Financial literacy and financial inclusion of micro and small business owners in Kenya

Abstract

Over the past decade Kenya has experienced intense financial sector reforms with extensive growth of technological advancements such as mobile banking and automatic teller machines. Growth in financial inclusion has been cited as one of the pillars that are expected to drive the economy towards a prosperous ten per cent growth rate as envisioned in the vision 2030. Greater financial inclusion is expected to increase household’s access to financial services, boost savings and investments, and lead to the realization of the country’s development agenda. However, despite the efforts, access to formal financial services remains low. The main intention of this research was to examine the effect of financial literacy on financial inclusion of micro and small business owners in Nairobi County. The following specific objectives were used to guide the study; to determine the influence of saving practices on financial inclusion, to examine the effect of debt management practices on financial inclusion, to determine the effect of financial planning practices on financial inclusion and to establish the effect of investment practices on financial inclusion of micro and small business owners in Nairobi County. Information asymmetry theory, behavioral economics theory and financial education theory were adopted to anchor the study. Both a descriptive and an explanatory research design were used in this research. The target population comprised of all the 13,428 small and micro retail businesses owners operating in Nairobi City Central Business District. Yamane formula was used to arrive at the sample size of 388. Primary data obtained using questionnaires was collected. The questionnaire's validity and effectiveness was tested in this study by randomly selecting 39 respondents to complete it. The questionnaires were administered through Google forms. Upon collection of the data, it was coded in quantitative format so as to enable analysing using version 24 of statistical package for social sciences (SPSS). Inferential as well as descriptive statistics generated included frequencies and percentages and simple and multiple linear regression respectively. Descriptive and inferential statistics generated were presented in tables and figures. 308 questionnaires were fully filled and returned giving a response rate of 79.4% that was considered adequate. Findings revealed a positive and significant relationship between various financial literacy practices – saving (β=0.225, p=0.000), debt management (β=0.405, p=0.000), financial planning (β=0.198, p=0.000), and investment (β=0.728, p=0.000)– and heightened financial inclusion. The study concludes that business owners engaging in disciplined saving practices, effective debt management, comprehensive financial planning, and active investment strategies were more likely to experience increased access to formal financial services. The research underscores the pivotal role of financial literacy in fostering financial inclusion among micro and small businesses. Recommendations include the development of targeted financial education programs, promotion of technology-driven financial solutions, and longitudinal studies to assess the sustained impact of financial literacy interventions. These insights provide a foundation for policymakers, financial institutions, and business support organizations to enhance financial inclusion strategies tailored to the unique needs of micro and small business owners in Nairobi County.