Effect of Financial Inclusion on Financial Development in Kenya

Abstract

Over the recent years, a lot of attention has been drawn to financial inclusion in efforts aimed on stimulating economic development sustainability and elimination of poverty, and it has become a topic of great importance. The main reason for this is the awareness that about 2 billion adults across the globe continue to lack access to financial services hence slowing down the social as well as economic development. It has been noted that lack of accessibility of financial services leads to inabilities of households to invest in activities like education and business. Henceforth the likelihood of increasing future levels of income, financial development and economic growth is lowered. This research sought to determine the effect of financial inclusion on financial development in Kenya. The independent variable for the study was financial inclusion operationalized as agency banking, mobile banking, bank branches, ATMs and number of microfinance institutions. The control variables were economic growth rate represented by economic growth rate, balance of payments represented by current account deficit and interest rates measured as the average bank lending rate on a quarterly basis. The dependent variable was financial development measured as a ratio of credit lending to the private sector to GDP. A period of 10 years between January 2010 and December 2019 was studied through gathering of secondary data. Descriptive research design was employed while multiple linear regressions model was applied in analysis of the association between the variable. The data was analyzed by use of SPSS version 23. An R-Square value of 0.740 was produced from the study results which meant that 74 percent of the disparity in financial development in Kenya can be explained by the eight independent variables while 26 percent in the disparity of financial development was related to the variables that were not part of this study. ANOVA results show that the F statistic was significant at 5% level with a p=0.000. Henceforth, the model was appropriate in explaining the relationship between the specified variables. In addition, it was revealed that bank branches, economic growth rate and balance of payments established positive and statistically significant values for this study while agency banking, mobile banking, ATMs and number of MFIs produced positive but statistically insignificant values for this study. Finally, interest rates produced negative and not statistically influence on financial development in Kenya. It is the recommendation of this study that measures be put in place to enhance bank branches, economic growth rate and balance of payments as these measures have a significant influence on financial development in Kenya.