Abstract:
Financial inclusion generally viewed as the process of enhancing access and usage of
formal financial services has emerged as an area of global concern and study. Previous
studies have found mixed results on direct effects of behavioral factors and financial
inclusion, suggesting that further scholarly examination incorporating moderating and
mediating variables into financial inclusion models are required. The main objective of
this study was to examine the conditional indirect effects of financial literacy on the
relationship between behavioral factors and financial inclusion through adoption of
financial innovations. The specific objectives examined the direct effects of the three
behavioral factors (self-control, confidence, and social proof), financial innovations and
financial literacy on financial inclusion. In addition, the mediating effects of financial
innovations on the relationship between the three behavioral factors and financial
inclusion was investigated. The moderating effects of financial literacy on the
relationship between the behavioral factors and financial innovations as well as
financial inclusion was further explored. The study was grounded on the behavioral life
cycle theory and the prospect theory which are part of behavioral finance theories.
Explanatory research design was adopted to understand the relationships between the
variables under investigation and cluster sampling design utilized to identify the
sample. Primary data was collected using a questionnaire from a sample of 486 out of
a population of 2,194 licensed micro enterprises in Embakasi East Constituency of
Nairobi County. Data was analyzed using descriptive and inferential statistics. Multiple
regression modelling including Process Macro Analysis using Model 59 (Hayes, 2018)
was undertaken. Findings indicated significant positive effects of self-control (β = .265,
ρ=.000), Confidence (β = .241, ρ=.000), Social proof (β = .212, ρ=.000), financial
innovations (β = .194, ρ=.000) and FL (β = .137, ρ=.000) on financial inclusion. In
addition, the results showed that financial innovations mediated the relationship
between each of the behavioral factors and financial inclusion as attested by the p-
values and confidence intervals of bootstrapping results which did not include zero;
self- control (β =.0941, ρ= .00; BootLLCI= .0436; BootULCI= .1496), confidence; (β
= .1019, ρ = .00; BootLLCI= .0524; BootULCI= .1595) and social proof (β = .1036, ρ
= .00; BootLLCI= .0512; BootULCI= .1616). The conditional direct effects of financial
literacy on the relationship between self-control and financial inclusion (β= 0.149,
ρ=0.008; BootLLCI= 0.626, BootULCI=0.2371) and social proof and financial
inclusion (β= .1449, ρ = 0.001; BootLLCI= 0.0580, BootULCI=0.2315) was significant
based on bootstrapping intervals which did not include zero. The conditional indirect
effects of financial literacy on the relationship between the three behavioral factors and
financial inclusion via financial innovations were evident based on confidence intervals
which all excluded zero. The study contributes to financial theory building through
establishment of the mediating role of financial innovations on the relationship between
the three behavioral factors and financial inclusion and this relationship is conditional
across the levels of financial literacy. Therefore, it is recommended that finance
practitioners should give emphasis to encouraging positive behavioral tendencies,
improving users’ financial literacy levels, and encouraging adoption of innovations in
the finance sector for enhanced financial inclusion in Kenya.