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

Abebe Birhanu Ayele; Keshav  Malhotra; Manu  Sharma

doi:10.17323/j.jcfr.2073-0438.19.1.2025.54-69

Abebe Birhanu Ayele Debre Markos University, Debre Markos, Ethiopia https://orcid.org/0000-0003-1352-1035
Keshav Malhotra Panjab University, Chandigarh, India
Manu Sharma Panjab University, Chandigarh, India https://orcid.org/0000-0001-6818-6778

DOI: https://doi.org/10.17323/j.jcfr.2073-0438.19.1.2025.54-69

Keywords: financial inclusion, GMM, bank performance, Ethiopia

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.

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