Discussion Paper No. 344 of 2024 on Role of Fintech in Enhancing Financial Inclusion in Arid Areas in Kenya

Abstract

The arid areas in Kenya have the lowest development indicators. Studies have evidenced that fintech is a channel for financial inclusion, which is instrumental in increasing the asset base of the poor through savings and investments. This aids in breaking cycles of poverty. This study assessed the use of fintech in enhancing financial inclusion in arid areas by assessing the factors influencing fintech adoption, the contribution of fintech to financial inclusion, and the effect of fintech in improving welfare in arid areas. The study adopted the diffusion of innovation theory and used a cross-section dataset from the Finaccess Household Survey, 2021. The results show that the adoption of fintech is aided by ICT gadgets such as ownership of a mobile phone. That said, the high costs of fintech services including service fees and therefore affordability of the services is a deterrent to adopting fintech. In the arid areas, partly because financial institutions are few, having a bank account or being a member of a SACCO did not serve as a significant source of information to register with a mobile platform or use fintech services such as savings and transactions. The type of economic activity highly influenced the adoption of fintech services. For example, farming and self-employed had a higher probability of adopting fintech. Fintech had a significant effect on financial inclusion, although using fintech for financial transactions had a lower probability of deepening financial inclusion. Furthermore, the adoption of fintech predicted a lower probability of vulnerabilities. As such, the policy interventions proposed to enhance the adoption and use of fintech in arid areas include creating an enabling environment to facilitate access to and use of affordable phones to boost access with affordable services; embracing a holistic approach to financial sector development given the interdependency and complementarity among the various channels of financial services; and prioritizing financial inclusion in addressing developmental needs such as enhancing the coping mechanism to shocks.