Dynamics of Financial Inclusion and Welfare in Kenya
Abstract
Financial inclusion (FI) is not an objective in itself, but only to the extent that it
helps improve welfare. Evidence linking FI and welfare is however less conclusive
despite growing interest. Understanding this link is often hampered first by, lack of
a substantive and universally acceptable measure of FI comparable across time and
geography and secondly by lack of empirical evidence. To address this gap, an
empirical examination on Kenya using GMM was preceded by the modeling of FI
to establish its determinants. The inter-temporal variation in household
consumption to generate vulnerability as expected poverty was also analyzed to
inform on the impact of FI on household vulnerability to poverty. Financial Access
surveys (2006, 2009, 2013 and 2016) organized into 126 cohorts provided a solid
empirical basis for tracking FI and its impact on welfare. Per capita income was
found to be one of the main drivers of FI pointing to operation of the demand
following hypothesis in Kenya. In terms of welfare impacts, transactionary, credit,
insurance and portfolio usage of financial services significantly raise consumption
expenditure per adult equivalent by 74.3, 81.6, 39.8 and 3.473 percent respectively
all things held constant. This welfare impact is also extended towards poverty
reduction. Safe for vulnerability to poverty in rural areas, FI was found to
significantly lower vulnerability to poverty among urban households as well as
headcount poverty in both rural and urban areas. The study recommends a
reduction in transactionary costs by financial service providers to consolidate gains
from financial inclusion, increased investment in human capital development by
the government to supplement financial inclusion, employment creation and
increased provision of basic services by government to enable households release
part of their income towards improving household welfare.
Key words: Pseudo panel estimation, financial inclusion, welfare, vulnerability,
transition matrix, dynamic regression
Publisher
University of Nairobi
Subject
Welfare In KenyaRights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
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