Effect of Financial Deepening on Economic Growth in Kenya: Evidence from ARDL Modelling Approach

Abstract

Financial deepening has proven to enhance economic growth by mobilizing investments and boosting productivity in developing countries. However, the empirical literature regarding its relationship with economic growth in Kenya remains inconclusive. This study examines the long-run and short-run effects of financial deepening indicators on Kenya's economic growth from 1990 to 2023, utilizing the Autoregressive Distributed Lag (ARDL) technique applied to data from Kenya. The results indicate that, in the long run, all financial deepening variables have a positive influence on economic growth in Kenya. In the short run, findings show a positive relationship between private sector credit, stock market performance, bank deposits, money supply, and economic growth. At the same time, liquidity liabilities exhibit a negative relationship in Kenya. This underscores financial deepening as a key driver for economic growth by facilitating economic upgrading through capital accumulation. To stimulate economic growth in Kenya, policies should prioritize enhancing access to private sector credit and improving stock market regulations. Furthermore, increasing financial literacy and integrating financial technology would encourage savings and expand access to financial services