Effects of Financial Literacy on Individual Choices Among Financial Access Strands in Kenya

Abstract

This paper investigates effects of financial literacy on individual choices among formal financial services, informal financial services, and complete financial exclusion in Kenya. The study employed cross-sectional analysis using Fin Access national surveys 2009 and 2013 for 6,598 and 6,449 individuals, respectively. Multinomial probity regressions show that financial literacy is a strong predictor of individual demand for financial services. Financial literacy scores increase with increasing level of formality and average performance on financial literacy tests is generally lower than those reported in extant studies for developed countries. The findings suggest importance of policy efforts to promote financial literacy to expand individual access to formal financial services. To our knowledge this is the first paper in developing countries context to use both objective and self-reported measures of financial literacy and its role in individual choices among different financial access strands.