DECLARATION

I hereby declare that no part of the work that appears in this study has been utilized in the
application of a degree or any other qualification to the University or any other institution of
learning

Signed: ________________________ Date: _________________________

BADHA ROBA ABUDO REG NO: ECO/2133/20

This project report has been presented for examination with my approval as the

University Supervisor.

Signed……………………………………………. Date…………………………….
DR. ONYANGO
LECTURER,
DEPARTMENT OF ECONOMICS
SCHOOL OF BUSINESS, MOI UNIVERSITY

2
 ACKNOWLEDGEMENT

I thank the almighty God for giving me the opportunity and ability to undertake the
Bachelor’s degree course and guiding me through the entire course. Finally, I wish to
acknowledge with much gratitude all the people who in a way facilitated completion of this
program including my friends and classmates.
May the almighty God bless you.

DEDICATION

I dedicate this proposal myself and my friends of great minds economic group and all other
learners in Moi University in the spirit of learning and encouraging the mindsets of searching
relevancy in the field of Economics

3
 ABSTRACT

The study investigates the impact of macroeconomic determinants on financial inclusivity in

Kenya. The study uses secondary data obtained from the World Bank and Central Bank of Kenya
covering the period between 2000 and 2021. The study employs an Auto Regressive Distributed
Lag (ARDL) approach to estimate the long-run relationship between the selected
macroeconomic determinants and financial inclusion. The study identifies several
macroeconomic determinants of financial inclusion in Kenya, including economic growth,
inflation rate, interest rate, exchange rate, and population growth rate.

The findings of the study show that economic growth has a positive and significant effect on
financial inclusion in Kenya. The results indicate that a 1% increase in economic growth leads to
a 0.39% increase in financial inclusion in the long-run. Similarly, the study finds that inflation
rate has a negative and significant impact on financial inclusion, implying that a 1% increase in
inflation rate results in a 0.11% reduction in financial inclusion. The study also shows that
interest rate has a negative and significant effect on financial inclusion in Kenya, indicating that
a 1% increase in interest rate leads to a 0.17% decline in financial inclusion.

Furthermore, the study finds that exchange rate has a positive and significant impact on financial
inclusion, implying that a 1% increase in exchange rate leads to a 0.21% increase in financial
inclusion in the long-run. Finally, the study shows that population growth rate has a positive and
significant effect on financial inclusion in Kenya, suggesting that a 1% increase in population
growth rate leads to a 0.28% increase in financial inclusion.

In conclusion, the study highlights the importance of macroeconomic determinants in shaping

the level of financial inclusion in Kenya. The study recommends that policymakers should focus
on promoting economic growth and maintaining low inflation rates and interest rates to enhance
financial inclusion in the country. Additionally, the study suggests that policies aimed at
stabilizing the exchange rate and supporting population growth can also contribute to the
expansion of financial inclusion in Kenya.

4
TABLE OF CONTENTS

DECLARATION ..............................................................................................................................2

ACKNOWLEDGEMENT ..................................................................................................................3

DEDICATION ................................................................................................................................3

ABSTRACT ....................................................................................................................................4

CHAPTER ONE ..............................................................................................................................9

INTRODUCTION ...........................................................................................................................9

1.1 BACKGROUND OF THE STUDY .......................................................................................................................... 9

1.1.1 Financial Inclusion ................................................................................................................................... 10

1.1.2 Inflation Rate ........................................................................................................................................... 11

1.1.3 Economic Growth and Government Policy ............................................................................................... 12

1.1.4 Suggestions ............................................................................................................................................. 13

1.2 STATEMENT OF THE PROBLEM ....................................................................................................................... 14

1.3 STUDY OBJECTIVES......................................................................................................................................... 15

1.3.1 General objective .................................................................................................................................... 15

1.3.2 Specific objectives ................................................................................................................................... 15

1.4 RESEARCH QUESTIONS ................................................................................................................................... 16

1.5 RESEARCH HYPOTHESIS.................................................................................................................................. 16

5
1.6 SIGNIFICANCE OF THE STUDY ......................................................................................................................... 17

CHAPTER TWO ........................................................................................................................... 19

LITERATURE REVIEW .................................................................................................................. 19

2.1 OVERVIEW ..................................................................................................................................................... 19

2.2 THEORITICAL FRAMEWORK............................................................................................................................ 20

2.3 EMPIRICAL LITERATURE ................................................................................................................................. 24

2.4 CONCEPTUAL FRAMEWORK ........................................................................................................................... 25

CHAPTER THREE......................................................................................................................... 27

RESEARCH METHODOLOGY ........................................................................................................ 27

3.1 INTRODUCTION .............................................................................................................................................. 27

3.2 RESEARCH DESIGN ......................................................................................................................................... 27

3.3 TARGET POPULATION .................................................................................................................................... 28

3.3 SAMPLING DESIGN ......................................................................................................................................... 28

3.4 DEFINITION OF VARIABLES ............................................................................................................................. 29

3.5 DATA TYPES, COLLECTION INSTRUMENTS COLLECTION PROCEDURES .................................... 30

3.6 PRIMARY DATA .............................................................................................................................................. 30

3.6.1 Questionnaires ........................................................................................................................................ 31

6
 3.6.2 Interviews ............................................................................................................................................... 31

3.7 SECONDARY DATA ......................................................................................................................................... 31

3.8 RELIABILITY AND VALIDITY TESTING ............................................................................................................... 31

3.8 DATA ANALYSIS AND PROCESSING................................................................................................................. 32

3.8.1 Study Model ............................................................................................................................................ 33

3.8.1 Ethical Considerations ............................................................................................................................. 35

CHAPTER FOUR DATA ANALYSIS, RESULTS AND DISCUSSION........................................................ 37

4.1 INTRODUCTION .............................................................................................................................................. 37

4.2 DESCRIPTIVE STATISTICS ................................................................................................................................ 37

4.3 CORRELATION ................................................................................................................................................ 40

4.3.1 Relationship between Economic Growth and Financial Inclusivity in Kenya............................................... 41

4.3.2 Impact of Inflation on Financial Inclusivity ................................................................................................ 42

4.3.3 Effect of Interest Rates on Financial Inclusivity in Kenya ........................................................................... 43

4.3.4 The Role of Government Policies in Promoting Financial Inclusivity in Kenya ............................................ 45

4.4 REGRESSION ANALYSIS .................................................................................................................................. 48

4.1.1 Summary of Selected Macroeconomics Variables Coefficients.................................................................. 48

CHAPTER FIVE ............................................................................................................................ 50

FINDINGS, CONCLUSIONS AND RECOMMENDATIONS.................................................................. 50

5.1 OVERVIEW .......................................................................................................................................... 50

7
5.2 SUMMARY OF FINDINGS .................................................................................................................. 50

5.3 CONCLUSIONS .................................................................................................................................... 51

5.4 RECOMMENDATIONS ....................................................................................................................... 52

5.5 AREAS FOR FURTHER RESEARCH ................................................................................................ 52

5.6 LIMITATIONS OF THE STUDY ......................................................................................................... 53

REFERENCES .............................................................................................................................. 54

APPENDIX .................................................................................................................................. 57

Appendix I: Letter to the Financial Intuitions ....................................................................................................... 57

Appendix II: Questionnaire .................................................................................................................................. 58

Appendix III: Financial Institutions ....................................................................................................................... 60

8
 CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Financial inclusion refers to the ability of individuals and businesses to access financial products

and services that are affordable and meet their needs. In Kenya, financial inclusion has been a

key policy objective for the government in recent years. The government has put in place various

measures to promote financial inclusion, including the establishment of a financial regulatory

framework and the introduction of mobile banking services.

However, despite these efforts, financial inclusion in Kenya remains low, with a large proportion

of the population lacking access to basic financial services. This is particularly true in rural areas,

where access to financial services is limited. The low level of financial inclusion in Kenya is a

major obstacle to economic growth and development, as it limits the ability of individuals and

businesses to access credit, save, and invest.

This study aims to identify the macroeconomic determinants of financial inclusivity in Kenya.

Specifically, the study will examine the relationship between key macroeconomic variables such

as inflation, economic growth, and the exchange rate, and financial inclusivity in the country.

The study will use a quantitative research design, collecting data on the key macroeconomic

variables and financial inclusivity indicators from various sources such as the Central Bank of

Kenya and the Kenya National Bureau of Statistics. The data will be analyzed using regression

analysis to determine the relationship between the macroeconomic variables and financial

inclusivity.

9
The findings of the study will be of great significance to policymakers and financial institutions

in Kenya. The study will provide insights into the factors that contribute to financial inclusivity

in the country, and help policymakers and financial institutions to develop strategies to promote

financial inclusion. Ultimately, the study aims to contribute to the broader objective of achieving

sustainable economic growth and development in Kenya.

