Information Frictions, Human Capital and Asset Wealth: The Micro-foundations of Financial Dualism in Kenya

This paper examines why many Kenyan adults rely exclusively on informal finance despite high formal financial inclusion. Drawing on information asymmetry, human capital and permanent income theories, it asks whether financial literacy, asset wealth and education are associated with exclusive informal use, and whether they reinforce one another. Using the 2024 FinAccess Household Survey analytical file of 18,182 respondents classified as formal-only or informal-only (1,211 informal-only; 6.7 percent), we estimate four nested logit models with county-clustered standard errors and average marginal effects. A one-category higher literacy, wealth and education score is associated with a 0.9, 2.4 and 2.7 percentage point lower probability of informal-only use, respectively. The literacy association falls by more than half once wealth and education are controlled. Relative to those aged 26–35, respondents aged 16–17 and 18–25 are 57.7 and 8.4 points more likely to be informal-only; only Nairobi and North Eastern differ significantly from Central. Wealth and education are complements (p < 0.01), though scale-sensitive. The literacy interactions, including the three-way term (p = 0.27), are insignificant in every specification. Literacy is associated with lower informal-only use in nearly all wealth-education groups, with the largest absolute reduction among the poorest households. These results are associations, not causal effects. We recommend piloting and rigorously evaluating simplified youth accounts, asset-based credit scoring with matched asset-building savings for low-wealth households, and financial education targeted first at low-wealth, low-education households.