Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.11, No.6, 2020 96 Diaspora Remittances and Stock Market Development at Nairobi Securities Exchange, Kenya Cliff Osoro 1 Eddie Simiyu PhD 2 Job Omagwa PhD 2 1.PhD Student, Kenyatta University, School of Business, P O Box 43844-00100 Nairobi, Kenya 2.Kenyatta University, School of Business, P O Box 43844-00100 Nairobi, Kenya Abstract Diaspora remittances, unlike other external sources of financing, tend to be more stable making remittances a reliable source of financing for emerging economies. Despite the consistent upward trend in diaspora remittances, emerging capital markets are typically characterized by a small number of listing and very high volatility. This study therefore sought to establish the effect of diaspora remittances on stock market development at the Nairobi Securities Exchange, Kenya. The study covered the period 2008-2018 and quarterly time series data was analysed using correlation analysis and the Autoregressive Distributed Lag Model. The study findings document a significant positive effect of diaspora remittances on stock market development in the short run as evidenced by the negative and significant coefficient of the Error Correction Term (ECT). Equally, diaspora remittances had a significant positive effect on stock market development in the long run. In view of the foregoing findings, the study recommends that the Kenya government should create a department of economic relations located at all Kenyan foreign embassies abroad to educate Kenyans abroad on the available investment opportunities at the Nairobi Securities Exchange and the importance of investing back at home. Keywords: Diaspora Remittances, Political Risk, Foreign Investor Participation, Stock Market Development and Nairobi Securities Exchange (NSE). DOI: 10.7176/RJFA/11-6-12 Publication date:March 31 st 2020 I. Introduction and Background The Kenyan economic blue print of vision 2030 aims at transforming the country into a newly industrialized middle income country that provides high quality life to its citizens. Moreover, the vision 2030 envisions an efficient and transparent stock market. This huge milestone is to be achieved through the deepening of the financial markets by expanding the bond, equity markets and leveraging on remittances and other long term foreign capital inflows (Republic of Kenya, 2007). Notably, the Nairobi Securities Exchange is however characterized by very small size and high volatility. The growth in the number of listed firms and the market liquidity is very low with the market turnover averaging at less than 10 percent of the overall market capitalization. The annual trend in key equity market indicators at the Nairobi Securities Exchange market for the period 2008-2018 are summarized in Table.1. Table 1: Key Equity Market Indicators (2008-2018) Market indicator 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Market capitalization (Bn 853.8 834.17 1167 868.2 1272 1920 2316 2054 1931 2521.8 2102 Equity Turnov (Bn) 97.52 38.16 110.3 78.06 86.79 115.8 215.7 209.4 147.2 171.6 175.6 NSE 20 Share Inde 3521 3247 4432 3205 4133 4927 5113 4041 3186 3732 2834 Listed Firms 55 55 55 58 61 61 64 64 66 67 67 Source: CMA quarterly statistical bulletins (2008-2018) Table 1 indicates that Market capitalization declined from Kshs. 853.1 Billion in 2008 to Kshs. 834.1 Billion in the year 2009 representing a loss of Kshs. 20 Billion while market turnover declined sharply from Kshs. 97.52 Billion to Kshs. 38.16 Billion over the same period. This can be attributed to the lagged aftermath effects of the global financial crisis and the post-election violence as foreign investors moved away their investments from the domestic market (Kibaara, 2008). The market recovered from the effects of the global financial crisis and the post- election violence in the year 2010 experiencing a steady bullish run till 2015 when the market capitalization decelerated from Kshs.2,316 Billion in the year 2014 to Kshs.2,054 Billion in the year 2015 representing a loss of Kshs. 262 Billion in a single financial year (CMA, 2016). The decline can be attributed to the re-introduction of the capital gains tax by the treasury that led to massive capital outflow and the subsequent replacement with a one off transaction fee of 0.3% on the value of the transaction (Gachanja & Kosimbei, 2018). The market capitalization picked a growth momentum in the year 2016-2017. However the worst decline throughout the period was experienced in the year 2018 attributed to the aftermath effects of the prolonged election period of 2017-2018. During this period the market capitalization dropped by over Kshs.400 Billion from Kshs. 2521 Billion in 2017 to Kshs. 2102 Billion in 2018 (NSE, 2018). The Market liquidity was very low throughout the period with market