Effect of Financial Innovations on Financial Deepening in Kenya

Abstract

Over three billion people in developing countries are still without effective access to financial services. The problem is particularly acute in Sub-Saharan Africa, where only between five and twenty-five percent of households have a formal relationship with a financial institution. Lack of access to financial services is therefore one of the largest constraints to private sector development in Africa. In responding to these changes, the Kenyan market in has recently witnessed a host of changes in the financial sector as a result of changes in the legal, regulatory, institutional framework. Fast changing technology has also greatly influenced access to financial services and increased channels through which financial services are provided. The objective of the research was to examine empirically the link between financial innovations and financial deepening by assessing the effect of increasing financial innovations in Kenya on financial sector development, the extent to which changes in regulation and increasing rollout of new products such as mobile money payment systems, mobile banking and agency banking affect access to financial services to the Kenyan population.The study used secondary data on use of financial services. The data collected was analysed using regression method with the help of SPSS edited for accuracy, uniformity, consistency, completeness and arranged to enable and tabulated. The analysis was presented in frequency and descriptive tables and graphs.

The study concluded that financial innovation has an insignificant positive impact on financial deepening. Both mobile money innovations and mobile banking have insignificant effects on financial deepening in Kenya. This means that the rise in mobile money transactions as well as in m-banking in Kenya do not significantly influence financial deepening. The study recommends that for financial deepening in Kenya to be enhanced, there is need for policy makers to relook at the approach of mobile money penetration in impacting use of formal financial services as this is seen to have an insignificant impact on financial deepening.