This study aimed to find out the effect of selected factors on the development of the Nairobi Securities Exchange. The general objective of this study was to determine the effect of selected factors on the development of the NSE. The specific objectives were to determine the effect of market information; market efficiency; market transparency; market openness; transaction processing system and operating/transaction cost; legal and regulatory framework on the development of the NSE. Both primary and secondary data collection methods were used. A structured data collection questionnaire was used to collect data on market infrastructure factors. The population of study was the Nairobi Securities Exchange. Secondary data was collected on market capitalization from 2006 to 2015 which was used as the indicator of NSE development. This study used a descriptive research design to describe the empirical data. A regression model was used for data analysis and hypothesis tested with a 0.05 significance level. The regression results of the study indicated that the predictor variables in the regression model explained 80.19% of the variation in development of the NSE; where a unit increase in market information leads to a 0.382 increase in NSE development, a unit increase in Market efficiency leads to a 0.097 increase in NSE development, a unit increase in Market transparency leads to a 0.348 increase in NSE development, a unit increase in Market openness leads to a 0.368 increase in NSE development, a unit increase in Transaction processing system and Operating/transaction cost leads to a 0.507 increase in NSE development and a unit increase in Legal and regulatory framework leads to a 0.226 increase in NSE development. Given the effect of the predictor variables on NSE development, the government should improve the market infrastructure which is the center on which financial market revolves. This can be done through initiation of policies that foster growth and development as countries liberalize their financial systems and further enhance domestic resource mobilization, public education awareness programmes, elimination of excessive barriers to the market and putting in place tax regimes and incentives geared towards stimulating companies to be listed in the stock market. Public education awareness programme. This study is of great importance to researchers and academics, government policymakers, regulators and investors and the results should lead to the creation of an enabling environment, development of good regulatory framework and thus faster development of the securities market.

Background of the Study 
The financial market handles the exchange of assets and is made up by several separate markets for various types of asset classes. Capital markets provide trading services for long- term securities such as shares and bonds with a maturity of more than one year. Other markets include money markets for shorter-term bonds; currency markets for foreign exchange; commodities markets where anything from metals to grain is traded; mortgage markets for property debt; and derivatives markets with products based on the underlying assets of all previously mentioned markets and more (Saunders, 2004). 

Financial markets play a fundamental role in the economic development of a country by facilitating the flow of funds from savers to investors and thus mobilizing domestic savings and efficiently channelling them into productive investments. Financial intermediation between borrowers and savers can be done through equity financing which is only possible through the development of capital markets which deal with securities and are associated with financial resource mobilization on a long term basis. The securities market forms a significant component of the financial sector of any economy (Ochieng, 2014). 

Capital markets allow for wider ownership among the public and provide an effective vehicle for making investment choices which suit investors’ preferences of risk and returns based on available information; thus capital markets help the economy generate more savings and productive investments. An efficient capital market should have constant liquidity and easy entry and exit by investors which requires sufficient volume and size of transactions in the market (Aduda, Masila & Onsongo, 2012). 

A well-functioning capital market facilitates the allocation of capital to productive use in companies by encouraging the placement of shares and bonds in the primary market. It gives investors an efficient means of buying or selling assets in a liquid secondary market, and it requires companies to provide accurate information to investors to facilitate them to make sound investment decisions and by doing so promotes good corporate governance. A typical capital market comprises of the following institutions: Banks, insurance companies, mutual funds, mortgage funds, finance companies and stock markets. A stock market is a financial institution where securities are bought and sold (Fauziah Wan Yusoff, 2015). 

Capital markets are expected to accelerate economic growth by boosting domestic savings and increasing the quantity and quality of investment. Thus a well-organized capital market is crucial for mobilizing both domestic and international capital and for serving as a medium for transferring part of the business ownership of foreign corporations to the citizens. Central to the efficient functioning of a capital market is the development of the securities market. In particular, capital markets encourage economic growth by providing an avenue for growing companies to access capitals at lower cost (Chepkoiwo, 2011). 

