Effect of Financial Literacy on Financial Access and Savings in Kenya

Abstract

Financial literacy enhances effective use of financial services, promotes technical progress, promotes economic growth and development and aids in poverty reduction. However, Fin Access survey data shows that 17 per cent of Kenyans are financially excluded as in 2016 while enrolment in primary, secondary, and post-secondary between 2000 and 2016 increased by 66, 259, and 431 per cent respectively. This implies that increased school enrolment has not translated to reduced financial exclusion standards of below five per cent. World Bank further asserts that Kenya is among the top 25 countries in the world with high financial exclusion levels. High exclusion levels hinder development in a country and exposes households to many financial risks. Majority of the financially excluded and informal financial services users are those with low education levels and those with no education at all. There is, therefore, a need to investigate the effects of financial literacy on financial access in the country. The specific objectives of this study were to find the impact of financial literacy on financial access in Kenya and to find the impact of financial literacy on savings in Kenya. The first objective was answered using multinomial logit while the second was answered using a probit model. The study used cross sectional data from FinAcess survey in 2013 and 2016. A variety of diagnostic tests likewald and model specification tests were carried out to ensure robust results. The results for 2013 and 2016 showed that an increase in age by one year increases the probability of accessing formal financial services but decreases the probability of accessing informal financial services compared to the excluded category. At the same time, an increase in income by one per cent increases the probability of accessing the formal financial strand but decreases the one for the informal one. An increase in the respondent’s level of education increases the probability of accessing formal financial services but decreases the probability of accessing the informal strand one. An increase in financial literacy and an increase in income ware found to increase the probability of savings. Increase in household size and increase in the distance to the nearest mobile money agent decreases the probability of savings. This calls for concerted efforts by the stakeholders, especially the government, to ensure that at least every student gets to a college level. This can be achieved through providing financial support to the students to further post-secondary and tertiary education levels. These institutions also need to be well equipped and offer quality education that guarantees employability and ensures better life for the students. This will ensure inclusion by encouraging formal financial access and mobilization of savings which are vital to economic development