Financial Inclusion in Kenya: The Role of Mobile Financial Services

Abstract

Access to Mobile Financial Services (MFS), which include mobile payments, savings, insurance, and digital credit, enables mobile phone users to leapfrog over the deficiencies of conventional banking structures and become financially included. The proliferation of MFS has consequently been staggering, summing up more than one billion accounts in developing economies already. In addition, the usage of MFS was shown to have various welfare increasing effects, such as consumption smoothing and decreases in poverty. However, the fast and furious growth of MFS might have also obscured risks and underutilized potentials of MFS. This cumulative dissertation, composed of three essays, contributes to our understanding of such risks and the low utilization of MFS in specific domains. The first essay is “Promises and pitfalls of digital credit: Empirical evidence from Kenya” and has two objectives. The first objective is to analyze whether digital credit increases overall credit access. The second is to analyze the probability of digital credit borrowers defaulting and the consequences thereof. For these analyses, we use three nationally representative household surveys from Kenya executed in the years 2012, 2015, and 2018 by the Kenya National Burau of Statistics, FSD Kenya, and the Central Bank Kenya (hereafter referred to as the FinAccess survey). Using descriptive statistics, we find that digital credit appears to have increased overall credit usage for a substantial share of Kenyans. We further find that digital credit borrowers are disproportionately likely to default and to get reported for defaulting; this type of reporting is also termed “blacklisting” as it can lead to long-term exclusions from all credit markets. Our study shows that 90 percent of all “blacklisting” in Kenya are directly related to digital credit borrowing. The second essay is “Digital credit and the gender gap in financial inclusion: Empirical evidence from Kenya”. The first aim of this essay is to analyze whether digital credit decreases the gender gap in financial inclusion, here, financial inclusion is defined as the usage of any formal credit. To achieve this, we use descriptive statistics based on four FinAccess surveys from 2009, 2012, 2015, and 2018. We find that the gender gap in financial inclusion has statistically significantly increased due to a large and persistent gender gap in formal digital credit usage, whereas gender differences in formal conventional credit usage have not statistically significantly changed. The second aim of this essay therefore is to find out what explains the considerable and persisting gender gap in formal digital credit usage. To answer this question, we use logistic regressions to analyze the correlation between socioeconomic variables and formal digital as well as semi-formal digital credit usage based on the 2018 FinAccess survey. We find that differences in socioeconomic variables, foremost education, income, and mobile phone ownership largely explain the persisting gender gap in formal digital credit usage. The main findings are robust to several other estimation techniques. We further find that there are no statistically significant gender differences in the usage of the less regulated, semi-formal digital credit. We infer that regulations in the formal digital credit market might truncate otherwise available contract terms disproportionately often for women. The last essay is “Use of mobile financial services among farmers in Africa: Insights from Kenya”. Here we investigate the role of MFS for farm-related activities analyzing data of the 2018 FinAccess survey. By using descriptive statistics, we find that a large share of farmers uses MFS but only a fraction uses these services for farm-related purposes. We consequently explore potential reasons for the low usage of MFS for farm-related purposes by using descriptive statistics. We suggest that overall MFS might not be -yet- tailored to the specific needs of the agricultural sector. More precisely we cautiously infer that current issues with MFS, such as server system downtimes, transaction limits, and short repayment periods of digital credit outweigh the benefits of using MFS for farm related purposes. Based on the three essays we draw several conclusions. On one hand, our findings confirm that MFS are widely used, including by typically marginalized groups such as rural farmers and women. On the other hand, our results show that usage rates of MFS for agriculture are much lower than what is often expected and claimed and that digital credit appears to increase the gender gap in financial inclusion and thereby increase inequalities. We further show that MFS could perversely lead to financial exclusion for a substantial share of digital borrowers who are “blacklisted”. Overall, this dissertation hence somewhat dampens the enthusiasm about MFS by revealing substantial risks that coincide with the rapid growth of MFS.