The Effect of Financial Innovation on Economic Growth 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 and Kenya falls in this category, where about 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 and Kenya in particular. 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 economic growth 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 RTGS affect the economic growth and prosperity in Kenya. The study used secondary data from Central bank of Kenya, Kenya Bureau of Statistics and other institution. 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 and the analysis presented in tables. The study concluded that financial innovation has an insignificant positive impact on economic growth with mobile transactions with greater impact. RTGS 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 have significantly influence economic growth. The study recommends that for financial innovation 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 economic growth.