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Is financial development a spur to poverty reduction? Kenya's experience

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Author Info

  • Nicholas M. Odhiambo

Abstract

Purpose – The paper seeks to examine the inter-temporal causal relationship between financial development and poverty reduction in Kenya during the period 1968-2006. The study attempts to answer one critical question: is financial development in Kenya a spur to poverty reduction? Design/methodology/approach – The study uses a trivariate causality model based on cointegration and error-correction mechanism. Unlike the majority of the previous studies, the current study incorporates the savings rate as an intermittent variable in the bivariate causality setting between financial development and poverty reduction – thereby creating a simple trivariate causality model. Findings – The study finds a distinct causal flow from financial development to poverty reduction in Kenya. In addition, the study finds a uni-directional causality from financial development to savings and a bi-directional causality between savings and poverty reduction. The results apply irrespective of whether the causality test is conducted in the short run or in the long run. Practical implications – The empirical results of this study will help policy makers to determine whether the financial development in Kenya is pro-poor and pro-savings. Originality/value – Although several attempts have been made to investigate the relationship between financial development, savings, economic growth and other macroeconomic variables, very few studies have examined the impact of financial development on the ultimate policy goal, i.e. poverty reduction. Moreover, the majority of the previous studies are based mainly on Asia and Latin America – affording sub-Saharan African countries very little or no coverage at all.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Journal of Economic Studies.

Volume (Year): 37 (2010)
Issue (Month): 3 (September)
Pages: 343-353

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Handle: RePEc:eme:jespps:v:37:y:2010:i:3:p:343-353

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Related research

Keywords: Africa; Economic growth; Kenya; Poverty;

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Citations

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Cited by:
  1. Uddin, Gazi Salah & Shahbaz, Muhammad & AROURI, Mohamed El Hedi, 2013. "Financial Development and Poverty Reduction Nexus:A Cointegration and Causality Analysis in Bangladesh," MPRA Paper 49264, University Library of Munich, Germany, revised 23 Aug 2013.
  2. Gazi Salah Uddin & Muhammed Shahbaz & Mohamed Arouri & Frédéric Teulon, 2014. "Financial Development and Poverty Reduction Nexus: A cointegration and causality analysis in Bangladesh," Working Papers 2014-291, Department of Research, Ipag Business School.

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