Policy Brief No. 11 of 2007 on Effectiveness of Financial Sector Reforms in Promoting Domestic Private Investment in Kenya

Abstract

The Kenyan government has over the last decade been implementing financial sector reforms aimed at promoting private investment. The main focus of the reforms was liberalization of interest rate and exchange rate, privatization of state-owned enterprises, abolition of direct credit controls, and modernization of the Nairobi Stock Exchange to encourage private investment. These reforms were expected to increase credit to the private sector, narrow interest rates spreads and increase private investment levels. However, the response of the reforms has mostly been on the contrary, particularly in increasing investment levels. Growth in private investment as a share of GDP has declined or stagnated. During some periods, investment levels registered negative rates. For example, over the period 1999-2003, private investment growth rate was negative 6.7 per cent of GDP. It is important to understand why private investment has not responded to financial sector reforms, in order to facilitate review of the current financial policy stances, which seem to constrain private investment growth.