Effect of Domestic Debt on Financial Inclusion in Kenya

Abstract

Kenya has witnessed a notable surge in domestic debt, nearing 50% of its total public debt by the end of 2022, which raises concerns about economic sustainability and potential fiscal vulnerabilities. Simultaneously, the nation stands out as a beacon of financial inclusion, with innovations like M-Pesa revolutionizing access to financial services for a vast majority. Given these concurrent trends, understanding the interplay between rising domestic borrowing and the state of financial inclusion becomes crucial. The objective of this study was to determine the effect of domestic debt on financial inclusion in Kenya. The study was grounded in three major economic theories: the crowding-out effect theory, financial inclusion theory, and financial intermediation theory. The control variables were interest rates, and economic growth. The study adopted a descriptive research design, utilizing secondary data obtained from reputable sources such as the Central Bank of Kenya, Kenya National Bureau of Statistics, and the World Bank. The dataset spans a 10-year period from 2013 to 2022, providing a temporal window to capture trends and patterns in financial inclusion within the specified timeframe. The data collected included quarterly information on financial inclusion, domestic debt, interest rates, and economic growth. Descriptive statistics, correlation analysis, and multiple regression analysis were employed as data analysis techniques to uncover the patterns and relationships within the dataset. The regression results reveal a statistically significant positive relationship between economic growth and financial inclusion, supporting the financial intermediation theory. The R Square value is 0.535, indicating that approximately 53.5% of the variance in financial inclusion can be explained by the included predictors. Conversely, a significant negative relationship is observed between domestic debt and financial inclusion, indicative of a potential crowding-out effect as proposed by economic theories. The coefficient for domestic debt is -0.037 (p = 0.001), suggesting a significant negative impact. Interestingly, while interest rates exhibit a negative correlation with financial inclusion, the relationship is not statistically significant (p = 0.172), emphasizing the complexity of the interest rate dynamics in the context of financial inclusion in Kenya. In conclusion, this study contributes to the existing literature by providing empirical evidence on the impact of economic factors on financial inclusion in Kenya. Recommendations for policy and practice include prioritizing economic growth strategies, adopting prudent domestic debt management practices, and continuously evaluating interest rate policies. Furthermore, the study suggests avenues for future research, including longitudinal analyses, in-depth qualitative studies, and investigations into the micro-level implications of economic factors on financial inclusion