Effect of Capital Account Liberalization on Financial Development in Kenya

Abstract

Financial liberalization has been part of financial reform packages in many countries as stabilization for financial development tools of respective economies. One of these countries is Kenya which has been undergoing various financial sector reforms since 1980 to improve economy mainly on the ease of financial sector, equity market and capital account. This research was conducted to establish the effect of financial sector liberalization on financial development in Kenya in relation to various financial liberalization effects and measures adopted from 1985 to 2018. The principal component analysis method was used in the calculation of the index required data for all the years since the liberalization process started in Kenya to calculate the financial liberalization index required for the study period. The research first identified events dates of major policy changes or reforms and their effect on financial development and population of study were from various financial sector institutions operating in Kenya. The Secondary data was sourced from Central Bank of Kenya reports and statistical bulletins. The findings revealed that, capital account liberalization facilitated financial development. The study recommended that, in a bid to promote capital inflows and enhance better risk-sharing, there is a need to reform financial rules, strengthen the banks and promote the business sector.