One of the most cost- effective strategies to access formal financial services so as to enhance domestic saving is through promotion of financial literacy. This is the ability of the consumer to understand the financial concepts.
An unpublished KIPPRA research paper empirically demonstrates that financial literacy affects the demand for formal financial services. This finding confirms conventional view that financial literacy is an effective policy tool for inculcating financial management behaviour and enhancing financial access.
Financial access is measured by the consumer’s ability to access financial services like banking and insurance. Kenya’s financial access is low, with 60 per cent of Kenyans excluded from the formal financial sector which comprises of banking, insurance, capital market, pension funds and quasi-banking institutions like Savings and Credits Co-operatives Societies, Micro-finance Institutions, Building Societies and Development Finance Institutions.
These statistics raise a public policy concern on the prospect of Kenya of enhancing domestic saving to 25 per cent of the GDP as envisaged in Vision 2030. In the era of increasingly low deposit rates, achieving such an ambitious policy goal will be insurmountable unless a policy is immediately put in place to mobilise three out of five Kenyans who operate informally outside the financial sector.
Prior to liberalising interest rate in July 1991, Kenya’s financial system was characterised by high barriers to financial access, with selective lending practices to prioritised sectors such as agriculture. Despite interest rate liberalisation, the difference between lending and deposit rates has remained high. This has triggered a sustained call to date for financial reform to spur economic growth.
The Financial Education Partnership (FEP) constituting of public and private organisations embodies the existing policy on financial education through its financial education initiative. The initiative offers the prospect of strengthening the development of financial markets and enhancing the impact of expanded services.
A financially literate consumer is likely to access financial services but more important once s/he gains access, s/he is likely to exert pressure that will enhance competition among the service providers. Competitive financial markets will eventually reduce the cost of financial access.
Building on the existing policy framework, there is need for a comprehensive and sustainable policy on financial education. Such a policy entails developing a standardised approach to measure financial literacy and devise appropriate intervention tools. The policy must be localised to address conceptualisation issues, including the content as well as the interpretation of the instrument.
While the financial literacy will increase the demand for formal financial service, it does not guarantee retention of consumers, once they gain financial access. Therefore, mixed strategies of promoting financial literacy coupled with the enforcement of Competition Act on consumer issue should be considered.
Prof Kieyah is head of private sector development division at KIPPRA. Adan Shibia also contributed to this article.
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