Financial Inclusion and Household Well-being: Evidence from Ethiopia

Abstract

This study investigates the impact of the level of financial inclusion on poverty reduction using Round Four of the Ethiopian Socioeconomic Survey. We constructed a Financial Inclusion Index using a standard counting method and employed an Instrumental Variable (IV)-Probit model, using knowledge of financial service use as the instrument to address endogeneity. The average poverty rate among Ethiopian households is 25.9%. The empirical results confirm that financial inclusion positively affects household well-being: a one-unit increase in the Financial Inclusion Index is associated with a 0.336 percentage-point reduction in the likelihood of being poor, holding other factors constant. We also examine effects by gender and location: male-headed and urban households show a statistically significant effect individually, but a formal test finds no significant difference between subgroups, so we treat this heterogeneity as inconclusive. Governments should improve access to technology-driven financial services to address exclusion caused by limited knowledge and distance from formal financial institutions.