Financial Inclusion and Bank Performance: Evidence from the Banking Sector in Ethiopia

Cover Page

Cite item

Full Text

Abstract

Evidence shows that financial inclusion plays a key role in driving economic growth and social development by strengthening the financial system and reducing poverty and income inequality. However, its impact on the financial performance of banks remains inconclusive. This paper explores the relationship between financial inclusion and the financial performance of commercial banks in Ethiopia, using a sample of 16 banks. We analyse 10 years of data (2013–2022) collected manually from the National Bank of Ethiopia (NBE) and the annual reports of commercial banks. A two-step system Generalized Method of Moments (GMM) is employed, alongside other linear panel data model estimators. The findings reveal that increased financial inclusion has a significant positive impact on the financial performance (ROA and ROE) of commercial banks in Ethiopia. The GMM estimation result also shows that bank performance indicators (ROA and ROE) are positively
associated with their past realizations. Regarding bank-specific control variables, the cost-efficiency ratio has a significant negative impact on bank profitability. The study recommends that banks improve accessibility by expanding branch networks and ATMs and by offering innovative financial products to enhance profitability.

About the authors

Ayele Birhanu Abebe

Debre Markos University

Author for correspondence.
Email: abebe_birhanu@dmu.edu.et
ORCID iD: 0000-0003-1352-1035

PhD, Asst. Professor, Department of Accounting and Finance

Ethiopia, Debre Markos

Keshav Malhotra

Panjab University

Email: keshavmalhotra@pu.ac.in
ORCID iD: 0009-0007-4051-737X

PhD, Professor, Department of Evening Studies, Multidisciplinary Research Center (MDRC)

