Starting with microcredit in the late 1980s, there has been a growing movement of multilateral institutions, private foundations, non-profits, corporations and governments that aims to provide formal financial services to low-income market segments around the world. This movement is largely motivated by the conviction that access to financial services reduces poverty. Over time, the focus of this movement has shifted from microcredit towards encouraging access to a wider, more comprehensive range of financial services, including savings, payments and insurance. There is also a growing emphasis on digital finance – the use of modern information and communication technologies (ICT) to help improve the quality and convenience of financial services, while lowering the cost of acquiring and servicing often isolated customers whose income streams support only relatively small or infrequent transactions.
Kenya has become both a posterchild and focal point of this movement. Today, mobile money is a key pillar of the country’s financial infrastructure and is central to commerce, household finance and innovation. Largely as a result of mobile money and later banking services offered on mobile phones through partnerships with mobile money operators, financial inclusion has grown at an astonishing rate of over 9.4 percent per year from 27 percent in 2006 to 83 percent in 2018. And as a share of GDP, banking system deposits increased from 30 to 44 percent between 2000 and 2016.
While there is a growing body evidence on the individual or household-level impacts of the adoption of specific financial products by low income population segments in Kenya, what is less clear are the wider economywide spill-over effects generated by the activity of a larger financial sector, rapid financial innovation and greater financial inclusion, in particular the effects on labour productivity and sustained long-run growth. While poverty reduction is often cited as the key goal of financial inclusion investments, sustained economic growth isn’t often explicitly mentioned as a means to that end, although a key finding of development research is that growth is one of the most effective ways to pull people out of poverty.
This paper proceeds surveys theories of economic growth and describes different facets of Kenya’s own recent growth experience, economic complexity and technology landscape using publicly available data and contrasts Kenya’s experience with of a group of comparison countries. Secondly, it examines the theoretical and empirical links between the financial sector, technological change and growth; provides an overview of key development in Kenya’s financial system and tries to unpack how those developments connect to the growth trajectory described in the first section.