Financial liberalisation in Kenya: its impact on savings investment efficiency and economic development.

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University of Dar es Salaam
Since the onset of financial liberalisation hypothesis, a majority of the developing countries have implemented far-reaching financial reforms. However, the experience of these countries with financial liberalisation has been predominantly traumatic, and whether financial liberalisation impacts positively on savings, investment efficiency and economic development remains an empirical issue. This study attempts to investigate the role of financial liberalisation on savings, investment efficiency and economic development in Kenya during the 1968-1997 period. The study has employed four separate models: McKinnon's complementarity hypothesis; Financial Deepening; Investment Efficiency; and Granger Causality test. Although there are several versions of financial liberalisation hypothesis, the study has used the one developed by Ronald McKinnon because of its succinctness and easy amenability to empirical verification. It is evident in this study that financial liberalisation positively influences economic development. However, the relationship is an indirect one. That is, financial liberalisation first impacts on savings, financial deepening, investment efficiency and finally on economic growth, which leads to economic development. In testing for McKinnon's complementarity hypothesis, a recursive system of equations is used. The demand for money is made a function of savings function, and, simultaneously, savings is made a function of real money balances. The study has utilised cointegration and the Error-Correction modelling approach, which capture both the short-run and long run dynamics. The results of McKinnon's complementarity reveal a strong support for the hypothesis in Kenya during the study period. Further results indicate that the current financial liberalisation being pursued in Kenya is likely to result in financial deepening and investment efficiency. Finally, the results of Granger Causality test using Hsiao's test procedure reveals a bi-directional causality between financial development and economic development in Kenya, which corroborates the results of the first three models. The study however recommends a strong prudential and regulatory framework to accompany financial liberalisation in Kenya since swift and outright liberalisation can be very disruptive at times especially in the short-run.
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Financial accounting, Kenya
Odhiambo, N. M. (1999). Financial liberalisation in Kenya: its impact on savings investment efficiency and economic development. Masters dissertation, University of Dar es Salaam. Available at (