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The Effect of Institutions on Households’ Saving Behavior in Kenya

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Date
2018-09
Author
Njenga, Moses Githinji
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Abstract
Savings is a vital source of investment funds, especially for developing economies. It is thus essential that internal savings capacity in these economies is increased to enhance investment financing and economic growth. Since increased reliance on international capital flows can result to economic instability, achieving a higher national saving rate is a critical macroeconomic objective for many developing countries. However, domestic savings remain low in many of them including Kenya, posing a significant development challenge. Household savings contribute a sizeable share of domestic and national savings in both industrialized and developing countries. Therefore, one set of fundamental determinants of national savings is the choices households make about their savings. However, households should not be considered fully as autonomous actors without the influence of institutions which lead to economic performance, efficiency, economic growth and development. Institutional theory of saving indicates that institutional factors significantly affect the ability to save. This study, therefore, attempted to enhance understanding of Kenya’s saving behavior through a close examination of the institutional theory of saving as a crucial framework that can assist in explaining its savings performance. The study used a multinomial/conditional probit model and a ranked ordered multinomial/conditional probit model to analyze the effect of institutions on households’ saving behavior. Data from the Financial Access National surveys (2006, 2009 and 2013) was used in the analysis. The study found that institutional factors including travel cost to access a saving option, interest rate on savings, trust, information and saving expectations influence the saving behavior in Kenya. It is, therefore, important to address the travel cost through the promotion of non-traditional saving services, offering attractive interest on savings, building trust in saving options, and enhancing financial education in Kenya. Further, enhancing formal education, income levels and reducing gender gaps are crucial in improving saving participation and performance in Kenya.
URI
http://ir-library.ku.ac.ke/handle/123456789/19074
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  • PHD-Department of Econometrics & Statistics [11]

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