Effect of Financial Literacy on Poverty Levels in Kenya

Abstract

Reducing poverty is the greatest challenge for the government as it pursues Vision 2030. According to official figures, 32 per cent of Kenyans are classified as poor, meaning they live on less than a dollar a day. Low financial literacy has been cited as one of the factors causing the high poverty levels in Kenya. Any long-term government plan must address financial literacy, which is the result of accumulated years of living in poverty. The reason someone is poor today perhaps is because they never had access to basic and advanced financial literacy education. The objective of this research was to determine the effect of financial literacy on Kenya’s poverty levels. The study was based on prospect theory, dual process theory and the goal setting theory. The independent variable was financial literacy measured using the multidimensional poverty index per quarter while the control variables were economic growth, the unemployment rate, and public debt. The dependent variable that the research attempted to explain was the poverty levels in Kenya. The data was collected on a quarterly basis over a period of twenty years (from January 2012 to December 2021). A descriptive research approach was employed in the research, with a multivariate regression model used to examine the connection between the study variables. The study's findings yielded an R-square value of 0.995, indicating that the chosen independent variables could explain 99.5 percent of the variance in Kenya’s poverty levels, while the other 0.5 percent was due to other factors not investigated in this study. The F statistic was significant at a 5% level with a P = 0.000. This suggests that the model was adequate for explaining poverty levels in Kenya. Further, the findings demonstrated that financial literacy had a negative and significant influence on Kenya’s poverty levels. Economic growth and public debt also had a negative and significant influence on Kenya’s poverty levels. Unemployment rate had a significant positive influence on poverty levels in Kenya. The research suggests the need for policy makers to make it a requirement for educational institutions to offer financial literacy as lack of financial literacy contributes to a rise in poverty levels. The study also recommends that there is need to come up with effective measures of creating employment as high unemployment rate has an adverse effect on poverty levels. The study recommends the need for future researchers to conduct a study for a longer period of time such as the last 30 years to capture the effects of economic cycles.