Discussion Paper No. 142 of 2012 on Effects of Financial Literacy on Financial Access in Kenya

Abstract

This study investigates effects of financial literacy on financial access in Kenya. The FinAccess National Survey 2009 shows that 60 per cent of the adult population in Kenya lacks access to formal financial services including banking, insurance and mobile money transfer services. Access to formal financial services is not only important for individuals for risk transfer, but also for the economy at large in savings mobilization and capital allocation. Multinomial probit regression results for a sample of 6,329 national representative individuals established that financial literacy is a strong predictor of formal financial access in Kenya. Using the number of household income earners as an instrument, it was established that financial literacy is exogenous. Control variables including age, education, urbanism, proximity to formal financial institutions and being male were also found to increase incidences of financial access in Kenya. It was concluded that other factors besides price affect demand for formal financial services and policy efforts aimed at boosting financial literacy should be enhanced.