This study examines the factors affecting the development of emerging capital marketsthe case of Nairobi Stock Exchange. The study covered the period 2005-2010 on all listed companies in NSE. However, despite various measures instituted by the government at different times, performance indicators show a relative poor performance of the NSE compared to other emerging stock markets. These include: low turnover ratio, low market capitalization to GDP ratio and low value of stock traded to GDP ratio. This study was therefore designed to identify factors affecting the development of emerging stock markets-The case of Nairobi Stock Exchange. A case study design was used at finding out the factors affecting the development of an emerging Capital market. However, descriptive and regression approach was used in data analysis and secondary data collection method was used. The study establishes both the external (macro economic and social cultural factors) and market (legal, regulatory and Institutional) factors which have constrained the development of the Stock Market. However, there are some variables which didn’t clearly show the above relationship, namely macroeconomic stability-inflation and private capital inflows. It can therefore be concluded that stock market development is determined by stock market liquidity, institutional quality, income per capita, domestic savings and bank development. Using the regression analysis, the study established that 85% of stock market development is determined by: stock market liquidity, institutional quality, income per capita, macroeconomic stability-inflation, domestic savings and private capital flows and bank development. The study recommends NSE needs to be developed further to enhance domestic resource mobilization. Various policies and programs that affect stock market development such as regulation of institutional investor and privatization need to be addressed. The policy makers should consider reducing impediments to stock market development by easing restrictions on international capital flows. NSE should play an increasingly educational role and CMA should also change its approach from heavy handed type to more productive.

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