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 FinAccess national surveys 2009 and 2013 for 6,598 and 6,449 individuals, respectively. Multinomial probit regressions show that financial literacy is a strong predictor of individual demand for financial services. Financial literacy scores increases 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.
Highlights
This study investigates effects of financial literacy on financial access in Kenya
A unit increase in financial literacy index increases the probability of access to formal and informal financial access by about 8% and 2% higher respectively, compared to the financially excluded category
Individuals who correctly scored on the test have about 47% and 8% higher probability of access to formal and informal financial services, relative to the base outcome
Summary
This study investigates effects of financial literacy on financial access in Kenya. Access to financial services is of interests due to its impacts on development outcomes such as household welfare and economic growth [6, 7, 8]. Low access to formal financial services in Kenya mirrors pervasive problem in Sub-Saharan Africa where only one in five households has access to formal financial services [8]. The classifications of formal or informal depend on extent to which financial service providers are regulated. Formal financial products are supplied by institutions supervised by regulatory agencies while informal financial products are provided by institutions operating outside legal framework [9, 10]
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