Effect of Financial Innovations on Financial Inclusion: a Case of Small and Medium Enterprises in Urban Informal Settlements in Nairobi County, Kenya

Abstract

In a global environment in which access to financial services and high-speed internet is neither affordable nor universal, Fintech has the ability to improve financial access, thereby promoting financial inclusion. With the potential of Fintech to increase financial inclusion, there still exists a mismatch between consumer perceptions regarding Fintech’s potential especially in improving financial inclusion among SME’s in urban informal Settlements in Kenya. The objective of the research was determining the effect of Fintech on financial inclusion among SME’s in urban informal settlements in Nairobi, Kenya. Specifically, it was to determine how selected financial innovations affect financial inclusion among SMEs in urban informal settlements in Nairobi, Kenya. This research project was based on the TAM and the diffusion of innovation theory. A descriptive design was applied in the investigation. The total population was 4,678 SMEs in urban informal settlements in Nairobi where a sample of 150 SME’s was selected using stratified sampling based on industry sub-sector. Data was obtained from 112 of the 150 which was equal to a 74.6% response rate. To accomplish the set objectives, primary data was obtained using questionnaires that were distributed using drop and pick later method and emails via method and using Google forms. The data collected was converted into quantitative form and subsequently analyzed using SPSS. The results of the data analysis were the generation of descriptive and inferential statistics such as frequencies, percentages, and correlation statistics. A linear regression was used to model the relationship between the variables. From the inferential statistics. Findings showed that SMEs in urban informal settlements in Nairobi extensively use financial innovations. This was established through the regression coefficients which showed that Mobile banking (β=0.316, p=0.000), Agency Banking (β=0.405, p=0.000), Online Banking (β=0.292, p=0.000) and Mobile loan App services (β=0.342, p=0.000) had a positive correlation with financial inclusion. The findings established that financial innovations have a material positive effect on financial inclusion. The model generated an R Square value of 0.312 which means 31.2% of changes in financial inclusion can be explained by changes in the innovations and 69.8% by factors outside the study’s scope. These findings were also confirmed through the regression and correlation results which yielded a positive notable relation between financial innovation and financial inclusion. The study recommends SMEs in Urban informal settlements to be more vibrant in adopting the financial technology available as this would boost their firm performance since it will allow them to access financial services easily hence being more financially included. To achieve this, there is a need for policymakers establish policies that facilitate SMEs in Urban informal settlements to obtain mobile credit from providers at low cost.