Nexus Between Financial Inclusion, Financial Development And Economic Growth In Ethiopia

Abstract

This paper investigates nexus between financial inclusion, financial development and economic growth in Ethiopia during the period from 1995 to 2024 using Autoregressive Distributed Lag (ARDL) approach, more specifically the role of financial inclusion as an important factor for economic growth. The paper also schedules Vector Error Correction Model (VECM) in order to observe how fast the co-integrated variables convergence in long-run. Accordingly, the results of bound test confirm existence of the long-run relationship between explanatory variables and economic growth. The result of the study shows evidence of long-run and short run positive impacts of financial inclusion and financial development on economic growth in Ethiopia which implies that progresses in financial sector contribute to economic growth in both short-run and long-run. In consideration of few control variables, the study finds indicators such as number of account holders, mobile money account and total credits granted are significantly influence economic growth in the long-run. Moreover, the study employs Granger causality tests in order to show direction of impact is running from financial development to economic growth both in short-run and long-run. Based on the findings, the study recommends that Policymakers and financial institutions should continue to increase the accessibility of formal financial services, especially in rural and underserved areas, by expanding branch networks and mobile banking services.