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Intra-Market Linkages in the Financial Sector and Their Effects on Financial Inclusion

Received: 5 October 2018     Accepted: 17 October 2018     Published: 7 November 2018
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Abstract

The financial stability objective of any financial system authority is to maintain confidence, and promote the safety and soundness of the domestic financial system. Financial stability has been defined as the resilience of the financial system in the face of adverse shocks to enable the continued smooth functioning of the financial intermediation process. The Kenyan Financial service providers are diverse and they include 42 commercial banks, 49 insurance companies, 12 deposits taking microfinance banks, and 199 registered savings and credit cooperatives (SACCOs). This paper examined financial intra-market linkages (dynamic relationship and volatility spillovers) effects between the Commercial banks and other financial sector segments (Insurance and Capital Markets) in Kenya and the impact of this transmission on financial inclusion. The study evaluated the effect of intra-market linkages on financial inclusion using Bayesian Vector Autoregressive (BVAR) using monthly data from the Kenyan market during the period January 2004 - December 2016. Impulse-response analysis and forecast error variance decomposition were used to investigate these intra-market linkages and their causal effect to financial inclusion. Results show that there are significant market interactions and interlinkages with significant shocks transmission moving from banks to other markets. Interest rates shock transmission affected all markets. This means that monetary policy transmission as expected trickles down to the entire financial sector. The study also found out that, positive shocks from credit impacts positively on lending rate and the capital markets performance implying banking mechanism to reward increased loan uptake at cheaper prices and hence creating cash-flow that spills over to more investment on the Nairobi Securities Exchange. The study recommends that policy makers design policies that help minimize the adverse impact of volatility/shocks but create opportunities for growth on each market to foster price stability and increase investments through financial inclusion.

Published in International Journal of Finance and Banking Research (Volume 4, Issue 5)
DOI 10.11648/j.ijfbr.20180405.11
Page(s) 79-90
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2018. Published by Science Publishing Group

Keywords

Spillover, Commercial Banks, BVAR, Shocks, Volatility, Financial Sector

References
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[18] Sims (2007) Bayesian Methods in Applied Econometrics, or, Why Econometrics Should Always and Everywhere Be Bayesian. Technical Report, Princeton University Villani.
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  • APA Style

    Caspah Lidiema. (2018). Intra-Market Linkages in the Financial Sector and Their Effects on Financial Inclusion. International Journal of Finance and Banking Research, 4(5), 79-90. https://doi.org/10.11648/j.ijfbr.20180405.11

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    ACS Style

    Caspah Lidiema. Intra-Market Linkages in the Financial Sector and Their Effects on Financial Inclusion. Int. J. Finance Bank. Res. 2018, 4(5), 79-90. doi: 10.11648/j.ijfbr.20180405.11

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    AMA Style

    Caspah Lidiema. Intra-Market Linkages in the Financial Sector and Their Effects on Financial Inclusion. Int J Finance Bank Res. 2018;4(5):79-90. doi: 10.11648/j.ijfbr.20180405.11

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  • @article{10.11648/j.ijfbr.20180405.11,
      author = {Caspah Lidiema},
      title = {Intra-Market Linkages in the Financial Sector and Their Effects on Financial Inclusion},
      journal = {International Journal of Finance and Banking Research},
      volume = {4},
      number = {5},
      pages = {79-90},
      doi = {10.11648/j.ijfbr.20180405.11},
      url = {https://doi.org/10.11648/j.ijfbr.20180405.11},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijfbr.20180405.11},
      abstract = {The financial stability objective of any financial system authority is to maintain confidence, and promote the safety and soundness of the domestic financial system. Financial stability has been defined as the resilience of the financial system in the face of adverse shocks to enable the continued smooth functioning of the financial intermediation process. The Kenyan Financial service providers are diverse and they include 42 commercial banks, 49 insurance companies, 12 deposits taking microfinance banks, and 199 registered savings and credit cooperatives (SACCOs). This paper examined financial intra-market linkages (dynamic relationship and volatility spillovers) effects between the Commercial banks and other financial sector segments (Insurance and Capital Markets) in Kenya and the impact of this transmission on financial inclusion. The study evaluated the effect of intra-market linkages on financial inclusion using Bayesian Vector Autoregressive (BVAR) using monthly data from the Kenyan market during the period January 2004 - December 2016. Impulse-response analysis and forecast error variance decomposition were used to investigate these intra-market linkages and their causal effect to financial inclusion. Results show that there are significant market interactions and interlinkages with significant shocks transmission moving from banks to other markets. Interest rates shock transmission affected all markets. This means that monetary policy transmission as expected trickles down to the entire financial sector. The study also found out that, positive shocks from credit impacts positively on lending rate and the capital markets performance implying banking mechanism to reward increased loan uptake at cheaper prices and hence creating cash-flow that spills over to more investment on the Nairobi Securities Exchange. The study recommends that policy makers design policies that help minimize the adverse impact of volatility/shocks but create opportunities for growth on each market to foster price stability and increase investments through financial inclusion.},
     year = {2018}
    }
    

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  • TY  - JOUR
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    AU  - Caspah Lidiema
    Y1  - 2018/11/07
    PY  - 2018
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    AB  - The financial stability objective of any financial system authority is to maintain confidence, and promote the safety and soundness of the domestic financial system. Financial stability has been defined as the resilience of the financial system in the face of adverse shocks to enable the continued smooth functioning of the financial intermediation process. The Kenyan Financial service providers are diverse and they include 42 commercial banks, 49 insurance companies, 12 deposits taking microfinance banks, and 199 registered savings and credit cooperatives (SACCOs). This paper examined financial intra-market linkages (dynamic relationship and volatility spillovers) effects between the Commercial banks and other financial sector segments (Insurance and Capital Markets) in Kenya and the impact of this transmission on financial inclusion. The study evaluated the effect of intra-market linkages on financial inclusion using Bayesian Vector Autoregressive (BVAR) using monthly data from the Kenyan market during the period January 2004 - December 2016. Impulse-response analysis and forecast error variance decomposition were used to investigate these intra-market linkages and their causal effect to financial inclusion. Results show that there are significant market interactions and interlinkages with significant shocks transmission moving from banks to other markets. Interest rates shock transmission affected all markets. This means that monetary policy transmission as expected trickles down to the entire financial sector. The study also found out that, positive shocks from credit impacts positively on lending rate and the capital markets performance implying banking mechanism to reward increased loan uptake at cheaper prices and hence creating cash-flow that spills over to more investment on the Nairobi Securities Exchange. The study recommends that policy makers design policies that help minimize the adverse impact of volatility/shocks but create opportunities for growth on each market to foster price stability and increase investments through financial inclusion.
    VL  - 4
    IS  - 5
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Author Information
  • Department of Economics, Accounts, & Finance, Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya

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