Towards a sound financial health


A Safaricom employee displays the M-Pesa money transfer service on a smartphone. FILE PHOTO | AFP

Financial inclusion refers to customers’ opportunities to access financial services for use in meeting various needs.

Data from the 2021 FinAccess Survey indicate that while financial inclusion has more than tripled from 26.7 percent in 2006 to 83.7 percent in 2021, the overall financial health of Kenyans has more than halved since to 17.1 percent in five years to 2021.

The core elements of financial health comprise the ability to manage and meet one’s day-to-day obligations; the ability to cope with risks and recover from financial shocks; and the ability to invest by building and maintaining reserves.

The ability to manage your daily obligations encompass meeting short-term goals, including paying bills on time, the ability to settle debts and living within an acceptable monthly debt-to-income ratio.

On the other hand, coping with risks and recovering from financial shocks entails having a financial safety net, including an emergency fund and access to affordable credit or a social network, appropriate insurance policies or building or achieving short-term savings goals.

Finally, in order to invest in one’s future, one should be able to save regularly, including for retirement, maintain a positive credit profile, and plan ahead for the medium- and long-term.

Three factors may influence financial health among Kenyans.

Consumer behaviour

Financial literacy and education play a complementary role in consumers’ decision-making, enabling them to choose products that optimise their investment needs, corresponding to their disposable income.

Financial products and service providers should act in a way that increases consumers’ confidence and trust in order to encourage actions that promote proper financial behaviour.

Data indicate that a majority of Kenyans mistrust formal financial service providers when making decisions on financial matters. Indeed, less than 3.0 percent of Kenyans rely on formal financial institutions for advice.

Income influences financial health, as does consumer behaviours, particularly those related to planning ahead and saving.

It is therefore imperative that consumers adopt beneficial saving habits, and adequately research products and services prior to taking them up in order to understand the impact of such decisions on their financial health.

Government policies

To protect consumers of financial services, some countries have a specific agency that regulates the financial services firms to ensure that providers are accountable for ensuring customers are satisfied with and value their financial services.

This is the case with the UK’s Financial Conduct Authority, Australia’s Prudential Regulation Authority, and South Africa’s Financial Sector Conduct Authority.

As observed in the Kenya Kwanza Manifesto, “when regulatory functions are bundled together, consumer protection gets the short shrift.”

Is it time to rethink the current regulatory and institutional dispensation in order to increase financial health, by enacting the Financial Services Authority Bill, 2016?

Such a review would provide for the protection of retail financial customers— (i) from misleading, deceptive, unfair and fraudulent conduct; (ii) promoting fair, equitable and sustainable access to financial products and financial services; (iii) ensuring that retail financial customers can make informed choices through the provision of useful information about financial products and services; and (iv) promoting financial literacy and the ability of retail financial customers to make sound financial decisions.

Financial products

The current shift to digital finance has not only increased access and usage but has provided consumers with opportunities to save for the future, manage daily obligations and cater for financial risks and shocks.

However, consumer risks like mobile app fraud, privacy intrusion and abusive debt collection practices arising from digital finance may create shocks that reduce consumer pliability and negatively affect their financial health.

Moreover, with over 35 percent of Kenyan digital borrowers using digital credit to meet day-to-day household needs, it is important to note that lower interest rates result in increased financial health.

The advent of technology presents an opportunity for financial sector players to address unmet consumer needs by designing high-quality products and services that promote financial health.

This is especially so for consumers who wish to identify investment vehicles that will enable them to build and maintain reserves for the future, and also give returns that can be applied to meet immediate needs.

PAYE Tax Calculator

Note: The results are not exact but very close to the actual.