India, Chandigarh

Manu Sharma

Panjab University

Email: manu.sharma@pu.ac.in
ORCID iD: 0000-0001-6818-6778

PhD, Asst. Professor

India, Chandigarh

References

  1. Oji C.K. Promoting Financial Inclusion for Inclusive Growth in Africa. South African Inst Int Aff; 2015.
  2. Allen F., Demirguc-Kunt A., Klapper L., et al. The foundations of financial inclusion: Understanding ownership and use of formal accounts. J Financ Intermediation. 2016;27:1–30. https://doi.org/10.1016/j.jfi.2015.12.003
  3. Arora R.U, Links between financial inclusion and financial stability: A study of BRICS. In: Anand S.F., Flavio C., eds. Handbook of BRICS and Emerging Economies. Oxford; 2020. https://doi.org/10.1093/oso/9780198827535.003.0007
  4. Morgan P., Pontines V. Financial Stability and Financial Inclusion. Finance Working Papers. 2014:24278. https://doi.org/10.2139/ssrn.2464018
  5. Sahay R, Cihak M, N’Diaye P, et al. Financial Inclusion: Can it Meet Multiple Macroeconomic Goals? Staff Discussion Notes. 2015;15(017). https://doi.org/10.5089/9781513585154.006
  6. Musau S.M. Financial Inclusion and Stability of Commercial Banks in Kenya. Kenyatta University; 2014.
  7. Khanh LC. Determinants of financial inclusions: comparing high, middle, and low-income countries. SSRN Electron J. 2019. https://doi.org/10.2139/ssrn.3349933
  8. Shihadeh F. Financial inclusion and banks’ performance: Evidence from palestine. Invest Manag Financ Innov. 2021;18(1):126–138. https://doi.org/10.21511/imfi.18(1).2021.11
  9. Hannig A., Jansen S. Financial Inclusion and Financial Stability: Current Policy Issues ADBI Working Paper. 2010:259. https://doi.org/10.2139/ssrn.1729122
  10. Sarma M. Index of Financial Inclusion. Indian Council for Research on International Economic Relations (ICRIER), New Delhi; 2008:215.
  11. Sarma M., Pais J. Financial inclusion and development. J Int Dev. 2011;23(5):613–628. https://doi.org/10.1002/jid.1698
  12. Ommeren S. An Examination of the Determinants of Banks’ Profitability in the European Banking Sector; A Master’s Thesis. ERASMUS UNIVERSITY ROTTERDAM; 2011.
  13. Gentry R.J., Shen W. The relationship between accounting and market measures of firm financial performance: How strong is it? J Manag Issues. 2010;22(4):514–530.
  14. Bawa A. Market-based performance measures: a shareholder’s perspective. In: 15th Annual International Bata Conference for PhD Students and Young Researcher. 2019:76-83.
  15. Beck T., Senbet L., Simbanegavi W. Financial Inclusion and Innovation in Africa: An Overview. J Afr Econ. 2014;24(S1):i3–11. https://doi.org/10.1093/jae/eju031
  16. Han R., Melecky M. Financial Inclusion for Stability: Access to Bank Deposits and the Deposit Growth during the Global Financial Crisis. Policy Research working paper; no. WPS 6577 Washington, DC: World Bank.
  17. Kacperczyk M., Schnabl P. How Safe Are Money Market Funds? The Quarterly Journal of Economics. 2013;128(3):1073-1122. https://doi.org/10.1093/qje/qjt010
  18. Chauvet L, Jacolin L. Financial Inclusion and Firms performance. Séminaire Banque de France / Ferdi. 2015:24.
  19. Siddik M.N.A., Sun G., Kabiraj S., et al. Impacts of e-banking on performance of banks in a developing economy: empirical evidence from Bangladesh. Journal of Business Economics and Management. 2016;17(6):1066-1080. https://doi.org/10.3846/16111699.2015.1068219
  20. Nthambi E.K. Financial inclusion, bank stability, bank ownership and financial performance of commercial banks in Kenya. 2015.
  21. Shihadeh, F.H., Hannon, A.(.T.)., Guan, J., et al. Does Financial Inclusion Improve the Banks’ Performance? Evidence from Jordan. In: Kensinger, J.W., ed. Global Tensions in Financial Markets. (Research in Finance, Vol. 34). Emerald Publishing Limited, Leeds; 2018:117-138. https://doi.org/10.1108/S0196-382120170000034005
  22. Shihadeh F. The influence of financial inclusion on banks’ performance and risk: New evidence from MENAP. Banks Bank Syst. 2020;15(1):59–71. https://doi.org/10.21511/bbs.15(1).2020.07
  23. Shihadeh F, Liu B. Does financial inclusion influence the banks risk and performance? Evidence from global prospects. Acad Account Financ Stud J. 2019;23(3):1–12.
  24. Bhatter HK, Chhatoi BP. Financial inclusion and financial performance: evaluating the moderating effect of mandatory corporate social responsibility. J Financ Econ Policy. 2023;15(3):208–225. https://doi.org/10.1108/JFEP-01-2023-0012
