Income Inequality and Household Saving in Kenya
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Date
2024-11
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Kenyatta University
Abstract
Household saving in a country is a critical source of funding to its investments especially in a developing economy like Kenya. Household saving emerges as an integral part towards national saving level in that country. Most studies conducted in developing countries with Kenya in inclusion show that these countries savings are below 30% of their Gross Domestic Product. Currently, Kenya’s national saving stands at 12% of its Gross Domestic Product. Over the past three decades, Kenya has shown a declining trend in gross domestic savings since it was at 23% of Gross Domestic Product in the early 1990s and dropped to 12% in the early 2020s. This declining saving rate could be explained by the country’s level of income inequality which also has detrimental effects on economic growth as well as the poverty reducing effects of a growing economy. Kenya has been having a declining rate of income inequality portrayed by declining Gini indices. Observing an unconventional trend between income inequality and gross national savings in Kenya, serves as the base for this study. The general objective of this study was to determine the effects of income inequality of household saving in Kenya. This study proposed to fulfil the following specific objectives; to investigate the effects of income inequality on household saving rate in Kenya and to determine the effects of income inequality on household saving option in Kenya. The study was anchored on saving and income theories; Life-Cycle Income Hypothesis, Permanent Income Hypothesis, and Absolute Income Hypothesis. The study took stance based on the previous empirical evidences and theoretical discussions pertaining the relationship between income inequality and household saving. This study used cross-sectional financial data collected from households in Kenya using the various Kenya Integrated Household Budget Surveys and ensured that all information that was analyzed reflected households from all over Kenya. For the Gini Index, the study generated it from the available income data from FinAccess. Data analysis involved descriptive statistics, diagnostic checks, and probit regression analysis. The study showed that the mean income of the respondents is Ksh. 7834, the mean age was 38 years and 65.66% of the households are located in the rural areas at 65.66% and the remaining 34.34% reside in the urban areas. The study findings were that income inequality had a negative effect of the likelihood of a household to save. The age, location, education level, gender, occupation, income level, household size and ownership of a bank account, all had a significant effect on the likelihood of a household to save. The estimates also showed that income inequality negatively affected household saving option for formal financial institutions. The size of the household and the gender of the household head did not determine the household saving option.
Description
A Research Project Submitted to the Department of Applied Economics in the School of Business, Economics, and Tourism in Partial Fulfilment of the Requirements for the Award of a Master of Economics Degree at Kenyatta University, November 2024.
Supervisor
Isaac Kimunio