(7/7) As other nations look to Kenya as a model, it is imperative to recognize both the achievements and the emerging risks. Digital financial inclusion must be redefined, not just as access, but as empowerment underpinned by rights, transparency, and accountability.

(6/7)
✅ Stronger data governance and liability structures for fraud and breaches
✅ Market-level reforms to address concentration and promote competition

(5/7) Key policy priorities include:
✅ Robust consumer protection frameworks, including bans on exploitative lending practices
✅ Investments in financial and digital literacy to support informed decision-making
[...]

(4/7) 📖The policy brief (joint work with colleagues from the University of Göttingen) draws on Kenya’s trajectory to offer a forward-looking agenda for inclusive and resilient DFS markets. It argues that access without safeguards risks undermining the very development gains digital finance promises.

(3/7) Yet recent data presents a paradox: even as financial access has surged; financial health has weakened. Only 42% of adults demonstrate basic financial literacy. The result? A surge in over-indebtedness, predatory lending, credit blacklisting, data misuse, and digital fraud.

(2/7) Over the past two decades, mobile money has expanded into a diverse set of Digital Financial Services (DFS), reshaping access to finance across SSA. In Kenya, over 86% of adults now use mobile money, and by 2023, an extraordinary 97% of loans were disbursed digitally. Remarkable achievements!

16/16
…to foster SME finance more directly by improving SMEs’ loan access – e.g. address problems of information asymmetry (credit registries), collateral issues (moveable asset registries) & facilitate digitalization (fin.inclusion, ease&cost of using fin. services, competition in the fin.sector).

15/16
This does not necessarily imply that governments should direct their primary efforts to advance capital markets. Depending on the current level of development, it may take strenuous institutional & structural reforms to achieve truly thriving capital markets. It may be better…

14/16
The good news for policymakers is that capital market development is beneficial for SMEs’ access to finance even if the development should be limited to the main market and not include advancements in the secondary markets such as dedicated SME exchanges or PE & VC markets.

13/16
I find evidence that the indirect, positive effect of capital market development runs – in line with the theoretical work of Song & Thakor (2010) – through the increased usage of capital market instruments by financial institutions and expanded availability of bank loans.

12/16
These results are robust to changes on various dimensions including instrumental variable (IV) approaches that account for potential endogeneity issues, in particular reverse causality concerns (due to interrelations between the banking sector and capital markets).

11/16
I find positive and significant effects, which indicates that smaller firms in sectors that are more heavily dependent on external finance are more likely to have sufficient access to loans if they are located in countries with more developed capital markets.

10/16
I adapt Léon’s (2020) extension of the influential cross-industry cross-country model of Rajan and Zingales (1998) to firm-level data, to explore whether capital markets indirectly alleviate SMEs’ financing constraints by improving SMEs’ access to bank loans.

9/16
Due to securitization, banks can use asset-backed securities instead of deposits to fund lending activities and thus further expand lending (Song & Thakor, 2010). (There are other interactions between banks and markets as well…)

8/16
Relatively inexpensive equity finance (bank equity capital) enables banks to improve their funding structures and to expand lending to previously unserved firms & households (Song & Thakor, 2010) – including riskier borrowers as banks can meet higher capital requirements.

7/16
Several fin. instruments feature the comparative advantages of banks (information-related activities) & markets (liquidity) and create interactions associated with benefit flows from banks to markets (e.g. securitization) and from markets to banks (e.g. bank equity capital).

6/16
Although SMEs hardly acquire finance through capital markets directly, capital market development may indirectly improve SMEs’ access to finance by increasing the availability of bank loans. This indirect channel builds on the complementarity & co-evolution of markets & banks: …

5/16
Market-based debt instruments are even less suited for SMEs: Bond-issuing firms are even larger than those using equity finance (Didier et al., 2014) and bond markets, in general, are found to be underdeveloped in LMICs (Didier et al., 2021).

4/16
Privately traded stocks, PE&VC, play a marginal role even in countries with vibrant, fast-growing capital markets: 6% relative to GDP in China & SouthKorea in 2020. Situation in other LMICs even bleaker: 1% despite reasonable (Mexico) or good (India) stock market performance.