  25. Khatib SFA, Hendrawaty E, Bazhair AH, et al. Financial Inclusion and the Performance of Banking Sector in Palestine. Economies. 2022;10(10):247. https://doi.org/10.3390/economies10100247
  26. Brickley J, Linck J, Smith C. Boundaries of the Firm: Evidence from the Banking Industry. J financ econ. 2003;70(3):351–383. https://doi.org/10.1016/S0304-405X(03)00170-3
  27. Bansal A. Profitable Models for Financial Inclusion. Glob J Manag Res. 2012;69–73.
  28. Al-Smadi MO. The Impact of E- Banking on The Performance of Jordanian Banks. J Internet Bank Commer. 2011;16(2).
  29. Le TH, Chuc AT, Taghizadeh-Hesary F. Financial inclusion and its impact on financial efficiency and sustainability: Empirical evidence from Asia. Borsa Istanbul Rev. 2019;19(4):310–322. https://doi.org/10.1016/j.bir.2019.07.002
  30. Bhattacharyya A, Wright S, Rahman ML. Is better banking performance associated with financial inclusion and mandated CSR expenditure in a developing country? Account Financ. 2019;61(1):125–161. https://doi.org/10.1111/acfi.12560
  31. Ongore V.O., Kusa G.B. International journal of economics and financial issues. Int J Econ Financ Issues. 2013;3(1):237–252.
  32. Dahiya S., Kumar M. Linkage between Financial Inclusion and Economic Growth : An Empirical Study of the Emerging Indian Economy. Vision The Journal of Business Perspective. 2020;24(3):097226292092389. https://doi.org/10.1177/0972262920923891
  33. Sharma D. Nexus between financial inclusion and economic growth Evidence from the emerging Indian economy. Journal of Financial Economic Policy. 2016;8(1):13-36. https://doi.org/10.1108/JFEP-01-2015-0004
  34. Vo D.H., Nguyen N.T., Van L.T-H. Financial inclusion and stability in the Asian region using bank-level data. Borsa Istanbul Rev. 2020;21(1):36–43. https://doi.org/10.1016/j.bir.2020.06.003
  35. Arellano M., Bond S. Some Test of Spesification for Data Panel: Monte Carlo Evidence and an Aplication of Employment Equations. Source Rev Econ Stud. 1991;58(2):277–297. https://doi.org/10.2307/2297968
  36. Blundell R., Bond S. Reprint of: Initial conditions and moment restrictions in dynamic panel data models. J Econom. 2023;234:38–55. https://doi.org/10.1016/j.jeconom.2023.03.001
  37. Kumar V., Thrikawala S., Acharya S. Financial inclusion and bank profitability: Evidence from a developed market. Glob Financ J. 2021;53(January):100609. https://doi.org/10.1016/j.gfj.2021.100609
  38. Demi˙rgüç-kunt A., Klapper L. Measuring Financial Inclusion: Explaining Variation in Use of Financial Services across and within Countries. 2013.
  39. Roa García M.J. Can Financial Inclusion and Financial Stability Go Hand in Hand? Econ Issues. 2016;21(2):81–103.
  40. Bai J., Choi S.H., Liao Y. Feasible generalized least squares for panel data with cross-sectional and serial correlations. Empir Econ. 2021;60(1):309–326. https://doi.org/10.1007/s00181-020-01977-2
  41. Miller S., Startz R. Feasible Generalized Least Squares Using Machine Learning. SSRN Electron J. 2017;1–25. https://doi.org/10.2139/ssrn.2966194
  42. Wooldridge J. Introductory Econometrics; A Modern Approach. 5th ed. Soth Western: Cenage Learning; 2013.
  43. Ullah S., Akhtar P., Zaefarian G. Dealing with endogeneity bias: The generalized method of moments (GMM) for panel data. Ind Mark Manag. 2018;71:69–78. https://doi.org/10.1016/j.indmarman.2017.11.010
  44. Wintoki M.B., Linck J.S., Netter J.M. Endogeneity and the dynamics of internal corporate governance. J financ econ. 2012;105(3):581–606. https://doi.org/10.1016/j.jfineco.2012.03.005
  45. Roodman D. How to do xtabond2: An introduction to difference and system GMM in Stata. Stata Journal. 2009;9(1):86–136.
  46. Labra Lillo R., Torrecillas C. Estimando datos de panel dinámicos. Un enfoque práctico para abordar paneles largos. Rev Colomb Estad. 2018;41(1):31–52.
  47. Akben-Selcuk E. Does Firm Age Affect Profitability? Evidence From Turkey. Int J Econ Sci. 2016;5(3):1–9. https://doi.org/10.20472/ES.2016.5.3.001
  48. Shehata N., Salhin A., El-Helaly M. Board diversity and firm performance: evidence from the U.K. SMEs. Appl Econ. 2017;49(48):4817–4832.
  49. Loderer C.F., Waelchli U. Firm Age and Performance. SSRN Electron J. 2010. https://doi.org/10.2139/ssrn.1342248

Supplementary files

Supplementary Files
Action
1. JATS XML
Download

Copyright (c) 2025 Abebe A.B., Malhotra K., Sharma M.

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.