in the 21st Century

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126 Kenya’s Financial Transformation in the 21st Century As time to bank branch or agent is related to many other important socioeconomic characteristics, we turn to a regression analysis. When we only analyse the economic factors outlined in the conceptual framework, the marginal effect of the time it takes to get to a bank from Regression 1 (Economic Factors) was positive and more significant the closer the individual was to a bank branch or agent. Yet, once all other factors were controlled for, distance to a bank branch or agent, while still positive, was no longer significant. This signals that increasing physical access alone, and thus reducing the time spent accessing services, is not enough to stimulate demand. Understanding user needs and tailoring formal bank products to meet their needs will help create a stronger product that incentivises use. 5 Socio-cultural characteristics of demand for formal banking products As discussed in the conceptual framework section, the demand for formal banking products is not solely determined by economic factors. People’s level of financial literacy, their cultural or ethnic backgrounds, the formality of their occupation, their level of trust in banks as a financial provider and intra-household decision-making power can all play a determining role in their preference for formal banking products, and therefore their demand. In this section, we will analyse these socio-cultural factors and their role in determining the actual demand for formal banking products. Financial literacy 15 Research has found that low levels of financial literacy are negatively related to saving, credit and investment practices (Hilgert et al., 2003). Financial literacy is also positively related to borrowing at higher costs (Lusardi and Tufano, 2009). Beck and la Torre (2006) argue that greater understanding of the benefits of financial services can lead to greater demand for formal banking. Furthermore, as outlined by Claessens (2006), a lack of awareness and understanding of formal banking products can result in voluntary exclusion. In measuring financial literacy, researchers have predominately used a measure of individuals’ financial numeracy skills. Carpena et al. (2011) argue, however, that a measure of financial literacy should also include questions on financial 15 As mentioned earlier, the chapter by Johnson, Li, Storchi and Vujiĉ in this book looks at the issue of financial capability in much greater detail and develops a measure to look at this concept and its role in formal financial inclusion.
Formal Financial Inclusion in Kenya: Understanding the Demand-Side Constraints 127 awareness and attitudes towards financial products. In analysing the role of financial literacy as a demand-side determinant, this chapter uses financial numeracy skills and financial product awareness as a proxy for financial literacy. Figure 12: Formal bank access and financial numeracy, 2009 and 2013 50 48% Percent formally banked 40 30 20 10 9% 11% 24% 29% 34% 0 No financial numeracy Some financial numeracy Financial numeracy Source: FinAccess 2009 and 2013 data. 2009 2013 Financial numeracy skills affect the probability of a person being formally banked. From Figure 12 we see that 48% of the survey respondents who answered the two numeracy questions correctly in 2013 were formally banked, compared to only 11% of those who got both questions wrong. Since 2009, the biggest increase in formal banking has been among those with financial numeracy skills – an increase of 15 percentage points. Among those with little or no financial numeracy skills, the increase from 2009 was only 2 percentage points. King (2012c), building on Beck and de la Torre (2007), shows how financial literacy can change a person’s indifference curve such that they have an increased preference for financial services. This may help explain why we see this increase in the percentage banked among those with financial numeracy skills. Claessens’ (2006) analysis of voluntary exclusion also points to increased awareness and understanding resulting in increased demand. Again, regardless of income, people with financial numeracy skills are more likely to be banked. This is confirmed by the probit regression. Controlling for everything else, answering one of the numeracy questions correctly increases the likelihood of being banked by 5.3 percentage points. Similarly, when analysing the relationship between awareness of formal financial terms (or 'terminology') and being formally banked, Figure 13 shows that the greater the awareness, the more likely a person is to have a formal
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Kenya’s Financial Transformation
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FSD Kenya 5th floor, KMA Centre Cor
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Dedication Ravi Ramrattan was FSD
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CHAPTER 1 Transformation of Kenya
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CHAPTER 2 The Geography of Financia
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The Digitisation of Financial Servi
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Is Kenya’s Digital Revolution Inf
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CHAPTER 6 Measurement of Financial
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CHAPTER 7 Financial Capability and
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