Discussion Paper No. 168 of 2014 on Financial Deepening, Savings Mobilization and Poverty Reduction in Kenya

Abstract

Kenya’s Vision 2030 identifies the financial sector as one of the key sectors, as it plays a key role in mobilizing savings that are necessary for economic development. Financial deepening accelerates economic growth through expansion of access to finance for those who do not have adequate finance themselves. Having access to finance is a key factor in poverty reduction. This study analyzes the interrelationship between financial deepening, domestic mobilization of savings, and poverty reduction in Kenya. The study finds that there is a unidirectional causality flowing from financial deepening to both savings and poverty reduction. The effect of financial deepening on poverty reduction in Kenya is positive, though not significant. Finally, the study finds the existence of a long run equilibrium relationship between financial deepening, savings mobilization, and poverty reduction. The government should take policy measures aimed at enhancing financial deepening because it is beneficial to both savings mobilization and poverty reduction. In particular, the interest rate margin should be reduced.