Financial Development and Economic Growth in Kenya: Granger Causality Approach

During the last two decades, there has been a large amount of empirical work examining the relationship between financial development and economic growth. However, the findings of these studies indicate that there is no consensus on the effect of financial development on economic growth. In the empirical literature, some argue that an efficient financial sector leads to economic growth while others maintain that it is growth that leads to financial development. Others provide evidence that there is a two way - causality between financial sector development and economic growth while others find no relationship between financial development and economic growth. This study was therefore to determine the causal link between financial sector development and economic growth in order to establish if it is supply leading hypothesis or demand leading hypothesis in Kenya using Ganger Cauaslity approach for the period 1970 to 2020. The results of this study revealed that financial development exerts a positive and statistically significant effect on economic growth in Kenya hence confirming supply leading hypothesis. From policy perspective, the policy makers need to formulate financial sector reform policies to ensure a well - functioning financial system that promotes domestic credit especially to productive sectors of the economy.