Investigation of the importance of cognitive abilities for the financial inclusion of households in Kenya

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Financial inclusion, especially of marginalized households, is considered an important goal in achieving the UN Sustainable Development Goals. However, in order to reduce the number of 1.4 billion financially excluded households, further scientific knowledge is required. In particular, the role of cognitive functions in this context has received little attention in the scientific literature. Four research packages in this project can make a relevant contribution to the understanding of the relationship between cognitive abilities and financial inclusion. In particular, access to credit constitutes an important pillar of financial inclusion. In the literature on this topic, access to credit is associated with both opportunities, e.g. poverty reduction, and risks, e.g. over-indebtedness, for consumers. However, to the knowledge of the applicant, the role of cognitive functions has not yet been considered in this literature stream. The first two research packages therefore aim to narrow down these important research gaps. The first research package examines the role of risk aversion as an explanatory mechanism for the potential relationship between cognitive abilities and access to credit by employing a mediational model. The second research package therefore uses regression analyses to examine the relationship between cognitive abilities and loan defaults. The results of these analyses build a necessary foundation for further scientific studies. There is a further need for research in the area of financial inclusion in relation to digital financial services (DFS). Specifically, the question of whether DFS actually increase financial inclusion for rural households remains unanswered. For example, systematically lower cognitive functions in rural areas could hinder the usability of and thus access to DFS. The third research package in this project therefore deals with the investigation of how the use of and access to DFS changes along an urban-rural continuum. In particular, the role cognitive abilities is to be examined. The analysis is also carried out using a mediation model, in which the use of DFS forms the independent variable and the urban-rural continuum the dependent variable; cognitive abilities manifest an explanatory mechanism. This research has direct relevance for policy makers and providers of DFS. The aforementioned correlation between ability to use DFS and cognitive functions further raise the question of whether cognitive abilities also moderate the effects of DFS. To answer this question, a regression model is to be estimated in which the explanatory variable is the interaction between cognitive abilities and the use of DFS and the dependent variable is the consumption smoothing ability of households. Various statistical methods such as propensity score matchings or instrumental variable estimation shall be estimated and compared. The results of these investigations are of direct importance for political decision-makers.