Abstract
Efforts are being exerted in many developing countries to promote financial inclusion by increasing individuals’ access to financial products and services. However, literature suggests that increasing the supply of financial products and services per se may not help in expanding financial inclusion unless concerted efforts are exerted in enhancing financial literacy. This is because financially literate individuals are more likely to appreciate the value of financial services and hence take up financial products. This paper reports the link between financial literacy and inclusion using data from a demand side financial inclusion survey conducted in Kenya and Tanzania in 2016 covering a total of 6029 individuals. Results from our instrumental variable regression analysis confirmed that financial literacy is a strong driver of financial inclusion. This implies that efforts to promote financial inclusion need to be accompanied with financial literacy campaigns in both countries.
Highlights
IntroductionKnowledge, skills, attitudes and behaviours necessary to make rational financial decision with the ultimate goal of achieving financial well-being (OECD-INFE 2012)
The last sub section presents the results of instrumental variable regression where the link between financial literacy and financial inclusion are discussed
Having recognized its welfare enhancing effects, policy makers in developing countries are advocating for expansion of financial inclusion
Summary
Knowledge, skills, attitudes and behaviours necessary to make rational financial decision with the ultimate goal of achieving financial well-being (OECD-INFE 2012). Financial literacy is low as only 33% of individuals show understanding of basic financial concepts (Klapper et al 2015) and around 3.5 billion individuals in the world are financially illiterate. This is alarmingly high compared to 2 billion unbanked individuals worldwide, which implies that 1.5 billion banked individuals in the world might be financially illiterate. Literacy levels are low in developing countries as evidenced by a global financial literacy survey where only
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