EFFECT OF NON BANK FINANCIAL INSTITUTIONS CREDIT ON POVERTY IN KENYA: A CO INTEGRATION ANALYSIS

ABSTRACT 
In the year 2013, there were 151 registered Non-Bank Financial Institutions (NBFIs) in Kenya controlling about 43% of the country’s financial sector. During the past 15 years there has been large amount of empirical studies examining the relationship between NBFIs’ credit and poverty reduction. A few of those studies have concentrated on household data to ascertain the effect of NBFI’s credit on poverty reduction in Kenya. However, household collected data may not give a clear indication of the performance of the entire economy as far as the effect of NBFI’s credit is concerned due to regional imbalances. Therefore it is against this background that this study was carried out to investigate the effect of NBFIs’ credit on poverty reduction in the Kenya. The study aimed at examining the effect of NBFI’s credit on the population of people living below the poverty line, the effect of NBFIs’ credit on per capita income and the effect of NBFIs’ credit on GDP growth rate in Kenya. Using annual time series data over the period 1980 to 2013, the study was informed by a credit model based on the vicious cycle of poverty theory. The Phillips-Perron test was conducted to test for stationarity of the variables under study after which the study employed autoregressive distributed lag (ARDL) model to examine the relationship between NBFIs’ credit on Poverty reduction. This study found that NBFIs’ credit has a negative and statistically significant negative effect on the number of people living below the poverty line. The study also established that NBFIs’ credit has a significant positive effect on per capita income and economic growth rate. Regression results also show that increase in private investment and reduction in unemployment rates are crucial in poverty reduction in Kenya. This study recommended that NBFIs should channel more credit to the private sector so as to promote growth of the economy and consequently reduce poverty levels. This can be achieved by reducing the borrowing interest rates and collaterals so as to allow more borrowers to access credit. The results of the study are useful to the Kenyan policy makers in designing effective policies to ensure easier and cheaper access to NBFI’s credit so as to raise the growth in investments, income and employment. This will consequently reduce poverty levels.

CHAPTER ONE 
INTRODUCTION 
Background to the Study 
The Kenyan government identified poverty as a major problem immediately after independence (GoK, 1965). Many policies, programs and projects have been designed and implemented with the aim of alleviating poverty. However, poverty continues to afflict a large segment of the Kenyan population. Estimates from the latest Household Budget Survey show that 45.9% of the populations live below the poverty line (KNBS, 2007). Currently 46.8% of the population lives below the poverty line in Kenya (UNICEF, 2014). 

Poverty has been a major concern of many governments world over and many poverty reduction programs have been developed over time and across regions. Despite these efforts, poverty continues to be a key impediment to both human and economic prosperity (OECD, 2000). As documented in various policy documents, for instance, the Sessional Paper No. 10 of 1965 on African Socialism and its Application to Planning in Kenya, the Government of Kenya directed its efforts to fighting poverty, disease and ignorance as part of its development objectives. In order to tackle poverty issue then people are advised to access microcredit from non-bank financial institutions because Commercial Banks charge high interest rate on loans and collateral security is required which poor people lack.Pitt and Khandker (2003) and Jean-Luc (2006) argue that the cause of poverty in developing economies among other things is that the low income earners and the vulnerable do not have access to credit for the purpose of working capital as well as investment for their small businesses. 

On the other hand, even with growth in the financial sector, Kenya is struggling with high levels of poverty. Poverty level in the country is made worse by high levels of income inequalities. Although a lot of efforts have been made to reduce the poverty levels in Kenya, poverty remains paramount and much still needs to be done. Several anti-poverty policies have been introduced including (NPEP, 1995-2005) where the government committed itself to poverty alleviation by 2015. Despite the poor state of the economy there have been efforts to grow the financial sector in the economy with an aim of reducing poverty. Kariuki, (2004). 

