Financial Inclusion and Household Entrepreneurship: Micro-level Evidence from Ethiopia

Abstract

This study investigates the influence of financial inclusion on household-level entrepreneurship in Ethiopia, utilizing nationally representative data from the 2018/19 Ethiopian Socioeconomic Survey. Entrepreneurship is defined by ownership of trading businesses, non-agricultural enterprises, professional offices, and bars/restaurants. Financial inclusion is assessed through a composite index encompassing bank account ownership, formal savings, formal insurance, and formal borrowing. Conventional index construction methods, including Multiple Correspondence Analysis (MCA) and Principal Component Analysis (PCA), demonstrated poor discriminatory power, leading to the adoption of a logical OR function. This function classifies households as financially included if they utilize at least one formal financial service. A multivariate probit (MVProbit) model is employed to account for the simultaneous nature of entrepreneurial decisions across sectors, while an instrumental variable probit (IV-Probit) model serves as a robustness check, confirming that endogeneity concerns are minimal. The results indicate that both formal financial inclusion and participation in informal community-based insurance (IDDIR) significantly enhance the likelihood of entrepreneurship. Additionally, household size, urban residence, and asset ownership are positively associated with business ownership, while older age and rural residence have a negative impact. The study underscores the importance of promoting both formal financial services and community-based risk-sharing mechanisms to foster entrepreneurial activity. Policy recommendations include expanding access to formal finance, strengthening informal networks such as IDDIR, and targeting support to rural households to stimulate business creation and sustainable economic development. These findings provide the first country-specific, demand-side evidence linking financial inclusion and informal insurance to household entrepreneurship in Ethiopia.