1.1.1 Financial Inclusion

The case study on macroeconomic determinants of financial inclusivity in Kenya focuses on

examining the factors that contribute to financial inclusion in the country. Financial inclusion

refers to the provision of affordable and accessible financial services to individuals and

businesses who have been excluded from the formal financial system.

In Kenya, financial inclusion is a key policy objective for the government, as many individuals

and businesses lack access to basic financial services, particularly in rural areas. Financial

exclusion can limit economic growth and development by restricting access to credit, savings,

and investment opportunities.

The case study will examine the macroeconomic determinants of financial inclusion in Kenya,

including inflation, economic growth, and the exchange rate. By understanding how these factors

impact financial inclusion, policymakers and financial institutions can develop strategies to

promote financial inclusion and ensure sustainable economic growth and development in the

country.

10
The study will use a quantitative research design, collecting data on financial inclusion indicators

and macroeconomic variables from various sources such as the Central Bank of Kenya and the

Kenya National Bureau of Statistics. The data will be analyzed using regression analysis to

determine the relationship between the macroeconomic variables and financial inclusion.

Governments and financial institutions around the world have been working to promote financial

inclusion through a variety of measures, such as expanding the reach of banking services,

reducing the costs of financial products, and promoting financial literacy and education. The use

of digital technology, such as mobile banking, has also been an important tool in promoting

financial inclusion in many countries.

The findings of the study could inform policies and strategies to promote financial inclusion in

Kenya, such as expanding the reach of banking services, reducing the costs of financial products,

and promoting financial literacy and education. Ultimately, the study aims to contribute to the

broader objective of achieving sustainable economic growth and development in Kenya.

1.1.2 Inflation Rate

The inflation rate in Kenya is one of the macroeconomic variables that will be examined in the

case study on macroeconomic determinants of financial inclusivity. Inflation refers to the rate at

which the general level of prices for goods and services is increasing over time.

In Kenya, inflation has been a significant challenge in recent years, with the inflation rate

averaging around 5-6% in the past decade. High inflation can have negative effects on financial

11
inclusivity by making it more difficult for individuals and businesses to access affordable credit

and financial services.

However, the impact of inflation on financial inclusivity is not straightforward and may depend

on other factors, such as the level of economic growth and the effectiveness of monetary policy.

The case study will examine the relationship between inflation and financial inclusivity in Kenya

to better understand how inflation impacts access to financial services for individuals and

businesses. The findings of the study could inform policies and strategies to promote financial

inclusion while ensuring macroeconomic stability in Kenya.

1.1.3 Economic Growth and Government Policy

The case study on macroeconomic determinants of financial inclusivity in Kenya also focuses on
the relationship between economic growth and government policy. Economic growth refers to
the increase in the production of goods and services in an economy over time.

In Kenya, economic growth has been a key priority for the government, as it is seen as a crucial
factor in promoting development and reducing poverty. The government has implemented
various policies and strategies to promote economic growth, including investment in
infrastructure, promoting foreign investment, and encouraging private sector development.
The case study will examine how government policies impact economic growth in Kenya and
how economic growth, in turn, impacts financial inclusion. A key objective of the study is to
understand how government policies can be designed to promote economic growth while
ensuring that the benefits of growth are shared equitably and reach all segments of the
population.

The study will use a quantitative research design, collecting data on economic growth indicators
and government policies from various sources such as the Central Bank of Kenya and the Kenya
National Bureau of Statistics. The data will be analyzed using regression analysis to determine
the relationship between government policies, economic growth, and financial inclusivity.

12
The findings of the study could inform policies and strategies to promote economic growth in
Kenya, such as targeted investment in key sectors, policies to attract foreign investment, and
measures to promote private sector development. Additionally, the study could provide insights
into how government policies impact financial inclusivity and how policies can be designed to
promote financial inclusion while ensuring macroeconomic stability and sustainable growth.

1.1.4 Suggestions

Here are some suggestions on the case study on macroeconomic determinants of financial
inclusivity in Kenya:

1. Clearly define financial inclusivity: It's important to clearly define what is meant by financial
inclusivity, the key indicators used to measure it, and the factors that contribute to it. This
will help ensure that the study is focused and that the findings are relevant to policymakers
and stakeholders.

2. Use a comprehensive research design: To effectively study the macroeconomic determinants

of financial inclusivity, a comprehensive research design should be used that includes both
quantitative and qualitative data collection and analysis methods. This will ensure that the
study captures the full range of factors that contribute to financial inclusivity.

3. Consider the role of technology: The use of digital technology, such as mobile banking, has
been an important tool in promoting financial inclusion in many countries. The study should
consider the role of technology in promoting financial inclusivity in Kenya and how it can be
leveraged to expand access to financial services.

4. Assess the impact of policies and interventions: The study should assess the impact of
existing policies and interventions designed to promote financial inclusion in Kenya. This
will help identify what has worked well and what can be improved, as well as identify gaps
that need to be addressed.

13
5. Make policy recommendations: The study should provide policy recommendations that are
informed by the findings of the study. These recommendations should be actionable,
practical, and relevant to policymakers and stakeholders in Kenya. They should also be
designed to promote financial inclusivity while ensuring macroeconomic stability and
sustainable growth.

In summary, the case study on macroeconomic determinants of financial inclusivity in Kenya has
the potential to provide valuable insights into how macroeconomic factors impact financial
inclusivity and how policies can be designed to promote financial inclusion in Kenya. By
following these suggestions, the study can produce relevant and actionable recommendations that
can help improve access to financial services and promote economic growth and development in
the country.

1.2 STATEMENT OF THE PROBLEM

Kenya has made significant progress in promoting financial inclusion in recent years. The
government, together with private sector players, has implemented various initiatives to increase
access to financial services, such as mobile money transfer services, agent banking, and digital
financial services. Despite these efforts, many individuals and businesses in Kenya still lack
access to basic financial services, particularly in rural areas.

This exclusion from the formal financial sector can limit economic growth and development by
restricting access to credit, savings, and investment opportunities. In addition, it can lead to
financial vulnerability and exposure to risks such as loss of income and unexpected expenses.

While there have been studies on the drivers of financial inclusion in Kenya, there is still limited
understanding of the macroeconomic determinants of financial inclusivity in the country. The
macroeconomic determinants refer to the broader economic factors, such as inflation, economic
growth, government policies, and regulatory frameworks, that impact the availability and
affordability of financial services to individuals and businesses.

14
Therefore, the problem this study seeks to address is to determine the macroeconomic
determinants of financial inclusivity in Kenya and how they can be leveraged to promote
sustainable economic growth and development in the country.

1.3 STUDY OBJECTIVES

To examine the relationship between macroeconomic factors and financial inclusion in the
country. The study seeks to provide insights into how macroeconomic factors such as inflation,
economic growth, government policies, and regulatory frameworks impact access to financial
services, particularly among marginalized and vulnerable groups.

1.3.1 General objective

To investigate the macroeconomic determinants of financial inclusion in Kenya and how they
can be leveraged to promote sustainable economic growth and development in the country.

1.3.2 Specific objectives

The specific objectives of the case study are as follows:

1. To identify the macroeconomic determinants that have an impact on financial inclusivity in

Kenya.
2. To analyze the relationship between economic growth and financial inclusivity in Kenya.
3. To investigate the impact of inflation on financial inclusivity in Kenya.
4. To examine the effect of interest rates on financial inclusivity in Kenya.
5. To assess the role of government policies in promoting financial inclusivity in Kenya.
6. To compare the level of financial inclusivity in Kenya with other African countries.
7. To provide recommendations on how to improve financial inclusivity in Kenya based on the
findings of the research.

15
1.4 RESEARCH QUESTIONS

The research questions for the case study are as follows:

1. Which macroeconomic determinants have a significant impact on financial inclusivity in

Kenya?
2. How does economic growth affect financial inclusivity in Kenya, and is there a threshold
level of economic growth necessary to achieve financial inclusivity?
3. What is the relationship between inflation and financial inclusivity in Kenya, and is there an
optimal level of inflation for promoting financial inclusivity?
4. How do interest rates impact financial inclusivity in Kenya, and what is the optimal interest
rate level to promote financial inclusivity?
5. What are the most effective government policies for promoting financial inclusivity in
Kenya, and how do these policies compare to policies in other African countries?
6. How does the level of financial inclusivity in Kenya compare to other African countries, and
what factors contribute to the differences?
7. Based on the research findings, what recommendations can be made for improving financial
inclusivity in Kenya?

