Urban Household Saving Behavior: a Case Study of Kenya

Abstract

Like many other developing countries, Kenya has faced problems in financing domestic investment. Despite a high proportion of GDP having been put into saving, Kenya has not met the investment finances fully. It· has had to rely on foreign savings to supplement domestic resources. However, factors working on both demand and supply side of foreign savings have made the country put more emphasis on mobilization of domestic saving. Saving is a complex socio-economic phenomenon. It is therefore necessary to understand the factors behind saving behavior. The main objective of the study is to examine the determinants of saving behavior of urban households in Kenya. Six towns are considered that is Nairobi, Mombasa, Kisumu, Nakuru and , Eldoret. An econometric study is carried out to test the explanatory power of various determinants of saving behavior and to see the effects of alternative policies that can be used in mobilizing savings. Due to data problems, the analysis lays greater emphasis on financial savings. Using OLS technique, savings funct ions for urban households are fitted at urban center level. From the empirical work the following conclusion are arrived at: income is an important variable in savings function for urban households where saving is a decreas ing non-linear funct ion of income; education and number of income contributors play insignificant role in explaining variations in financial savings, movement towards equitable distribution of income means increasing financial savings thus aggregate savings and, reducing family size will leave more income for saving purpose. From these results various policy implications are drawn. First, with the population control policy the country will achieve a lot in mobilizing domestic personal savings in urban areas. Secondly, it is necessary that the government ensures equitable .distribution of income in urban areas. Thirdly, although the effects of education policy may be indirectly felt on saving, education policy will not exert direct effect on savings.