Effect of Alternative Channels of Banking on Poverty in Kenya

Abstract

Creating sustainable alternative channels of banking has been the priority of the Kenya Government over the last decade. In the last ten years, Kenya, like other developing countries has experienced high levels of financial exclusion and poverty incidences. Financial inclusion as a consequence of alternative channels of banking is seen as a step toward poverty reduction. Within the broader context of economic empowerment, financial inclusion is seen as a crucial instrument to deal with poverty and disparities and as a result, further economic growth. Financial inclusion increased from 26.7 percent in 2006 to 75.3 percent in 2018 thanks to the invention of mobile money and agency banking. The poverty rate dropped from 46% in 2007 to 36% in 2018. Individuals are being offered financial services such as credit, payment of services, and savings through mobile money, hence expanding access to financial services. To reduce poverty, it is important that the country’s population have access to appropriate financial services and products to boost their standard of living. It is noted, however, that the rate of decline in poverty was much lower than the rate of growth in alternative channels of banking. This study aimed at investigating the effect of alternative channels of banking on households’ savings and poverty in Kenya. The variables investigated were agency banking, mobile banking, households’ savings and poverty levels. The study used a longitudinal research methodology and monthly data from March 2007 to December 2018. The research questions were answered using descriptive and regression analysis approaches. According to the estimates, a 10% increase in mobile banking usage would result in a 0.9 percent increase in household savings, a 10% increase in agency banking usage would result in a 3.83 percent increase in household savings, and a 10% increase in household savings would result in a 1.44 percent reduction in poverty. It is proposed that the government should collaborate with other innovators such commercial banks, microfinance institutions and telecommunications firms to increase coverage and access to alternative channels of banking for enhanced financial inclusion and poverty reduction. This can partly be achieved through design and implementation of favourable policies that support growth and uptake of alternative channels of banking and relevant innovation.