In Kenya the gap between the rich and the poor is huge and the major issue being distribution of wealth and income. Recent statistics for Kenya show that income is heavily skewed in favor of the rich and against the poor. The country’s top 10% household’s control 42% of the total income while the bottoms 10% control less than 1%.This means that for every shilling earned by the poorest 10% households, the richest 10% earn about Kshs 56. It is notable that the 8th, 9th and 10th population groups account for over 70% of the income. (KIBHS (2012). 

Estimates of KIBHS (2014) on Kenya demographics indicate that 0-14 years: 42.1%; 15-24 years: 18.7% ; 25-54 years: 32.8% ; 55-64 years: 3.7% while 65 years and over: 2.8%. The Kenyan urban population makes up for 24% of total population (2011) while the rate of urbanization is 4.36% annual rate of change (2010-15). As in regards to income opportunities and socio-economic rights, the wealthier groups in Kenya generally have better access to education than the poor ones and also access better health care facilities than the poor. Also the rich have comparative access to clean water than the poor. (KIBHS (2006). These aspects clearly show that Kenya has high levels of inequality in income distributions. 

Gupta et al. (1998), Li et al. (2000), Hendriks et al. (1998), and Johnston (1989) argue that corruption increases income inequality through several channels. First, to the extent that corruption decreases economic growth, which is more likely to increase the income share of the poor than the rich, it increases income inequality and poverty. Second, corruption leads to a bias of the tax system in favor of the rich and powerful, thus making the effective tax system regressive (Hendriks et al. 1998), which implies that the burden of the tax system falls disproportionately on the poor. 

Efforts were made to establish the Kenya financial sector deepening programme in the year 2005 to support the development of financial markets with an aim of stimulating wealth creation and reducing poverty. The growth of the NBFI services in the country has been growing. Despite all these efforts many Kenyans are still stuck in poverty and with little access to financial services because of the biasness involved in accessing credit (Kibua, 2007). Although GDP growth has shown upward growth trend poverty levels are still above 47% of the total population. The contribution of NBFI credit on poverty reduction in Kenya has yet to be well assessed. 

An empirical study done in Kenya by Odhiambo (2009) shows causality between bank-based financial development and economic growth. The study shows that a well-functioning banking sector supports economic growth and poverty reduction. Poverty remains a major concern of development policy in Africa and in Kenya policy regulations need to be assented to in order for the poor to have access to the privileges of accessing credit. In view of the social costs associated with poverty, poverty reduction is an important goal for development policy. This is evidenced by the attention poverty is receiving in international development debate. For example, two recent World Development Reports (World Bank, 2008; 2010), focused on poverty. Further, in the year 2000, leaders from 189 countries endorsed a set of Millennium Development Goals (MDGs) to be achieved by 2015, one of which was to ‘halve’ the number of people living in absolute income poverty relative to the 1990 levels. To achieve the goal, it is estimated that African countries must attain a GDP growth rate of at least 8 percent per annum. 

One way of measuring human poverty, although it is far from adequate, is by using the human poverty index (HPI) introduced by UNDP in the Human Development Report of 1997. The HPI is a composite index of different features of deprivation in the quality of life that helps to judge the extent of poverty in a community. HPI measures human poverty in developing countries. The variables used are: (1) The percentage of people expected to die before age 40; (2) the percentage of adults who are illiterate; and (3) deprivation in overall economic provisioning measured by: (a) the percentage of people without access to health services and safe water and (b) the percentage of underweight children under five. The HPI is constructed by taking a simple average of the three variables. The trend in the HPI for Kenya between 1997 and 2012 is evident from Table 1. The table shows that the value of the HPI for Kenya has been rising and the poverty ranking of Kenya rose compared to other developing nations. Table 1also shows that the percentage of people living below the poverty line rose from 42 percent in 1997 to 45.9 percent in 2012 implying that half the population in Kenya was living below the poverty line in 2012....

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Item Type: Kenyan Material  |  Attribute: 59 pages  |  Chapters: 1-5
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