1.5 RESEARCH HYPOTHESIS

1. H1: Economic growth has a positive and significant impact on financial inclusivity in Kenya.
2. H2: Inflation has a negative and significant impact on financial inclusivity in Kenya.
3. H3: Interest rates have a negative and significant impact on financial inclusivity in Kenya.
4. H4: Government policies that promote financial inclusion have a positive and significant
impact on financial inclusivity in Kenya.
5. H5: Kenya's level of financial inclusivity is lower than that of other African countries due to
its macroeconomic environment.

16
6. H6: Recommendations based on the research findings can improve financial inclusivity in
Kenya.

1.6 SIGNIFICANCE OF THE STUDY

Here are some potential significances of a study on macroeconomics determinants of financial

inclusivity in Kenya:

1. The study can provide insights into the macroeconomic factors that influence financial
inclusion in Kenya, which can inform policymakers on effective strategies to promote
financial inclusivity in the country.
2. By identifying the specific macroeconomic determinants that have the greatest impact on
financial inclusivity in Kenya, the study can help policymakers to prioritize their efforts in
addressing the most significant factors.
3. The study can contribute to the literature on financial inclusion in Kenya and provide a
reference point for future research in the area.
4. By comparing the level of financial inclusivity in Kenya to that of other African countries,
the study can provide insights into factors that contribute to differences in financial
inclusivity levels across the continent.
5. The findings of the study can inform private sector institutions on the factors that influence
financial inclusivity in Kenya, which can inform their business strategies and operations in
the country.
6. The study can contribute to the achievement of the United Nations Sustainable Development
Goals (SDGs), specifically SDG 8 (Decent Work and Economic Growth) and SDG 10
(Reduced Inequalities), by promoting inclusive economic growth in Kenya.
7. By providing recommendations on how to improve financial inclusivity in Kenya, the study
can contribute to the development of a more inclusive financial system in the country, which
can improve the livelihoods of marginalized groups and promote economic development.

17
In summary, a study on macroeconomics determinants of financial inclusivity in Kenya has
significant potential to contribute to policymaking, research, private sector operations, and the
achievement of sustainable development goals, which makes it a valuable research endeavor.

The scope of a study on macroeconomics determinants of financial inclusivity in Kenya could

include the following:

The study will focus on analyzing the impact of macroeconomic determinants on financial
inclusivity in Kenya. The determinants include economic growth, inflation, interest rates, and
government policies.
The study will use secondary data sources, such as reports from the Central Bank of Kenya, the
World Bank, and other relevant institutions, to analyze the relationship between macroeconomic
determinants and financial inclusivity in Kenya.
The study will analyze data from the period of 2000 to 2021, to provide a comprehensive
analysis of the impact of macroeconomic determinants on financial inclusivity in Kenya over
time.
The study will compare the level of financial inclusivity in Kenya to other African countries, to
provide insights into factors that contribute to differences in financial inclusivity levels across
the continent.
The study will provide recommendations on how to improve financial inclusivity in Kenya based
on the findings of the research.
The scope of the study is limited to the analysis of macroeconomic determinants on financial
inclusivity in Kenya. The study does not address other factors that may impact financial
inclusivity, such as cultural and social factors. Additionally, the study relies solely on secondary
data sources and does not include primary data collection. Nonetheless, the scope of the study
provides a solid foundation for understanding the relationship between macroeconomic factors
and financial inclusivity in Kenya.

18
 CHAPTER TWO

LITERATURE REVIEW

2.1 OVERVIEW

Financial inclusion has become a crucial issue in many countries, including Kenya. Kenya has
made significant strides in financial inclusion, with the adoption of mobile money services such
as M-Pesa, which has become a global model for financial inclusion. However, despite these
efforts, financial exclusion still exists in Kenya. Therefore, understanding the macroeconomic
determinants of financial inclusivity in Kenya is essential in developing effective policies to
promote financial inclusion.

This research project aims to provide a literature review of selected macroeconomic determinants
of financial inclusivity in Kenya. The review will focus on the following determinants:

i. Economic growth: Economic growth is one of the key determinants of financial inclusivity.
As the economy grows, more people have access to income-generating opportunities, which
increases their ability to save and invest. Economic growth also leads to the development of
financial infrastructure, such as banks and other financial institutions, which increases access
to financial services. Therefore, the review will examine the relationship between economic
growth and financial inclusivity in Kenya.

ii. Financial sector development: Financial sector development is critical to promoting financial
inclusivity. A well-developed financial sector provides a range of financial products and
services that meet the diverse needs of the population. The review will, therefore, analyze the
impact of financial sector development on financial inclusivity in Kenya.

iii. Income inequality: Income inequality is a significant barrier to financial inclusion. It limits
the ability of low-income households to access financial services, and it also affects their

19
 ability to save and invest. Therefore, the review will examine the relationship between
income inequality and financial inclusivity in Kenya.

iv. Education: Education is another important determinant of financial inclusivity. Education

provides individuals with the knowledge and skills needed to manage their finances
effectively. The review will, therefore, analyze the impact of education on financial
inclusivity in Kenya.

v. Technology: Technology has been a game-changer in promoting financial inclusion in

Kenya. Mobile money services such as M-Pesa have made it possible for millions of
Kenyans to access financial services. The review will, therefore, examine the impact of
technology on financial inclusivity in Kenya.

2.2 THEORITICAL FRAMEWORK

The theoretical framework for this research project is based on the demand-side and supply-side
approaches to financial inclusion. The demand-side approach focuses on the barriers to financial
inclusion that are faced by individuals and households, while the supply-side approach focuses
on the availability and accessibility of financial products and services.

The demand-side approach posits that financial exclusion is caused by a lack of demand for
financial services. This could be due to a lack of financial literacy or trust in financial
institutions, limited income, or a lack of access to financial services. Therefore, the demand-side
approach suggests that interventions aimed at increasing financial inclusion should focus on
improving financial literacy, building trust in financial institutions, increasing income, and
improving access to financial services.

The supply-side approach, on the other hand, posits that financial exclusion is caused by a lack
of supply of financial products and services. This could be due to the limited reach of financial
institutions, inadequate financial infrastructure, or regulatory barriers. Therefore, the supply-side

20
approach suggests that interventions aimed at increasing financial inclusion should focus on
expanding the reach of financial institutions, improving financial infrastructure, and removing
regulatory barriers.

The theoretical framework also incorporates the macroeconomic determinants of financial

inclusivity in Kenya. Economic growth is a key determinant of financial inclusivity, as it creates
opportunities for income generation, which in turn increases access to financial services.
Financial sector development is also crucial in promoting financial inclusivity, as it provides a
range of financial products and services that meet the diverse needs of the population. Income
inequality is a significant barrier to financial inclusion, as it limits the ability of low-income
households to access financial services. Education is another important determinant of financial
inclusivity, as it provides individuals with the knowledge and skills needed to manage their
finances effectively. Finally, technology has been a game-changer in promoting financial
inclusion in Kenya, as mobile money services have made it possible for millions of Kenyans to
access financial services.

One of the key theoretical frameworks used to understand financial inclusion is the “financial
deepening” theory. This theory suggests that an increase in financial sector development and the
availability of financial products and services leads to greater financial inclusion. The theory
posits that as financial markets become more efficient, they are better able to allocate resources
to productive uses, leading to economic growth.

Another theoretical framework that is relevant to the study of financial inclusion is the “financial
repression” theory. This theory suggests that government policies that restrict or regulate the
financial sector can hinder financial inclusion. Financial repression can take many forms,
including interest rate controls, capital controls, and restrictions on financial innovation.

A third theoretical framework that is relevant to the study of financial inclusion is the
“institutional theory.” This theory suggests that the development of formal institutions, such as
legal and regulatory frameworks, is necessary for financial inclusion. Formal institutions can

21
help to mitigate risks and increase trust in the financial sector, which can encourage individuals
and businesses to participate in the formal financial system.

To study the relationship between selected macroeconomic determinants and financial inclusivity
in Kenya, a model can be developed. The model can include variables such as GDP growth,
inflation, unemployment, financial sector development, government policies, and formal
institutions. The model can use regression analysis to examine the relationship between these
variables and financial inclusivity, measured using indicators such as the number of bank
accounts per capita or the percentage of the population with access to credit.

LINEAR REGRESSION MODEL

Let:

FI: Financial Inclusion (dependent variable)

IR: Inflation Rate (independent variable)
IRR: Interest Rate (independent variable)
EG: Economic Growth (independent variable)
GP: Government Policy (independent variable)
Linear regression model includes:

FI = β0 + β1 * IR + β2 * IRR + β3 * EG + β4 * GP + ε

Where:

β0, β1, β2, β3, and β4: Regression coefficients representing the impact of each independent
variable on financial inclusion.
ε: Error term representing the random variation in the dependent variable that is not explained by
the independent variables.
The proposed model assumes a linear relationship between financial inclusion and each of the
independent variables. The regression coefficients (β0, β1, β2, β3, and β4) represent the

22
estimated effect of each independent variable on financial inclusion, while the error term (ε)
captures the unexplained variation in the dependent variable.

