International Journal of Economics and Finance; Vol. 10, No. 5; 2018 ISSN 1916-971X E-ISSN 1916-9728 Published by Canadian Center of Science and Education 114 Impact of Financial Inclusion on Consumption Expenditure in Kenya Isaac Mwangi 1 & Rosemary Atieno 2 1 Research and Policy Analysis Department, Central Bank of Kenya 2 Institute of Development Studies, University of Nairobi, Kenya Correspondence: Isaac Mwangi, Central Bank of Kenya, Box: 60000-00200 Nairobi, Kenya. Tel: 254-721-395-781. E-mail: wamwabz@gmail.com Received: April 5, 2017 Accepted: March 29, 2018 Online Published: April 10, 2018 doi:10.5539/ijef.v10n5p114 URL: https://doi.org/10.5539/ijef.v10n5p114 Abstract The main agenda of this study is to explore the impact of both single (transactionary, credit, savings and investment, insurance and pension) and composite (portfolio usage) measures of financial inclusion on household welfare in Kenya. To address this, the study makes use of repeated household Financial Access datasets over 2009-2016 to apply dynamic panel regression methods. The results show that the observed differences in welfare varies by financial product with the credit channel taking the lions share. A zero to one change from non-usage (control) to usage (treatment) of credit, transactionary and insurance products among Kenyan households was found to be statistically significant in raising household welfare ceteris paribus. Similarly, the coefficient of the constructed index of financial inclusion was found to be both positive and statistically significant in explaining household welfare. Given the significant role financial inclusion plays in enhancing welfare, the study recommends a reduction in transactionary costs through an increase in the range of formal financial products to raise competition in financial markets. Policies targeting welfare improvement through finance should also be aligned to specific financial inclusion transmission channels to be more effective as opposed to policy formulation based on economic aggregates. Keywords: welfare, endogeneity, financial inclusion, consumption 1. Background Poverty and inequality remains a major challenge to many Kenyans despite the rapid economic expansion in the last two decades. Empirical evidence revealed that a surge in financial inclusion (FI) promotes inclusive growth perceived to be critical towards reducing poverty and income inequality (Park & Maercado, 2014). This poverty reduction goal is achieved through contingency plans targeting the young and old-age populations such as retirement pensions, financial contracts enforcement and financial regulatory oversight. FI cushions economic agents against unexpected short term shocks enabling them to make consumption and investment decisions over a long period. This facilitates the crafting of policy initiatives geared towards raising access to a broad range of affordable financial services for poverty reduction. This study interrogates the impact of FI on welfare by first constructing both sigle and composite measures of FI using household survey data. Measurement of FI followed Sarma (2008) definition of access, availability and usage of formal financial services. The economic pillar of Vision 2030, Kenya's economic blueprint and financial sector Medium Term Plan (MTP), of the period 2012-2017 recognize FI as key in promoting economic growth and poverty alleviation (GoK, 2003) in Kenya. This positive link between FI and growth is also supported by both theoretical and empirical evidence (World Bank, 2002; DFID, 2004; Rajan & Zingales, 1998). Literature on financial inclusion and how it’s linked to economic welfare however remains scanty. This is compounded by lack of a universally acceptable definition and measure of FI which limits impact studies. Research has shown that policy surrounding FI and its various outcomes is highly dependent on the adopted FI measures and definitions. Earlier theories of development made little mention of finance instead concentrating on labour and capital to reduce income inequality and accelerate economic growth. Some of the poverty eradication programs rolled out in Kenya include; Welfare Monitoring Surveys (1992, 1994 and 1997); Millennium Development Goals (UN, 2000); and the Economic Recovery Strategy for Wealth and Employment Creation (GoK, 2008). Inspite of the domination of FI in global policy discussions on growth and development,