Effect of Financial Technology on Financial Deepening in Kenya

Abstract

The importance of financial deepening cannot be over emphasized due to its contribution to economic development. Financial deepening enhances the mobilization, pooling, and channeling of the saving into a productive capital pool that enhances economic development. Some scholars believe that the application of fintech has improved financial deepening through financial innovation and technology spillover, reducing service costs and information asymmetry. Some others believe that the development of fintech has spawned many enterprises, new service models, and new financial products. However, it has also caused a certain negative – even subversive – impact, on the financial system, hindering financial deepening. The objective of this research was to determine the effect of financial technology on Kenya’s financial deepening. The study was based on disruptive innovation theory and supported by financial intermediation theory as well as diffusion of innovation theory. The independent variable was financial technology measured using the number of transactions through mobile banking, internet banking, agency banking and Mpesa while the control variables were interest rate and inflation. The dependent variable that the research attempted to explain was the financial deepening in Kenya. The data was collected on a quarterly basis over a period of 10 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 0.770, indicating that the chosen independent variables could explain 77 percent of the variance in Kenya’s financial deepening, while the other 23 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 financial deepening in Kenya. Further, the findings demonstrated that mobile banking; internet banking and Mpesa had a significant positive impact on financial deepening as indicated by positive coefficients and p values less than 0.05. Inflation was established to possess negative and considerable outcome on financial deepening, as shown from the negative coefficient and a p value less than 0.05 while agency banking and interest rate were found not to have a significant effect. The research recommends the need for policy makers to create a conducive environment for development of more fintech innovations while at the same time ensuring the safety of the existing ones as this contributes to a rise in financial deepening. The study also recommends that there is need to come up with effective measures of managing inflation levels as high inflation has an adverse effect on financial deepening. The study recommends the need for future researchers to conduct a study for a longer period of time to capture the effects of economic cycles.