The main objective of this study was to establish the effect of financial deepening on the performance of the Youth Enterprise Development Fund (YEDF). The performance of the YEDF was measured by the growth rate of the loans advanced while the financial deepening indicators included the reduction of transactions costs, the ratio of loans to GDP and the ratio of loans to deposits. The study adopted a descriptive survey design and relied on secondary data collected from the financial statements, news bulletins and websites of Central Bank of Kenya (CBK) and YEDF. The collected data was cleaned and coded before being analyzed by use of the Statistical Package for Social Sciences (SPSS). The data analysis techniques included descriptive statistics like the mean, minimum, maximum and standard deviation. In addition, inferential statistics like correlation analysis and regression analysis were also used to establish relationships between the dependent and independent variables. The findings were presented in tables, line graphs and bar graphs. Major research findings indicated that the growth rate of the loans advanced by YEDF was on a steady increase in the period between 2008 – 2012. In addition, the findings indicated that the financial deepening indicators affected the growth rate of loans advanced by YEDF to an extent of 78.02%. The three factors (reduced transaction costs, ratio of loans to GDP and ratio of loans to deposits) also had a positive correlation with the growth rate of loans at YEDF. However, only the ratio of loans to deposits had a significant correlation at a level of significance of 0.01. The main conclusion was that the growth rate of loans advanced by financial intermediaries was highly determined by the financial deepening variables like reduced transaction costs, high ratio of loans to GDP and high ratio of loans to deposits. The researcher recommends improvement of the allocation policies to guard against bad debts and waste of funds. There is also need to come up with a policy to ensure that the loans advanced are equitably distributed across the country to ensure that the advantages of economic and financial development are reaped by a wider population. The researcher suggests that a similar study be carried out to come up with a model to guide the establishment of the appropriate lending rate that can ensure that the YEDF loan portfolio keeps growing and that the lending rate is responsive to the market forces of supply and demand while still recognizing the social nature of the fund.

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