Abstract: Effect of Financial Literacy on Poverty Reduction across Kenya, Tanzania, and Uganda (Society for Social Work and Research 28th Annual Conference - Recentering & Democratizing Knowledge: The Next 30 Years of Social Work Science)

Schedule:

Thursday, January 11, 2024

Marquis BR Salon 14, ML 2 (Marriott Marquis Washington DC)

* noted as presenting author

Jamal Appiah-Kubi, PhD, Research Fellow, Ankara Yildirim Beyazit University, Turkey

Emmanuel Owusu Amoako, MSW, Doctoral Student, University of North Carolina at Chapel Hill, NC

Solomon Achulo, MSc, Student, Brown School, Washington University in St. Louis, St. Louis, MO

Joshua Muzei, MBA, Student, University of Illinois at Urbana-Champaign

David Ansong, Ph.D., Associate Professor, University of North Carolina at Chapel Hill, Chapel Hill, NC

Moses Okumu, PhD, Assistant Professor, University of Illinois at Urbana-Champaign, Urbana, IL

Background: Financial literacy can be critical to reducing poverty, but limited evidence exists on the mechanisms of change. Despite the acknowledgment of its potential for poverty reduction backed by evidence from developed countries, there is limited evidence of its implementation in SSA. Guided by the financial capability framework, this study examines the direct effects of financial literacy on poverty and the indirect effect through financial inclusion and entrepreneurship,

Methods: The study used data from wave 5 of the InterMedia Financial Inclusion Insights Program on 3,129 households in Kenya, 3,060 in Tanzania, and 3,001 in Uganda. Poverty was also measured using the progress out of poverty index (PPI), which comprises 10 easy-to-answer questions to estimate consumption-based poverty rates for households recruited for the pro-poor programs. An additive financial literacy score that ranges from 0 to 7 was created from a 7-item instrument. A binary poverty variable was used (i.e., “1 = Poor”; “0 = Non-poor”). Entrepreneurship was measured using a binary variable (i.e., 1=self-employment; 0=otherwise), and so was financial inclusion (1=Yes, 0=No). We employed an instrumental variable Probit model to estimate the association between financial literacy and poverty.

Results: The endogeneity-corrected results suggest that increased financial literacy is associated with a 6.9% decrease in poverty. When disaggregated by countries, a unit increase in financial literacy is associated with a decrease in the probability of poverty by 5.9% points in Kenya, 6.7 in Tanzania, and 4.2 in Uganda. Comparatively, respondents in Tanzania are most likely to experience the strongest effect of financial literacy on poverty reduction, followed by Kenya and Uganda, respectively. We found that entrepreneurship and financial inclusion act as mechanisms of change through which financial literacy decreases poverty.

Conclusion & Implication: These findings point to the poverty-reducing effect of financial literacy, mainly in Tanzania, followed by Kenya and Uganda. The results contribute to understanding how financial literacy and poverty interact and can inform contextually relevant interventions and policies. They also point to the importance of promoting financial literacy on a broader scale in the countries studied and other countries in poverty alleviation strategies. Policymakers should take seriously and support initiatives to design and promote national financial capability strategies, such as the financial literacy week observed in many emerging countries.