The relationship between financial inclusion and economic development in Kenya

Abstract

The importance of an inclusive financial system is widely recognized in the policy circle and has become a policy priority in many countries including Kenya. This research project seek's to examine critically financial inclusion and economic development in Kenya. The objective of the study is to review existing sources of detailed data on financial inclusion and economic development and establish the relationship between financial inclusion and economic development in Kenya and make recommendation. The research design chosen for analysis was meta-analysis. Secondary data was collected from United Nations Development Programme (UNDP), International Monetary Fund (IMF) and Financial Access Surveys (FAS). This data was analyzed using descriptive statistical approach, regression and correlation analysis. The excel software was used to transform the variables into a format suitable for analysis after which the statistical package for social sciences for data analysis (SPSS) was used, which provided various statistics. The output from SPSS provided the basis for analysis and findings of .the study. The period covered by the study was 7 years from the year 2005 to 2011.The study found out that there is a positive relationship between financial inclusion and economic development and an increase in financial inclusion leads to an increase in economic development. This was revealed by the various correlation tests and regression test carried out i.e. the Pearson correlation matrix highlighted that there is a significant correlation between the dependent variable human development Index (HDI) independent variable number of bank branches, and number of bank accounts at 0.985 and 0.952 respectively. Financial inclusion ensures ease.of availability, accessibility and usage of the formal financial system to all members of :t4~ economy. Financial inclusion is an important aspect of development. Policymakers in developing countries have an important role to play in creating the conditions for improved access, and thereby unlocking the economic potential of their populations. The potential for economic growth and poverty alleviation through the development of a more inclusive financial services sector has been recognized as a priority issue in many countries. There is need for government of Kenya to recognize the importance of financial inclusion and make policies that are more inclusive for greater economic development. Further research is needed on financial inclusion, its indicators and determinants as well as its impact on development. Its impact as an effective developmental policy is still under research.