The Impact of Financial Inclusion on Bank Performance in Ethiopia: Panel Data Analysis
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Date
2024-06-18
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A.A.U
Abstract
This study examines the relationship between financial inclusion and banking performance in Ethiopia, using data of 10 banks from 2012 to 2022. The study employs the panel data model to assess the impact of financial inclusion on bank performance. The Regression analysis was conducted after carrying out the Housman test to determine the suitability of either the fixed effect or random effect model after developing the bank performance index and financial inclusion index using principal component analysis (PCA). The results show that financial inclusion negatively affects bank performance and profitability, as measured by the bank performance index. The research has shown bank-specific factors, such as net loan-to-asset ratio, are insignificant to banking performance.
Additionally, the deposit has a positive significance for banking performance in the study of selected ten banks in Ethiopia. Inflation and GDP growth rate significantly impact banking performance. The emphasis on increasing the availability of financial services underscores the importance of establishing a robust infrastructure that can cater to the diverse needs of customers across various regions. By expanding physical branches, developing digital banking solutions, and implementing innovative delivery channels, banks can ensure that their services are easily accessible to a wider audience.
Finally, the authors suggest the crucial need for banks to collectively prioritize accessibility, utilization, and availability to boost not only their profitability but also their essential role in catalyzing sustainable economic growth and cultivating a more inclusive financial landscape in Ethiopia. This strategic alignment between financial institutions and economic development goals signifies a pivotal stride towards strengthening the nation's economic foundation as a whole.
Key Words: Financial Inclusion, bank performance, return on asset, return on equity, net interest margin, principal component analysis (PCA), Gross Domestic Product (GDP)