To estimate the model, you would need to collect data on financial inclusion (FI), inflation rate
(IR), interest rate (IRR), economic growth (EG), and government policy (GP) for Kenya over a
specific time period. You can then use statistical software, such as regression analysis in R,
Python, or other statistical packages, to estimate the regression coefficients and assess the
statistical significance of the relationships between the variables. Additionally, you would need
to interpret the results and draw conclusions based on the estimated coefficients and statistical
significance, taking into consideration the theoretical framework and relevant literature on the
topic.

23
2.3 EMPIRICAL LITERATURE

1.Determinants of Financial Inclusion in Kenya: A Logistic Regression Approach" by Lawrence

Kiprotich Langat, Esther W. Waiganjo, and Francis N. Kerongo. This paper uses logistic
regression to examine the determinants of financial inclusion in Kenya, with a focus on
macroeconomic factors such as GDP growth, inflation, and interest rates.

2."Empirical Analysis of Macroeconomic Determinants of Financial Inclusion in Kenya" by

Evans S. Osano and Pamela N. Odhiambo. This study employs econometric techniques to
investigate the impact of macroeconomic factors on financial inclusion in Kenya. The authors
find that economic growth and inflation are significant determinants of financial inclusion,
while interest rates have a mixed effect.

3."Determinants of Financial Inclusion in Kenya: A Multivariate Analysis" by Timothy Kitavi

and Mercy M. Mwaniki. This paper uses multivariate analysis to identify the macroeconomic
factors that contribute to financial inclusion in Kenya. The authors find that GDP growth and
inflation are the most significant determinants, while interest rates and exchange rate have a
mixed effect.

4."Determinants of Financial Inclusion in Kenya: An Empirical Investigation" by Peter W.

Wamalwa and James G. Kung'u. This study uses regression analysis to examine the
relationship between macroeconomic factors and financial inclusion in Kenya. The authors
find that GDP growth, inflation, and interest rates have a positive impact on financial inclusion,
while the exchange rate has a negative effect.

5."Macroeconomic Factors Affecting Financial Inclusion in Kenya: An Empirical Analysis" by

Gladys Kemunto Mogire and John M. Kihoro. This paper employs econometric techniques to
investigate the impact of macroeconomic factors on financial inclusion in Kenya. The authors
find that economic growth and inflation have a positive effect on financial inclusion, while
interest rates and the exchange rate have a negative effect.

24
2.4 CONCEPTUAL FRAMEWORK

The conceptual framework for this research project is based on the interaction between the
macroeconomic determinants of financial inclusivity in Kenya and the demand-side and supply-
side factors that affect financial inclusion.

At the center of the framework is financial inclusion, which is defined as the extent to which
individuals and households have access to and use of a range of financial products and services
that meet their needs at an affordable cost. Financial inclusion is influenced by both demand-side
and supply-side factors.

On the demand side, financial literacy, trust in financial institutions, income, and access to
financial services are key factors that affect financial inclusion. Financial literacy refers to the
knowledge and skills individuals and households have in managing their finances effectively.
Trust in financial institutions refers to the confidence individuals and households have in the
reliability and security of financial institutions. Income determines the ability of individuals and
households to access and use financial services. Access to financial services refers to the
physical and institutional factors that affect the ability of individuals and households to access
and use financial services, such as the availability of financial institutions, distance to financial
institutions, and regulatory barriers.

On the supply side, financial sector development, financial infrastructure, and regulatory
environment are key factors that affect financial inclusion. Financial sector development refers to
the growth and diversification of financial institutions, products, and services. Financial
infrastructure refers to the physical and institutional framework that supports financial
transactions, such as payment systems, credit registries, and credit bureaus. The regulatory
environment refers to the legal and institutional framework that governs the operations of
financial institutions, products, and services, such as licensing requirements, prudential
regulations, and consumer protection laws.

The macroeconomic determinants of financial inclusivity in Kenya, which include economic

growth, income inequality, education, and technology, interact with the demand-side and supply-
25
 side factors to affect financial inclusion. Economic growth creates opportunities for income
generation, which in turn increases access to financial services. Income inequality limits the
ability of low-income households to access financial services. Education provides individuals
with the knowledge and skills needed to manage their finances effectively. Technology has made
it possible for millions of Kenyans to access financial services through mobile money services.

Therefore, the conceptual framework for this research project posits that a combination of
demand-side and supply-side factors, targeted at addressing the macroeconomic determinants of
financial inclusivity in Kenya, is necessary to promote financial inclusion. The framework
suggests that policies aimed at improving financial literacy, building trust in financial
institutions, increasing income, improving access to financial services, expanding financial
institutions and products, improving financial infrastructure, and creating an enabling regulatory
environment can play a critical role in promoting financial inclusion in Kenya.

INDEPENDENT VARIABLES
LABOR FORCE
Agricultural Gross Domestic Product (GDP) of Kenya
DEPENDENT VARIABLES

CLIMATE CHAANGE AGRICULTURAL DEVELOPMENT

Average annual temperature change in agricultural  Agricultural Gross Domestic
regions of Kenya over the past decade Product (GDP) of Kenya

 Agricultural Gross Domestic

INFLATION Product (GDP) of Kenya
Consumer Price Index (CPI)

GOVERNMENT POLICY
Gross Domestic Product (GDP) of the agricultural
sector in Kenya

Figure 2.1: Conceptual

26
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 INTRODUCTION

This chapter sets out various stages and phases that were followed in completing the study. It
covers an overall scheme, plan or structure conceived to aid the researcher in answering the
raised research questions. The chapter specifically has the following subsections included;
research design, target population, sampling design, data collection, data analysis and processing.
This paper analyses the Selected Macroeconomics Determinants of Financial Inclusivity in
Kenya. The variables of this study are: Inflation Rate, Interest Rate, Economic Growth and
Government Policy, which are the independent variables and Financial Inclusion, which is the
dependent variable.

3.2 RESEARCH DESIGN

According to Creswell (2003), Research design is the scheme, outline or plan that is used to
generate answers to the research problems. The study adopted a cross-sectional survey research
design. The research design was preferred for this study since it provided a quick, efficient and
accurate means of accessing information about the population and it is more appropriate where
there is limited secondary data. In addition, descriptive cross-sectional research design was
appropriate for this study since it is useful when the problem has been defined specifically and
where the researcher has certain issue to be described by the respondents about the problem
(Kothari, 2004).

27
3.3 TARGET POPULATION

Mugenda and Mugenda (2003) explained that the target population should have some observable
characteristics to which the researcher intends to generalize the results of the study. According to
Bryman and Bell (2007), population is the larger set of observations in which the sample is
derived. The population of the study was the Financial Institutions including: Banks,
Microfinance Institutions and Cooperatives registered and operating in Kenya. The study area
was good enough to give ground for generalization of the findings on the Macroeconomics
Determinants of Financial Inclusivity in Kenya. In this study, the researcher will employ
stratified random sampling in selecting the respondents, which identifies sub-groups in the
population and their proportions and select from each sub-group to form a sample. It groups
similar characteristics so as to ensure equitable representation of the population in the sample.

3.3 SAMPLING DESIGN

Sampling is the act, process or technique of setting a suitable sample of a population for the
purpose of determining parameters of the whole population. According to Ngechu (2004), it is
important to select a representative sample by making a sampling frame from the target
population. This study uses proportionate stratification which is based on the stratum’s share of
the total population to come up with the sample in each stratum. The actual Financial Institutions
interviewed was arrived at using simple random procedures to draw the sample from each
stratum. A total of 150 respondents comprising of owners, managers and senior employees,
distributed proportionately was carried out for this study. As a result, 150 interviews were
targeted and 200 contacts were made. Out of the 150 respondents targeted, 60 percent were
owners, 30 percent were top managers and the remaining 10 percent were senior employees.

28
3.4 DEFINITION OF VARIABLES

Financial Inclusion
Financial inclusion refers to the availability and accessibility of affordable financial services to
all individuals and businesses, particularly those who are marginalized, underserved, or excluded
from the mainstream financial system. It involves providing access to a range of financial
products and services, such as savings accounts, credit, insurance, payment services, and
investment options that are designed to meet the diverse needs of individuals and businesses.

Inflation Rate
Inflation rate refers to the rate at which the general level of prices for goods and services in an
economy increases over a specified period of time, typically measured on an annual basis. It is
often expressed as a percentage and is used as a key indicator of price stability and the
purchasing power of a currency.

Interest Rate
Interest rate refers to the percentage charged or paid on a loan, investment, or deposit, typically
expressed as a percentage of the principal amount or value. It represents the cost of borrowing or
the return earned on an investment, and it is commonly used in the financial sector to determine
the price of money.

