Effect of Equity 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 equity market. This research was conducted to establish the effect of equity market 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 equity market liberalization is beneficial to the financial development in Kenya. When moderated with business risk, business risk does not moderate the relationship between equity market liberalization and financial development. The study recommended that, in a bid to promote capital inflows and enhance better risksharing, there is a need to reform financial rules, it is essential for equity market liberalization to be embedded within a sound institutional framework to enhance financial development.