How Does Financial Inclusion Affect Bank Stability? Evidence from the Banking Sector in Ethiopia

Abstract Evidence confirms that financial inclusion is a key enabler for economic growth and social development by deepening the financial system and reducing poverty and income inequality. However, its association with the financial stability of commercial banks remains inconclusive. Hence, this study is sought to examine the relationships between financial inclusion and the stability of the Ethiopian Banking Sector using a sample of 16 commercial banks. The study analyzed data spanning a period of 10 years, from 2013 to 2022, collected manually from the National Bank of Ethiopia and each commercial bank’s annual reports. Using the fixed effect method of panel data analysis, the results of this study showed that greater financial inclusion activities have a positive significant influence on banks’ Z-Score and a negative significant effect on the non-performing loan ratio of commercial banks in Ethiopia at 1 and 10 percent levels of significance. Concerning the effect of bank-specific control variables, the cost-efficiency ratio, return on assets, age, and size of banks significantly influenced the stability of banks with different signs. Banks in Ethiopia should increase their accessibility and level of penetration. By expanding their branch networks, ATMs as well as providing innovative financial products to customers given the positive contribution of enhanced financial inclusion in fostering bank stability.