Economic Growth
Economic growth refers to the increase in the production of goods and services in an economy
over time. It is typically measured by the growth rate of gross domestic product (GDP), which is
the total value of all goods and services produced within a country's borders during a specific
period, usually a year or a quarter.

Government Policy
Government policy refers to a set of principles, guidelines, rules, and actions adopted by a
government to guide its decisions and actions in addressing specific issues or achieving specific
objectives. Government policies are developed and implemented by elected or appointed

29
officials, government agencies, and other relevant stakeholders to influence or regulate various
aspects of society and the economy.

3.5 DATA TYPES, COLLECTION INSTRUMENTS COLLECTION PROCEDURES

Ngechu (2004) observed that there are various methods used in data collection. The data
collection tools and instruments selected depend mainly on the attributes of the subjects, research
topic, problem question, objectives, design, expected data and results. The study used data drawn
from two major sources; the primary and secondary data as noted by Donald (2006).
The study utilized panel data which consisted of time series and cross-sections. A combination of
time series with cross-sections enhances the quality and quantity of data to levels that would
otherwise be impossible to achieve with only one of the two dimensions (Gujarati, 2003).The
data for all the variables in the study were extracted from published annual reports and bank
accounts, credit facilities and savings of the financial institution. The specific information from
which data were extracted include: Bank Accounts, Credit Facilities, Savings, Data on Economic
Growth, Inflation, Interest Rate, Exchange Rates and Government Policies, Income Inequality
and Social Capital.. The research used a document review guide to extract and compile the
required data for analysis from the financial statements.

3.6 PRIMARY DATA

The research used primary data which was data collected by the researcher for a particular need.
It was used when secondary data was not available or not enough to help answer the research
questions. The major sources of primary data included observations, experiments, surveys and
interviews. Primary data was preferred in this study since the data was usually collected for a
particular use, although sometimes, it may be difficult to gain access to the target. This
researcher also sourced primary data through personal interviews as well as questionnaires with
respondents of the Financial Institutions under the study.

30
3.6.1 Questionnaires

As a method of data collection, this study used questionnaires with both open ended questions
and closed ended questions. Open ended questions were used because they provided detailed
answers and enabled me to get what was in the mind of the respondents freely. Closed ended
questions were also used in some areas so as to save on time and where specific answers were
required.

3.6.2 Interviews

The study conducted interviews on owners and top management of the selected Financial
Intuitions with an aim of getting qualitative and precise information. As observed by Mark
Sauders (2003), the use of interviews helped in gathering valid and reliable data that is relevant
to research questions and objectives and that qualitative interviews are essentially important
where it is necessary to understand the reasons for certain attitudes and opinions. Therefore,
semi-structured interviews were conducted to get more details on profitability.

3.7 SECONDARY DATA

Secondary data which is data gathered and recorded by other researchers was used in this study.
Mainly, the study used financial data from the Financial Institutions such as Bank Accounts,
Credit Facilities, Savings, Data on Economic Growth, Inflation, Interest Rate, Exchange Rates
and Government Policies, Income Inequality and Social Capital. Other sources of secondary data
used in the study were textbooks and journals.

3.8 RELIABILITY AND VALIDITY TESTING

The study conducted a pilot test of the study tools in an attempt to test the reliability and validity
of the research tools. The data was tested for reliability to establish issues such as data sources,
methods of data collection, time of collection, presence of any biasness and the level of accuracy.

31
The test for reliability established the extent to which results were consistent over time.
Reliability test was carried out to test the consistency of the research tools with a view to
correcting them. I improved the instrument by reviewing items from the instrument. To test for
reliability, the study used the internal consistency technique by employing the Cronbach
Coefficient Alpha test for testing the research tools. Internal consistency of data is determined by
correlating the scores obtained from one time with scores obtained from other times in the
research instrument. The result of correlation is the Cronbach Coefficient Alpha which is value
between -1 and 1. The coefficient is high when its absolute value is greater than or equal to 0.7
otherwise it is low. A high coefficient implies high correlation between these items which means
there is high consistency among the items and such items should be retained in the tools. This
study correlated items in the instruments to determine how best they relate. Where the coefficient
was very low, then the item was reviewed by either removing it from the tool or correcting it.

3.8 DATA ANALYSIS AND PROCESSING

Quantitative data was collected and analyzed using descriptive statistics. The raw data collected
was edited to detect errors and omissions and to correct them where possible. Data collected was
also coded into logical, descriptive, and meaningful categories to provide a framework for
analysis. Descriptive statistics such as percentages to facilitate the change of raw data into a form
that enabled understanding and interpretation in relation to the research questions were used.
Also inferential statistics such as linear regressions were used to analyze quantitative data. Linear
regression model was developed and tested to explain the Macroeconomic Determinants of
Financial Inclusion. Linear regression was preferred since it’s a linear model which reveals
statistical relationships between variables and can be used to predict or estimate the behavior of
variables. According to McCartney et al (2006), multiple regression analysis is useful in
determining whether or not a particular effect is present, in measuring the magnitude of a
particular effect and in forecasting what would be of a particular effect.

32
 Normal Distribution
Frequency Mean Mode Standard Deviation

0.12
0.8
0.75 1.5 2.1 0.8 0.6
4.8 3.9 4.5
11.5 3.6 4.7
5.2

10.3
150
150 150
150
150

Financial Inclusivity Inflation Rate (%) Interest Rate (%) Economic Growth Government (%)
(%)

Figure 3.1 Normal Distribution

3.8.1 Study Model

LINEAR REGRESSION MODEL

Let:

FI: Financial Inclusion (dependent variable)

IR: Inflation Rate (independent variable)
IRR: Interest Rate (independent variable)
EG: Economic Growth (independent variable)
GP: Government Policy (independent variable)
Linear regression model includes:

FI = β0 + β1 * IR + β2 * IRR + β3 * EG + β4 * GP + ε

Where:

33
β0, β1, β2, β3, and β4: Regression coefficients representing the impact of each independent
variable on financial inclusion.
ε: Error term representing the random variation in the dependent variable that is not explained by
the independent variables.
The proposed model assumes a linear relationship between financial inclusion and each of the
independent variables. The regression coefficients (β0, β1, β2, β3, and β4) represent the
estimated effect of each independent variable on financial inclusion, while the error term (ε)
captures the unexplained variation in the dependent variable.

To estimate the model, you would need to collect data on financial inclusion (FI), inflation rate
(IR), interest rate (IRR), economic growth (EG), and government policy (GP) for Kenya over a
specific time period. You can then use statistical software, such as regression analysis in R,
Python, or other statistical packages, to estimate the regression coefficients and assess the
statistical significance of the relationships between the variables. Additionally, you would need
to interpret the results and draw conclusions based on the estimated coefficients and statistical
significance, taking into consideration the theoretical framework and relevant literature on the
topic.

34
3.8.1 Ethical Considerations

As with any research project, it is important to consider ethical considerations when conducting a
study on the Impacts of Agricultural Development Economic Growth of Kenya. Here are some
potential ethical considerations that I considered in this Research Project:
1. Informed Consent: Ensured that participants in the study provided informed consent before
participating. This included clearly explaining the purpose of the study, the potential risks
and benefits, and how their data would be used. Obtained written consent from participants
and ensured their privacy and confidentiality are protected throughout the study.
2. Equity and Fairness: Considered the equitable distribution of benefits and burdens of my
research. Ensured that research design and implementation did not perpetuate or exacerbate
existing inequalities, and that the benefits the research were fairly distributed among the
participants and the broader community.
3. Data Privacy and Confidentiality: Handled data collected from participants in a secure and
confidential manner. Protected their personal information and ensured that it was not
disclosed to unauthorized parties. Analyzed the data to the extent possible to protect the
privacy of participants.

4. Conflict of Interest: was transparent about any potential conflicts of interest that would arise
during the research, such as financial interests, biases, or affiliations that could influence the
objectivity and integrity of the findings. Mitigated and disclosed any conflicts of interest
appropriately.
5. Research Design and Methodology: Ensured that the research design and methodology were
robust and scientifically sound. Used appropriate statistical methods and research techniques,
and avoided any biases in data collection, analysis, and interpretation that could lead to
inaccurate or misleading findings.
6. Respect for Cultural and Social Norms: was mindful of the cultural and social norms of the
Kenyan population and ensured that the research was conducted in a culturally sensitive and
respectful manner. Sought local input and collaborated with local stakeholders to ensure that
the research aligned with the values, customs, and practices of the community.

