The Effect of Digital Financial Services on Financial Inclusion in Kenya: Systemic Infrastructure, Network Externalities, and Policy Mechanics

This study analyses the impact of digital financial services on financial inclusion, measured in structural terms, for households in Kenya from 2007 to 2024. The study leverages time-series secondary data and utilises an Autoregressive Distributed Lag - Error Correction Model specification, then applies a Prais-Winsten Instrumental Variable framework with Newey-West Heteroskedasticity and Autocorrelation Consistent standard errors to address endogeneity, heteroskedasticity, and serial correlation. The inquiry reveals that expansion of digital infrastructure and technological access are major catalytic factors for financial deepening in Kenya. On the other hand, macroeconomic instability, in the form of inflation, has a statistically significant contractionary effect. Most importantly, financial literacy is statistically insignificant in all model specifications, which shows that the statistical data on cognitive readiness is not the most important factor to encourage adoption, but rather radical transaction friction reduction and system optimisation are more important factors. The error correction mechanism imparts a quick self-equilibrating convergence path to long-run steady-state equilibrium. The empirical findings demonstrate that the joint synergy of systemic macroeconomic stability, network externalities, and agent density is essential for scaling up financial inclusion. Therefore, digital financial service policies should start by reconfiguring agents' networks as publicly provided services and by adopting Usability-by-Design principles to redesign financial architecture for frontier markets like Kenya.