Impact of Financial Inclusion on Consumption Expenditure in Kenya

This study looked at the impact of financial inclusion on households’ welfare in Kenya based on both the single (transactionary, credit, savings and investment, insurance and pension) and composite measures (portfolio usage) of financial inclusion. The study used repeated household Financial Access datasets for the period 2009 to 2016 to run five autoregressive distribution models to capture the welfare impact. Estimation results established that the impact of financial inclusion on household welfare varies by product with the credit channel taking the lions share. A shift from non-usage (control) to usage (treatment) of financial services (zero one change) among the sampled respondents raises household welfare by 126, 110 and 49 percent with respect to credit, transactionary and insurance products respectively ceteris paribus. Conversely, a counterfactual assessment revealed a 56, 52 and 33 percent drop in welfare from the non-usage of credit, transactionary and insurance products respectively. Portfolio usage of financial services as captured by the index of financial inclusion raises household welfare by 347 percent other factors held constant. Given the positive welfare impact of financial inclusion, the study recommends increase in the range of formal financial products to increase competition in financial markets lowering transaction costs for welfare improvement. Policies targeting welfare improvement through finance should also be aligned to specific financial inclusion transmission channels to be more effective as opposed to blanket proposals.