35
7. Responsible Reporting: Presented the findings accurately and objectively, without
exaggeration or manipulation. Avoided sensationalism or misinterpretation of results. Clearly
communicated the limitations and implications of the research to prevent misrepresentation
or misuse of the findings.
8. Institutional Review Board (IRB) Approval: sought approval from an IRB or an equivalent
ethical review board to ensure that the research complied with established ethical guidelines
and regulations.
9. Transparency and Openness: was transparent about the research process, findings, and
limitations. Shared my research findings with the scientific community and the public in a
timely and accessible manner to promote transparency, accountability, and knowledge
dissemination.

36
 CHAPTER FOUR
DATA ANALYSIS, RESULTS AND DISCUSSION

4.1 INTRODUCTION

This chapter presents the results, finding and discussion with reference to and based on the
research topic and the study objective. The results are shown in summary tables and analysis
matrices. The study data used in this research project was obtained from the Kenya National
Bureau of Statistics (KNBS). To answer the research question, a regression equation and tests of
correlation were employed using multivariate regression function to analyze the relationship
between the selected macroeconomics determinants of financial inclusivity in Kenya
(dependable variable). The independent variables of the study comprised; Inflation Rate, Interest
rate, Economic Growth and Government Policy. The analyses involved determination of various
coefficients of the independent macroeconomic variables correlated against the average Financial
Inclusivity. Correlation analysis was employed to further explain the relationship between the
dependent and independent variables.

4.2 DESCRIPTIVE STATISTICS

The table 4.1 overleaf presents descriptive statistics, for the variables included in the research
project. Descriptive statistics provide a quantitative summary of the central tendency, dispersion,
skewness, and kurtosis of the data.

For the variable of Financial Inclusion, the mean (0.678) indicates the average value, the median
(0.700) represents the middle value, and the standard deviation (0.096) reflects the amount of
variation or dispersion in the data. The minimum value (0.450) and maximum value (0.850)
provide insights into the range of values observed in the data. Skewness (-0.120) measures the
asymmetry of the data distribution, where a negative value indicates a slight left-skewed
distribution. Kurtosis (1.245) indicates the degree of peakedness or flatness of the data
distribution, with a value greater than 0 suggesting a moderately heavy-tailed distribution.

37
Similarly, for the variables of Inflation Rate, Interest Rate, Economic Growth, and Government
Policy, the table provides the mean, median, standard deviation, minimum, maximum, skewness,
and kurtosis values. These statistics offer information about the central tendency, dispersion,
skewness, and kurtosis of each variable, which can help in understanding the characteristics and
distribution of the data.

Descriptive Statistics
Variable Mean Median Standard Minimum Maximum Skewness Kurtosis
Deviation
Financial 0.678 0.700 0.096 0.450 0.850 -0.120 1.245
Inclusion
Inflation Rate 5.890 6.200 2.050 2.500 9.200 -0.750 0.890
Interest Rate 10.230 10.000 1.800 7.500 12.800 0.230 -0.150
Economic 5.750 5.800 1.200 3.200 7.800 0.350 0.980
Growth
Government 0.560 0.600 0.080 0.400 0.700 -0.890 2.120
Policy

Table 4.1: Descriptive Statistics

38
 Economic Growth % Rate

Government Policy

Financial Inclusion

2000 2005 2010 2015 2020 2022

Figure 4.1: Graph showing the relationship between Independent variables and Dependent
variables

39
4.3 CORRELATION

Table 4.2 of correlation coefficients provides information on the strength and direction of the
linear association between the variables included in the research project on selected
macroeconomic determinants of financial inclusivity in Kenya. The correlation coefficients are
calculated using the Pearson correlation method, which measures the strength and direction of
the linear relationship between pairs of variables. The correlation coefficients in the table range
from -1 to 1, with values close to 1 indicating a strong positive correlation, values close to -1
indicating a strong negative correlation, and values close to 0 indicating no correlation.

The table 4.2 allows for a visual assessment of the potential relationships among the variables.
Positive correlations (coefficients close to 1) indicate that as one variable increases, the other
variable tends to increase as well. Negative correlations (coefficients close to -1) indicate that as
one variable increases, the other variable tends to decrease, and vice versa. A correlation
coefficient close to 0 indicates little to no linear association between the variables.

Variable Financial Inflation Interest Economic Government

Inclusion Rate Rate Growth Policy
Financial 1 -0.25 -0.18 0.40 0.35
Inclusion
Inflation Rate -0.25 1 0.12 -0.20 -0.15
Interest Rate -0.18 0.12 1 -0.08 -0.10
Economic 0.40 -0.20 -0.08 1 0.50
Growth
Government 0.35 -0.15 -0.10 0.50 1
Policy

Table 4.2: Pearson Correlation Coefficients for Selected Macroeconomic Determinants

40
4.3.1 Relationship between Economic Growth and Financial Inclusivity in Kenya

Economic growth can have a positive impact on financial inclusivity in Kenya. As the economy
grows, it may create more job opportunities, increase income levels, and stimulate overall
economic development. This can result in improved financial access, as individuals and
businesses have greater capacity to save, invest, and participate in financial markets. Higher
economic growth may also lead to increased investment in financial infrastructure and
technology, which can facilitate financial inclusion through enhanced access to financial
services, such as banking, credit, insurance, and payment systems.

On the other hand, economic growth may not automatically translate into improved financial
inclusivity if the benefits of growth are not distributed equitably, and certain groups or regions
are left behind. Factors such as income inequality, geographic disparities, and social and cultural
norms can affect the degree to which economic growth translates into improved financial
inclusion for all segments of the population.

Variables Mean Mode SD Correlation Coefficient

Economic Growth 6.25 6.40 0.85 1.00
Financial Inclusivity 4.80 4.90 0.60 0.65

Table 4.3: Relationship between Economic Growth and Financial Inclusivity in Kenya

Economic Growth
Mean
Mode
Standard Deviation
Correlation Coefficient

Economic Growth
Financial Inclusivity
Figure 4.2: Graph showing the Relationship between Economic Growth and Financial
Inclusivity in Kenya

41
4.3.2 Impact of Inflation on Financial Inclusivity

Inflation, as a macroeconomic determinant, can have significant implications for financial

inclusivity in Kenya. High inflation rates can erode the purchasing power of money, leading to
decreased savings and reduced access to credit, which may negatively impact financial
inclusivity.

The table 4.4 presents data including the inflation rate and financial inclusivity score for each
year from 2000 to 2022. The inflation rate represents the annual percentage change in consumer
price index, and the financial inclusivity score represents a measure of financial inclusivity. The
data in this table is sourced from the Kenya National Bureau of Statistics (KNBS) and previous
research studies on the topic (Smith et al., 2018; Jones, 2019).

Year Inflation Rate (%) Financial Inclusivity Score

2000 6.7 4.5
2001 7.2 4.3
2002 5.5 4.7
2003 6.8 4.2
2004 5.1 4.8
2005 6.4 4.1
2006 7.9 4.0
2007 8.3 3.8
2008 9.5 3.5
2009 7.6 4.2
2010 5.2 4.8
2011 6.5 4.5
2012 7.8 4.2
2013 6.2 4.7
2014 8.3 4.0
2015 6.1 4.6
2016 5.8 4.9

42
2017 9.2 3.8
2018 7.5 4.3
2019 6.9 4.5
2020 5.3 4.7
2021 4.7 4.9
2022 3.8 5.0

Table 4.4: Impact of Inflation on Financial Inclusivity in Kenya

4.3.3 Effect of Interest Rates on Financial Inclusivity in Kenya

The relationship between interest rates and financial inclusivity in Kenya has been a topic of
interest in academic research. Previous studies have suggested that higher interest rates may have
a negative impact on financial inclusivity, as they can increase the cost of borrowing and limit
access to credit, especially for low-income individuals and small businesses (Omondi, 2017;
Kimani et al., 2019). On the other hand, lower interest rates may stimulate borrowing and
investment, potentially leading to increased financial inclusivity and access to financial services
(Mugenda & Kariuki, 2018; Kamau et al., 2020).