Emerging capital markets are financial markets that reside in the low or middle income economies or where the ratio of investable market capitalization to Gross National Product is low. The International Finance Corporation (IFC) defines an emerging market as one which is found in a developing country (IFC, 1994). According to Emerging Economies Report, The Centre for knowledge Societies give examples of emerging markets as India, China, Indonesia, South Africa, Kenya, Egypt and Brazil (Joshi et al. 2008). 

Ellefsen, (2004) noted that emerging capital markets show the following characteristics which distinguish them from developed Capital market. First, market size in emerging markets is far smaller than developed markets. The overall size of their economies and the size of their financial market in relation to their economies as a whole is relatively small compared to developed countries. The market is not open to all as foreign investors are restricted and there is also an ownership restriction. There is market inefficiency in emerging market as new information is not quickly reflected in the securities prices. The policy enrolments in many emerging markets are very unstable and investors in emerging market are particularly concerned about the case of capital movement owing to emerging markets spotty liquidity. Other characteristics include low market activities (few companies keep the market active) few market intermediaries, lack of electronic trading, no qualified personnel of emerging capital markets. 

The securities market plays significant role in any economy, according to Stijn (1995) and Munga (1974) as quoted by Basweti (2002), a stock market acts as a vehicle for raising capital for firms and it takes on a large role in developing countries, where privatization of state corporations is taking place. Most companies and governments of the developing countries have turned to the stock market as an avenue raising capital to finance various projects. 

The proponents of securities markets emphasize the importance of having a developed securities market in enhancing the efficiency of investment. A well-functioning securities market is expected to lead to a lower cost of equity capital for firms and allow individuals to more effectively price and hedge risk, attract foreign portfolio capital and increase domestic resource mobilization, expanding the resources available for investment in developing countries. Recognizing the importance of securities market on economic growth, prudential authorities such as World Bank, IMF and ADB undertook stock market development programs for emerging markets in developing countries during 80s and 90s and they found that, emerging securities markets have experienced considerable development since the early 1990s (Masila, 2010). 

The securities market is one of the most important sources for companies to raise funds as it enables businesses to be publicly traded thus raise additional capital in a public market. An attractive feature of investing in stocks, is the liquidity an exchange provides enables investors to quickly buy and sell securities. An economy where the stock market is on the rise is considered to be an up-and-coming economy as the stock market is often considered to be the primary indicator of a country's economic strength and development. Exchanges also act as the clearinghouse for each transaction, meaning that they collect and deliver the shares, and guarantee payment to the seller of a security. This eliminates the risk to an individual buyer or seller that the counterparty could default on the transaction (Caster, 2014) 

Kenya’s capital market has come a long way since the country’s independence in 1963.The capital market now comprise of; the trading debt and equity over the Nairobi Securities Exchange(NSE); debt capital markets(bonds); development financial institutions (DFI’s) and pension funds. (Chepkoiwo, 2011). The NSE was incorporated under Companies act of Kenya 1991 as a company limited by guarantee and without a share capital (NSE, 2016). In Kenya, the capital market has not played its role in capital mobilization, though if properly organized it could be a source of much needed capital necessary for, economic growth (Wagacha 2001). Additional supply of capital is urgently required to maintain the momentum of the growth in GDP. 

NSE is today poised to play an important role in the Kenyan economy: It facilitates the mobilization of capital for development and provides savers in Kenya with an alternative sawing tool, it can also be used by the government and local authorities as an alternative source of funds to increasing taxes in order to finance development projects and is used as an instrument of privatization and also as an avenue of liberalization of sectors previously dominated by the government (Chepkoiwo, 2011). However, as an emerging capital market, NSE has faced challenges to its development and growth. This study therefore looked at the effect of selected factors on the development of the NSE and to makes the necessary recommendations.

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Item Type: Kenyan Postgraduate Material  |  Attribute: 76 pages  |  Chapters: 1-5
Format: MS Word  |  Price: KSh900  |  Delivery: Within 30Mins.


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