THE EFFECT OF FINANCIAL INCLUSION ON HOUSEHOLD INCOME; THE CASE OF SELECTED DISTRICTS IN SILTIE ZONE, CENTRAL ETHIOPIA REGION

Abstract<br> This study investigates the impact of financial inclusion on household income in selected districts of the Silte Zone, Central Ethiopia. Financial inclusion is increasingly recognized as a key strategy for reducing poverty and improving livelihoods; however, the research employs cross-sectional data collected from a sample of 369 households, selected using stratified and random sampling techniques. To estimate the causal impact of financial inclusion while addressing potential selection bias, Propensity Score Matching (PSM) was applied. Financial inclusion was measured as a composite index comprising access to formal financial services such as bank accounts, mobile banking, savings, credit, and insurance. Covariates used in the matching process included demographic, socioeconomic, and geographic variables such as age, household size, marital status, employment status, location, education, source of income, and availability of collateral. The unmatched sample indicated that financially included households had an average income advantage of approximately 35,726.57 ETB over their non-included counterparts, a statistically significant difference at the 1% level (t = 4.64). After applying PSM, the estimated Average Treatment effect on the Treated (ATT) was 25,861.67 ETB (t = 2.03), confirming that financial inclusion significantly increases household income. This result was robust across alternative matching algorithms and a secondary ATT estimate of 25,637.85 ETB supported the main finding. Covariate balance diagnostics and sensitivity analysis further reinforced the validity of the model, with results remaining stable up to a gamma value of 2.These findings suggest that financial inclusion plays a substantial role in improving household income in rural settings. The study recommends expanding access to inclusive financial services as a policy tool for enhancing economic well-being and reducing income inequality among rural households.