Financial Regulations, Financial Literacy, and Financial Inclusion: Insights from Kenya

This paper examines the relationship between financial regulation and financial inclusion in Kenya. Employing Probit regression on cross-sectional household level survey data and fixed effect regression on banks panel data, we find that: (i) agency banking regulations and financial literacy could improve formal financial access, and (ii) know-your-customers rules and capital and liquidity macro-prudential regulations could harm financial inclusion. Results are robust to alternative specifications. Given our findings, Kenya should boost financial literacy efforts, relax customer identification requirements in specific instances where they may jeopardize financial inclusion efforts, and stabilize macroeconomic environment to mitigate unintended adverse effects of macro-prudential regulations.