Effects of behavioral factors, financial innovations and financial literacy on financial inclusion of micro- enterprises in Embakasi East Constituency, Nairobi County, Kenya

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.