FINANCIAL INCLUSION DETERMINANTS AND THEIR EFFECT ON UTILISATION OF FORMAL FINANCIAL SERVICES BY SMALLHOLDER FARMERS IN KENYA

Abstract

Kenya’s financial services sector has witnessed significant technological revolution in the past decade resulting to new financial products. Whereas 80 percent of Kenyan adults owned a formal bank account as at 2019, the level of usage of formal financial services among the smallholder farmers was still low with usage of bank accounts at 17 percent. This study aimed at addressing this low utilisation of formal financial services by the smallholder farmers in Kenya by determining suitable financial inclusion approaches which could raise the level of utilization of formal financial services among the small holder farmers thus increasing productivity in the agricultural sector. The main objective of this study was to establish financial inclusion determinants and their effect on the utilisation of formal financial services by smallholder farmers in Kenya. The specific objectives were; to determine the impact of demographic factors on utilisation of formal financial services among smallholder farmers, to evaluate the effect of socio-economic factors on utilisation of formal financial services among smallholder farmers, to determine the effect of institutional factors on utilisation of formal financial services among smallholder farmers, to examine the extent of technological factors on utilisation of formal financial services among smallholder farmers. The study also sought to explore the moderating effect of financial literacy on the utilisation of formal financial services among the smallholder farmers. The study adopted a descriptive cross-sectional survey research design. The target population of the study was 3,666,294 from Nakuru, Busia and Kirinyaga counties in Kenya from which a sample size 560 of smallholder farmers was selected. Simple random sampling was used to select the three counties and sub-counties while convenience sampling was used to select the smallholder farmers for study in each ward. Data was collected using structured and semi-structured questionnaires which were administered to smallholder farmers identified through random sampling. Descriptive and inferential statistical techniques were used to analyse the data using SPSS (Statistical Package for Social Sciences) in order to address each study objective. Descriptive statistics used were frequencies, percentages and chi-squares. Inferential statistics comprised correlation, Multinomial logistic regression and multiple linear regression analyses were then conducted. Regression results showed that age group, marital status and education levels of the respondents were the significant demographic variables. It is also evident that the socio-economic variable annual income, land size and occupation institutional factors and product differentiation were all significant financial inclusion variables. Technology factors were also significant to the formal predicting utilisation of financial services. The findings also revealed that financial literacy had a significant moderating effect on the utilisation of formal financial services. The study, therefore, recommends that policymakers should also consider reviewing policies that present obstacles to financial inclusion along demographic lines and address them to increase utilisation of formal financial services. Policymakers should also encourage smallholder farmers by way of incentives to disclose their annual income to improve their chances of accessing formal financial services that can expand their enterprises. Also, financial services providers and their technological intermediaries such as mobile service providers should revise their product strategies to encourage subscription from smallholder farmers. Policymakers should encourage more investment in the digitalisation of small scale farming activities to encourage more technology adoption. Financial institutions in the country need to develop more friendly and accessible products with features that encourage not only their uptake but also integrate into other financial services.