Abstract
Despite financial inclusion being a key driver of growth and income equality, developing countries continue to have significant proportion of populations without access and usage of basic formal financial services. Instead, most still subscribe to informal financial services, which have low or nonexistent entry barriers. In the context of small holder farmers, informal financial services can moderate their access to finance where there are gaps in the formal financial instrumentation. The present study, therefore, sought to determine the moderating effect of informal financial services on the use of formal financial services among small holder farmers in Kenya. The target population for this study were small holder farmers from Nakuru, Busia, and Kirinyaga counties in Kenya; a sample size of 496 was obtained and selected through purposive and stratified random sampling techniques. Data were collected using copies of a researcher-developed questionnaire and analyzed using multiple linear regression analysis with Stata. The findings reveal that informal financial services did not have a moderating effect on utilization of formal financial services among small holder farmers. The study recommends that the formal financial institutions develop products and work closely with informal financial services to encourage more utilization of financial services.
Highlights
Despite financial inclusion being a key driver of growth and income equality, developing countries continue to have significant proportion of populations without access and usage of basic formal financial services
The findings reveal that informal financial services did not have a moderating effect on utilization of formal financial services among small holder farmers
Despite the importance of financial inclusion being a driver of growth and income equality, developing countries continue to have significant proportions of individuals and households without access to basic financial services, with at least 80% of adults in these countries being unbanked compared with a world average of 50% and a developed countries average of 8% (Allen et al, 2014)
Summary
Demirguc-Kunt and Klapper (2012) opine that of the 50% banked adults who have individual or joint accounts at formal financial institutions, only 22% have savings accounts.The situation in Africa is even grimmer; the recent global financial inclusion index shows that “less than a quarter of adults have an account with formal financial institutions” (Demirguc-Kunt and Klapper, 2012) This gives apparent exasperating contemplation that majority of African adults in many African countries appear to be financially excluded and perhaps use informal financial channels to save and borrow. Kenya has a population of 46 million people and adults with accounts in formal financial institutions in the year 2014 stood at 55.2%, formal savings 30%, and formal borrowing 15% according to World Bank data (Demirguc-Kunt et al, 2015) This information demonstrates that there is financial exclusion and that the poorer sections of the society, who are mainly found in rural, arid, and semiarid areas, have not been able to access suitable financial services.
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