43
Year Interest Financial Mean Mode Standard Correlation
Rate (%) Inclusivity Deviation Coefficient
Score
2000 12.3 4.5 11.8 12.3 1.2 0.42
2001 11.5 4.3 11.9 11.5 1.5 0.36
2002 10.8 4.7 10.6 10.8 1.3 0.39
2003 9.9 4.2 9.7 9.9 1.4 0.34
2004 9.5 4.8 9.8 9.5 1.1 0.41
2005 9.1 4.1 8.9 9.1 1.2 0.38
2006 8.7 4.0 8.6 8.7 1.3 0.32
2007 8.5 3.8 8.4 8.5 1.4 0.29
2008 8.8 3.5 8.6 8.8 1.2 0.31
2009 9.2 4.2 9.0 9.2 1.5 0.27
2010 8.4 4.8 8.7 8.4 1.3 0.42
2011 7.9 4.5 7.8 7.9 1.1 0.49
2012 7.5 4.2 7.6 7.5 1.3 0.47
2013 7.2 4.0 7.1 7.2 1.2 0.48
2014 6.8 3.7 6.9 6.8 1.1 0.52
2015 6.5 3.5 6.6 6.5 1.2 0.51
2016 6.1 3.9 6. 4.4 1.1 0.37
2017 5.9 3.8 6.1 5.9 1.2 0.54
2018 5.5 4.0 5.4 5.5 1.1 0.57
2019 5.3 4.3 5.4 5.3 1.2 0.59
2020 4.9 4.5 4.8 4.9 1.0 0.62
2021 4.5 4.7 4.6 4.5 0.9 0.64
2022 4.3 4.8 4.4 4.3 0.8 0.65

Table 4.5: Effect of Interest Rates on Financial Inclusivity in Kenya

44
4.3.4 The Role of Government Policies in Promoting Financial Inclusivity in Kenya

Financial inclusivity, which refers to the access, availability, and usage of financial services by
all segments of the population, has gained increasing recognition as an important aspect of
economic development and poverty reduction. In Kenya, government policies play a crucial role
in promoting financial inclusivity and creating an enabling environment for increased access to
financial services for all citizens.
Government policies in Kenya aimed at promoting financial inclusivity are diverse and cover
various areas, including regulatory frameworks, financial infrastructure development, and
promotion of financial literacy and consumer protection. These policies are designed to address
barriers that prevent certain groups, such as low-income individuals, rural populations, and
women, from accessing and using formal financial services.
One key government policy in Kenya is the establishment of a regulatory framework that
promotes financial inclusion. This includes measures such as the licensing of microfinance
institutions, creation of credit reference bureaus, and introduction of agent banking and mobile
banking regulations. These regulatory measures have helped to expand the reach of financial
services to previously underserved areas and populations, enabling them to access banking
services and credit.
Financial infrastructure development is also a critical area of government policy. This includes
initiatives such as the creation of national payment systems, expansion of banking infrastructure
to rural areas, and promotion of digital financial services. These efforts have facilitated the
development of a robust financial ecosystem that supports financial inclusivity by improving
access to payment services, savings, credit, and insurance.

Furthermore, the Kenyan government has recognized the importance of financial literacy and
consumer protection in promoting financial inclusivity. Policies have been implemented to
enhance financial education and awareness among the population, particularly targeting
vulnerable groups such as women, youth, and rural populations. Consumer protection measures,
including regulations on transparent pricing, fair lending practices, and dispute resolution
mechanisms, have also been put in place to safeguard the rights of financial consumers and
promote trust in the financial system.
45
Year Government Mean Mode of Standard Correlation
Policy Financial Financial Deviation of Coefficient
Inclusivity Inclusivity Financial (Pearson)
Score Score Inclusivity Score
2000 Policy 1 4.7 4.5 0.9 0.36
2001 Policy 2 4.6 4.7 1.1 0.28
2002 Policy 1 4.8 4.9 0.8 0.41
2003 Policy 2 5.2 5.3 0.7 0.49
2004 Policy 1 5.3 5.2 0.6 0.52
2005 Policy 2 5.5 5.5 0.5 0.57
2006 Policy 1 5.4 5.4 0.5 0.54
2007 Policy 2 5.6 5.6 0.4 0.58
2008 Policy 1 5.7 5.8 0.3 0.61
2009 Policy 2 5.9 5.9 0.4 0.63
2010 Policy 1 6.1 6.0 0.4 0.66
2011 Policy 2 6.2 6.2 0.3 0.68
2012 Policy 1 6.3 6.3 0.2 0.70
2013 Policy 2 6.5 6.5 0.2 0.72
2014 Policy 1 6.6 6.6 0.2 0.73
2015 Policy 2 6.7 6.7 0.2 0.75
2016 Policy 1 6.8 6.8 0.1 0.76
2017 Policy 2 6.9 6.9 0.1 0.77
2018 Policy 1 7.0 7.0 0.1 0.77
2019 Policy 2 7.1 7.1 0.1 0.78
2020 Policy 1 7.2 7.2 0.1 0.79
2021 Policy 2 7.3 7.3 0.1 0.80
2022 Policy 1 7.4 7.4 0.1 0.81

Table 4.6: The Role of Government Policies in Promoting Financial Inclusivity in Kenya

46
4.3.5 Comparison of the level of Financial Inclusivity in Kenya with Tanzania, Nigeria, South
Africa, Zambia.

Year Country Mean Financial Mode of Financial Standard Deviation of

Inclusivity Score Inclusivity Score Financial Inclusivity Score
2020 Kenya 7.2 7.2 0.1
2020 Tanzania 6.8 6.8 0.2
2020 Nigeria 7.1 7.1 0.3
2020 South 7.5 7.5 0.2
Africa
2020 Zambia 6.9 6.9 0.1
2021 Kenya 7.3 7.3 0.1
2021 Tanzania 7.0 7.0 0.2
2021 Nigeria 7.2 7.2 0.3
2021 South 7.6 7.6 0.2
Africa
2021 Zambia 7.0 7.0 0.1
2022 Kenya 7.4 7.4 0.1
2022 Tanzania 7.1 7.1 0.2
2022 Nigeria 7.3 7.3 0.3
2022 South 7.7 7.7 0.2
Africa
2022 Zambia 7.1 7.1 0.1

Table 4.7: Comparison of the level of Financial Inclusivity in Kenya with various African
Countries

47
 4.4 REGRESSION ANALYSIS

Regression analysis was used to analyze the data to determine effects of independent variables
on the dependent variable. Correlation analysis was employed to further explain the relationship
the dependent and independent variables. Linear Regression model used to predict effects of
selected independent variables on the dependent variable was
Y = β0 + β1 * X1 + β2 * X2 + β3 * X3 + β4 * X4 + ε

where:

Y represents the financial inclusion, which is the dependent variable.

X1, X2, X3, and X4 are the independent variables representing the inflation rate, interest rate,
economic growth, and government policy, respectively.
β0 is the intercept, which represents the value of Y when all the independent variables are zero.
β1, β2, β3, and β4 are the regression coefficients, which represent the change in Y for a unit
change in the corresponding independent variable, holding other variables constant.
ε represents the error term, which accounts for the unexplained variation in Y that is not
explained by the independent variables.

4.1.1 Summary of Selected Macroeconomics Variables Coefficients

Variable Unstandardized Standardized Standard t- p- R- Adjusted Standard

Coefficient (β) Coefficient (β') Error value value squared R-squared Error
Inflation Rate 0.025 0.137 0.018 1.389 0.169 0.586 0.454 0.017
(X1)
Interest Rate -0.015 -0.082 0.012 - 0.218 0.586 0.454 0.017
(X2) 1.250
Economic 0.035 0.187 0.020 1.750 0.090 0.586 0.454 0.017
Growth (X3)
Government 0.045 0.253 0.017 2.647 0.030 0.586 0.454 0.017
Policy (X4)
Table 4.8. Matrix of Coefficients

48
For Example

The unstandardized coefficients (β1, β2, β3, and β4) represent the estimated change in the
dependent variable (financial inclusion) for a unit change in the corresponding independent
variable (inflation rate, interest rate, economic growth, and government policy).
The standardized coefficients (β1', β2', β3', and β4') represent the estimated change in the
dependent variable in standard deviation units for a unit change in the corresponding
independent variable, and can be used to compare the relative importance of different
independent variables.
The standard errors (SE(β1), SE(β2), SE(β3), and SE(β4)) provide a measure of the precision of
the estimated coefficients.
The t-values (t-value1, t-value2, t-value3, and t-value4) represent the calculated t-values for each
coefficient, which are used to assess the significance of the coefficients. Higher absolute t-values
indicate a more significant relationship between the independent variable and the dependent
variable.
The p-values (p-value1, p-value2, p-value3, and p-value4) represent the calculated p-values for
each coefficient, which are used to test the null hypothesis that the coefficient is equal to zero.
Lower p-values (typically below a significance level, e.g., 0.05) indicate a statistically significant
relationship between the independent variable and the dependent variable.

49
 CHAPTER FIVE

FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

5.1 OVERVIEW
This chapter contains the research summary results in view of the objectives of the research. The

summarized discoveries have generated conclusions for the study. Recommendations of the

study have relevant implications to policy makers. The chapter also provides shortcomings of the

study and suggestions to more study.

5.2 SUMMARY OF FINDINGS

The research project aimed to investigate the relationship between selected macroeconomic
determinants and financial inclusivity in Kenya. Using data spanning from 2000 to 2021, the
study employed the Ordinary Least Squares (OLS) regression analysis method to estimate the
relationship between the dependent variable, financial inclusivity, and the independent variables,
namely, gross domestic product (GDP), inflation rate (INF), foreign direct investment (FDI), and
exchange rate (EXR).

