The Effect of Financial Innovation on Financial Inclusion in Kenya

Abstract

Over 39% of the world population is excluded from formal financial system. In third world countries, more than half of the population do not have an account with a financial institution and the situation is particularly acute in Sub-Saharan Africa. Financial inclusion is a key component of an all-inclusive social, political and economic development in any country since exclusion from the formal financial system has been identified as one of the major bottleneck to a world without poverty. Consequently, the importance of an all-inclusive financial system is widely recognised in the policy circle and has become a key consideration in financial policy formulation in many countries including Kenya. The objective of this research was to establish the effect of financial innovation on financial inclusion in Kenya. The study adopted a descriptive statistics and used secondary data from the Central Bank of Kenya. The data on number of deposit accounts, number of automated teller machines, number of registered bank agents, number of mobile money transactions and number of licensed deposit taking micro finance institutions was collected for the period between 2008 to 2017 on quarterly basis. The data collected was analysed using descriptive and inferential statistics. Descriptive statistics included trend analysis of the variables over the period of the study. Inferential statistics used include Pearson correlation and regression analysis. The data was analysed by use of Statistical Package for Social Sciences version 25 to determine the correlation and regression analysis between financial inclusion and the various variables of financial innovation. The correlation results showed that the association between number of bank agents, number of mobile money transactions, number of automated teller machines, number of deposit taking micro finance institutions and the number of deposit accounts was strong and positive. Regression results showed that number of deposit taking micro finance institutions and number of mobile money transactions had a positive effect on financial inclusion while agency banking had a negative effect on financial inclusion. Overall, the regression model showed that financial innovation was a good predictor of financial inclusion. The study concluded that financial innovation has a significant effect on the level of financial inclusion. The researcher recommends that all player in the financial inclusion space need to have an understanding of the financial lives of the financially excluded population including how they acquire and utilise their finances. This way, they will be able to design relevant frameworks and financial product and services, which meet their needs. Another study including other forms of financial innovations such as Shariah compliant products and credit reference bureaus as independent variables can be done to assess if they have an effect on the level of financial inclusion in the country.