The capital market is important since it connects the financial sector with other non-financial sectors of the economy. This study examines the effect of Capital Market Deepening on economic growth in Kenya. Controversy exists among researchers on the role of deep capital markets in growth. The finance growth nexus forms the basis of the research with the capital markets assumed to have a supply leading effect on economic growth. This study aimed at addressing the issue by incorporating a measure of bond market turnover. The research objective was to determine the effect of capital market deepening on economic growth in Kenya. The study used data from the Nairobi Securities Exchange from 1992-2011 and GDP data from The Kenya National Bureau of Statistics. The study therefore concludes that Capital Market Deepening has a positive effect on GDP growth in Kenya and therefore lends support to the finance growth nexus. The Capital market plays an important role in economic growth and therefore the study recommends the government should take policy initiatives to foster growth of the capital market and especially so the bond market which is instrumental in providing finance for development of the Vision 2030 socio economic blue print. JEL classification numbers: F43, O16.
Key words: Capital Market Deepening, Economic Growth and Kenya.