Long-Run Relationships among Financial Development, Financial Inclusion, and Economic Growth: Empirical Evidence from Kenya

Abstract

Purpose: This study aims to assess the impact of financial development and financial inclusion on economic growth in Kenya by investigating the long-run relationships among them. Design/methodology/approach: This study uses bank claims on the private sector and broad money to proxy for financial development, and mobile money to proxy for financial inclusion. With controlling for investment and trade openness, this study employs the vector error-correction model to investigate the long-run relationships among real gross domestic product (GDP), bank claims on the private sector, broad money, and mobile money for the period 2007-2018. Finding: The study finds the existence of stable long-run relationships in which financial inclusion has a significant positive impact on future economic growth, whereas financial development reveals a mixed impact, as the latter shows a significant negative impact. The empirical results also indicate that there exists a bidirectional relationship between mobile money and economic growth and a unidirectional relationship running from bank claims on the private sector to economic growth. Research limitations/implications: The study recommends the policymakers to improve access to affordable credit by the private sector or lower the lending rates on credit to encourage the necessary innovation and expansion in plant capacity in agriculture, industry and manufacturing while creating an environment that fosters innovations in information technology and promotes mobile money services to extend financial inclusion to the poor.

Keywords

• economic growth
• financial inclusion
• financial development
• mobile money
• vector error correction model (vecm)