The Relationship between Savings and Credit in Kenya: A VAR Analysis

Abstract

In Kenya, the relationship between credit uptake (loans) and savings is complex. This study examines the relationship between credit uptake, measured by domestic credit to the private sector as a percentage of GDP, and saving rates, expressed as gross domestic savings as a percentage of GDP. Utilising methodologies such as Granger causality, cointegration, and vector autoregression (VAR), the findings reveal bidirectional causality between credit supply and saving rates. This near convergence indicates that many Kenyan households actively engage in both borrowing and saving activities. Such bidirectional causality challenges traditional economic theories, particularly the traditional view that savings must precede investment or credit. Instead, it suggests the simultaneous presence of both supply-leading dynamics—where credit stimulates growth and subsequently enhances savings—and demand-following dynamics—where growth increases the demand for credit and savings. As a result, monetary authorities should develop policies that concurrently address both variables, as interventions targeting one will inevitably affect the other.