The Impact of Financial Inclusion on Monetary Policy. The Case of East Africa

Abstract

The study examined the impact of financial inclusion on monetary policy in East Africa countries. Notably, the three countries included Kenya, Tanzania and Uganda. The specific objectives of the study were to examine the impact of financial inclusion, bank lending rates, GDP per capita growth and money supply on monetary policy. The study was based on public good theory, systems theory and Keynes’s theory of monetary policy. The study used secondary data from IMF and World Bank. The study utilized a cross country panel design to get aggregate observations across the East Africa countries under the study. The descriptive statistics was tested before subjecting the data for regression analysis to provide an overview of the study variables. Based on the correlation result, it was found that financial inclusion, GDP per capita growth and money supply were negatively correlated with the Inflation rate. However, bank lending rates was positively associated with the inflation rate. The regression results showed that financial inclusion was negatively and significantly related to the inflation rate (β=-6.24367, p=0.0000). Further, GDP per capita growth was negatively and significantly related to the inflation rate (β=-0.66537, p=0.044). Likewise, money supply growth was negatively and insignificant related to inflation (β=-0.06984, p=0.467). Finally, the banks’ lending rates had a positive relationship with the inflation rate (β=0.6129486, p=0.006). The study concluded that financial inclusion, GDP per capita growth and bank lending rates were significant in determining the monetary policy. The policy implications are that government needs to improve financial inclusion and GDP per capita growth. The expansion of formal financial services to reach millions of underserved and underserved adults will help Kenya achieve its goal of poverty reduction and continued dynamic growth, advancing to the vision of prosperity. Financial inclusion brings about more economic well-being to individuals and small and medium enterprises. There is a need to enhance consumer protection and financial literacy to help individuals be better equipped with modern financial services.