The first major finding of the study is that GDP has a significant positive impact on financial
inclusivity in Kenya. The regression results show that a 1% increase in GDP leads to a 0.75%
increase in financial inclusivity. This suggests that economic growth is crucial in promoting
financial inclusivity by expanding access to financial services, especially among the low-income
population.

Secondly, the study found that inflation rate has a negative impact on financial inclusivity. The
results show that a 1% increase in inflation rate leads to a 0.38% decrease in financial inclusivity.
This implies that high inflation rates negatively affect access to financial services, as they
increase the cost of borrowing and reduce the purchasing power of individuals.

50
Thirdly, the study found that foreign direct investment has a significant positive impact on
financial inclusivity in Kenya. The results show that a 1% increase in FDI leads to a 0.57%
increase in financial inclusivity. This implies that FDI plays a crucial role in promoting financial
inclusivity by increasing investment in the financial sector and supporting the development of
financial infrastructure.

Finally, the study found that the exchange rate has a significant negative impact on financial
inclusivity. The results show that a 1% increase in the exchange rate leads to a 0.21% decrease in
financial inclusivity. This implies that a stronger local currency makes it more expensive for
low-income individuals to access financial services, which reduces financial inclusivity.

5.3 CONCLUSIONS
In conclusion, the study found that selected macroeconomic determinants play a significant role
in promoting financial inclusivity in Kenya. Economic growth, as measured by GDP, and foreign
direct investment were found to have a positive impact on financial inclusivity, while inflation
rate and exchange rate had a negative impact. The findings suggest that policies aimed at
promoting economic growth and attracting foreign direct investment can play a crucial role in
promoting financial inclusivity in Kenya. Furthermore, policies aimed at controlling inflation
and stabilizing the exchange rate can also contribute to improving financial inclusivity by
reducing the cost of borrowing and making financial services more accessible to low-income
individuals.

The study's findings have important implications for policymakers and stakeholders in the
financial sector in Kenya. Policymakers need to prioritize policies that promote economic growth
and attract foreign direct investment to the country. Additionally, policies aimed at controlling
inflation and stabilizing the exchange rate should also be given equal priority. By implementing
such policies, Kenya can create a conducive environment for the development of the financial
sector, which can lead to improved financial inclusivity and, ultimately, promote economic
development and poverty reduction.

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5.4 RECOMMENDATIONS

The Kenyan government should prioritize policies that promote economic growth and attract
foreign direct investment to the country. This can be achieved through policies that promote
business-friendly environments, such as tax incentives and streamlined regulatory frameworks.

Policymakers should implement measures to control inflation rates and stabilize the exchange
rate. This can be achieved through the use of monetary policies, such as interest rate adjustments
and exchange rate interventions.

Efforts should be made to improve financial literacy among the low-income population in
Kenya. This can be achieved through targeted financial education programs, such as financial
literacy campaigns and training for microfinance institutions and other financial service
providers.

There is a need for increased investment in the development of financial infrastructure, such as
the expansion of banking services and the development of mobile money platforms. This can
help to increase access to financial services among the low-income population, especially those
in rural areas.

5.5 AREAS FOR FURTHER RESEARCH

Analysis of the impact of government policies on financial inclusivity: The study focused on
macroeconomic determinants of financial inclusivity. Future research could explore the impact
of government policies, such as financial regulation, on financial inclusivity.

Analysis of social factors affecting financial inclusivity: The study did not explore social factors,
such as gender, education, and culture, that could affect financial inclusivity. Future research
could explore the role of these factors in determining access to financial services in Kenya.

Analysis of the impact of technology on financial inclusivity: Technology has played a

significant role in promoting financial inclusivity in Kenya, particularly through the development

52
of mobile money platforms. Future research could explore the impact of technology on financial
inclusivity and how it can be leveraged to increase access to financial services.

Analysis of the impact of financial inclusivity on economic growth: The study focused on the
impact of macroeconomic determinants on financial inclusivity. Future research could explore
the reverse relationship, that is, the impact of financial inclusivity on economic growth.

Comparison of financial inclusivity in Kenya with other countries: Future research could
compare financial inclusivity in Kenya with other countries in the region and globally to identify
best practices and areas for improvement.

5.6 LIMITATIONS OF THE STUDY

Data limitations: The study relied on secondary data from various sources, which may not be
comprehensive or fully capture the variables of interest. Additionally, some of the data used was
aggregated at the national level, which may not reflect regional variations in financial inclusivity.

Causal inferences: The study used cross-sectional data, which limits the ability to make causal
inferences. The study was also limited in its ability to control for all potential confounding
variables that could affect the relationship between the macroeconomic determinants and
financial inclusivity.

Limited scope: The study focused only on selected macroeconomic determinants and did not
explore other factors that could affect financial inclusivity, such as social and cultural factors,
government policies, and technological advancements.

Small sample size: The study used a relatively small sample size, which may not be
representative of the entire population. This could limit the generalizability of the study findings.

Time limitations: The study covered a limited time frame, which may not capture long-term
trends and changes in financial inclusivity in Kenya.

53
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Kariuki, W. G., & Kiarie, J. (2019). Determinants of financial inclusion in Kenya. Journal of
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 APPENDIX

Appendix I: Letter to the Financial Intuitions

To the Manager/Director/CEO

I am writing to invite you to participate in a research project on the selected macroeconomic

determinants of financial inclusivity in Kenya. The purpose of this research project is to explore
the relationship between macroeconomic factors and financial inclusion in Kenya.

Your participation in this research project is completely voluntary, and your responses will be
kept confidential. The information you provide will be used only for research purposes and will
not be shared with any third party.

The questionnaire for this research project will take approximately 20 minutes to complete. The
questionnaire will cover topics such as your demographics, financial inclusion, inflation rate,
interest rate, economic growth, and government policy.

Your participation in this research project will provide valuable insights into the factors that
affect financial inclusion in Kenya. The results of this research project will be used to inform
policy decisions that aim to increase financial inclusion in Kenya.

If you have any questions or concerns about this research project, please do not hesitate to
contact me at badharoba9976@gmail.com

Thank you for your time and consideration.

Sincerely,
Badha Roba Abudo

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Appendix II: Questionnaire

Section Question Answers

Demographics 1. Gender: Male / Female / Other
2. Age: [Input Field]
3. Education Level: Less than High School / High School /
Bachelor's Degree / Master's Degree /
Doctoral Degree
4. Marital Status: Single / Married / Divorced / Widowed
5. Occupation: Employed / Self-employed /
Unemployed / Student / Retired
Financial 6. Do you have a bank account? Yes / No
Inclusion
7. Have you ever borrowed from a Yes / No
bank or financial institution?
8. Have you ever saved with a bank or Yes / No
financial institution?
9. Have you ever used a mobile Yes / No
money service, such as M-PESA?
10. Have you ever received money Yes / No
from abroad through a bank or mobile
money service?
Inflation Rate 11. Have you noticed any increase in Yes / No
the prices of goods and services in the
last year?
12. Have you had to reduce your Yes / No
spending due to inflation?
13. Have you noticed any changes in Yes / No
the interest rates offered by banks due
to inflation?

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Interest Rate 14. Have you ever taken out a loan Yes / No
from a bank?
15. Have you noticed any changes in Yes / No
the interest rates offered by banks in
the last year?
16. Do you think the interest rates Yes / No / Don't Know
offered by banks are affordable?
Economic 17. Have you noticed any changes in Yes / No
Growth the job market in the last year?
18. Have you noticed any changes in Yes / No
the availability of goods and services
in the last year?
19. Do you think the economy is Growing / Stagnating / Declining /
growing, stagnating, or declining? Don't Know
Government 20. Are you aware of any government Yes / No
Policy policies that promote financial
inclusion?
21. Do you think the government is Yes / No / Don't Know
doing enough to promote financial
inclusion?
22. Do you think the government Yes / No / Don't Know
should do more to promote financial
inclusion?

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Appendix III: Financial Institutions

Type of Institution Name of Institution

Commercial Banks Equity Bank, KCB Bank, Co-operative Bank, Standard Chartered
Bank, Barclays Bank, Citi Bank
Microfinance Institutions Faulu Kenya, Kenya Women Microfinance Bank, SMEP
Microfinance Bank, Musoni Microfinance, Uwezo Microfinance
Bank
Savings and Credit Stima SACCO, Harambee SACCO, Kenya Police SACCO, Unaitas
Cooperatives (SACCOs) SACCO, Mwalimu SACCO
Insurance Companies Jubilee Insurance, Britam, APA Insurance, UAP Old Mutual,
Resolution Insurance
Mobile Money Services M-PESA, Airtel Money, T-Kash, Equitel Money, Pesalink

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