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

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.

Downloads

References

Oji C.K. Promoting Financial Inclusion for Inclusive Growth in Africa. South African Inst Int Aff; 2015.

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

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

Morgan P., Pontines V. Financial Stability and Financial Inclusion. Finance Working Papers. 2014:24278. https://doi.org/10.2139/ssrn.2464018

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

Musau S.M. Financial Inclusion and Stability of Commercial Banks in Kenya. Kenyatta University; 2014.

Khanh LC. Determinants of financial inclusions: comparing high, middle, and low-income countries. SSRN Electron J. 2019. https://doi.org/10.2139/ssrn.3349933

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

Hannig A., Jansen S. Financial Inclusion and Financial Stability: Current Policy Issues ADBI Working Paper. 2010:259. https://doi.org/10.2139/ssrn.1729122

Sarma M. Index of Financial Inclusion. Indian Council for Research on International Economic Relations (ICRIER), New Delhi; 2008:215.

Sarma M., Pais J. Financial inclusion and development. J Int Dev. 2011;23(5):613–628. https://doi.org/10.1002/jid.1698

Ommeren S. An Examination of the Determinants of Banks’ Profitability in the European Banking Sector; A Master’s Thesis. ERASMUS UNIVERSITY ROTTERDAM; 2011.

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.

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.

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

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.

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

Chauvet L, Jacolin L. Financial Inclusion and Firms performance. Séminaire Banque de France / Ferdi. 2015:24.

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

Nthambi E.K. Financial inclusion, bank stability, bank ownership and financial performance of commercial banks in Kenya. 2015.

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

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

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.

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

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

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

Bansal A. Profitable Models for Financial Inclusion. Glob J Manag Res. 2012;69–73.

Al-Smadi MO. The Impact of E- Banking on The Performance of Jordanian Banks. J Internet Bank Commer. 2011;16(2).

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

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

Ongore V.O., Kusa G.B. International journal of economics and financial issues. Int J Econ Financ Issues. 2013;3(1):237–252.

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

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

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

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

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

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

Demi˙rgüç-kunt A., Klapper L. Measuring Financial Inclusion: Explaining Variation in Use of Financial Services across and within Countries. 2013.

Roa García M.J. Can Financial Inclusion and Financial Stability Go Hand in Hand? Econ Issues. 2016;21(2):81–103.

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

Miller S., Startz R. Feasible Generalized Least Squares Using Machine Learning. SSRN Electron J. 2017;1–25. https://doi.org/10.2139/ssrn.2966194

Wooldridge J. Introductory Econometrics; A Modern Approach. 5th ed. Soth Western: Cenage Learning; 2013.

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

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

Roodman D. How to do xtabond2: An introduction to difference and system GMM in Stata. Stata Journal. 2009;9(1):86–136.

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.

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

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.

Loderer C.F., Waelchli U. Firm Age and Performance. SSRN Electron J. 2010. https://doi.org/10.2139/ssrn.1342248

Published
2025-04-19
How to Cite
AyeleA. B., MalhotraK. and Sharma M. (2025) “Financial Inclusion and Bank Performance: Evidence from the Banking Sector in Ethiopia”, Journal of Corporate Finance Research / Корпоративные Финансы | ISSN: 2073-0438, 19(1), pp. 54-69. doi: 10.17323/j.jcfr.2073-0438.19.1.2025.54-69.
Section
New Research