SADC Countries: The Savings and Investment Channel," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 66(4), pages 507-523, December.
    6. Wolde-Rufael, Yemane, 2009. "Re-examining the financial development and economic growth nexus in Kenya," Economic Modelling, Elsevier, vol. 26(6), pages 1140-1146, November.
    7. Sheunesu Zhou & Olivier Niyitegeka, 2023. "On the Dynamic Relationship between Household Debt and Income Inequality in South Africa," JRFM, MDPI, vol. 16(10), pages 1-17, September.
    8. Ndanshau, Michael O. A. & Kilindo, Ali A. L., 2012. "Interest Rates and Financial Savings in Tanzania: 1967 - 2010," MPRA Paper 44387, University Library of Munich, Germany, revised Jan 2013.
    9. Gnilane Ndiaye & Cheng BO & V. V. Azenga & Juniter Kwamboka, 2019. "The Impact of Internal Control on the Profitability of Microfinance Institutions in Senegal," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 8(2), pages 41-51, April.
    10. Christian Lambert NGUENA & Roger TSAFACK NANFOSSO, 2014. "Macroeconomic Factors and Dynamics of Financial Deepening: An empirical Investigation applied to the CEMAC Sub-region," Research Africa Network Working Papers 14/015, Research Africa Network (RAN).
    11. Moyo, Clement & Le Roux, Pierre, 2018. "Interest rate reforms and economic growth: the savings and investment channel," MPRA Paper 85297, University Library of Munich, Germany.
    12. Christian Lambert Nguena & Roger Tsafack Nanfosso, 2013. "Financial Deepening Dynamics and Implication for Financial Policy Coordination in a Monetary Union: the case of WAEMU," AAYE Policy Research Working Paper Series 13_005, Association of African Young Economists, revised Nov 2013.
    13. Sulaiman, Saidu & Masih, Mansur, 2017. "Is liberalizing finance the game in town for Nigeria ?," MPRA Paper 95569, University Library of Munich, Germany.
    14. Taiwo Akinlo, 2019. "The causal relationship between financial development and real sector in sub-Saharan Africa (1986–2015)," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 21(1), pages 116-142, June.
    15. Jubaedah & Ivan Yulivan & Abdul Razak Abdul Hadi, 2016. "The Influence of Financial Performance, Capital Structure and Macroeconomic Factors on Firm¡¯s Value ¨C Evidence from Textile Companies at Indonesia Stock Exchange," Applied Finance and Accounting, Redfame publishing, vol. 2(2), pages 18-29, August.
    16. Eglantina Hysa & Naqeeb Ur Rehman, 2023. "Economic Growth Through Financial Development: Empirical Evidences from New Member States and Western Balkan Countries," Springer Proceedings in Business and Economics, in: Luminita Chivu & Ignacio De Los Ríos Carmenado & Jean Vasile Andrei (ed.), Crisis after the Crisis: Economic Development in the New Normal, chapter 0, pages 49-67, Springer.
    17. Nicholas Odhiambo, 2010. "Interest rate reforms, financial deepening and economic growth in Tanzania: a dynamic linkage," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 13(2), pages 201-212.
    18. Stephen Oluwafemi Adeusi & Olufemi Adewale Aluko, 2015. "Relevance of Financial Sector Development on Real Sector Productivity: 21st Century Evidence from Nigerian Industrial Sector," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 5(6), pages 118-132, June.
    19. Nanda, Kajole, 2019. "Dynamics between Bank-led Financial Inclusion and Economic Growth in Emerging Economies: The Case of India," International Journal of Development and Conflict, Gokhale Institute of Politics and Economics, vol. 9(1), pages 95-121.
    20. Salah Abosedra & Ali Fakih & Sajal Ghosh & Kakali Kanjilal, 2023. "Financial development and business cycle volatility nexus in the UAE: Evidence from non‐linear regime‐shift and asymmetric tests," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 2729-2741, July.
    21. Odhiambo, Nicholas M., 2009. "Finance-growth-poverty nexus in South Africa: A dynamic causality linkage," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 38(2), pages 320-325, March.
    22. Christian Lambert Nguena & Roger Tsafack Nanfosso, 2013. "What Drives and Limits Financial Deepening Dynamics? Fresh Empirical-based Policy Lessons for African Sub-Regions," AAYE Policy Research Working Paper Series 13_003, Association of African Young Economists, revised Nov 2013.
    23. Alton Best & Brian M. Francis & C. Justin Robinson, 2017. "Financial Deepening and Economic Growth in Jamaica," Global Business Review, International Management Institute, vol. 18(1), pages 1-18, February.

    More about this item

    Keywords

    Africa; Kenya; interest rate liberalization; financial deepening; economic growth;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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