The Economic Impact of Increased Access to Commercial Banks in Ethiopia

Abstract: Savings rates are strongly predictive of future economic growth and, for several reasons, it is difficult to save in areas where resources are scarce. Increasing access to financial services is crucial to efficiently allocate funds and can help even small savings be invested in countries that historically have had lower financial development. This paper examines to what level increased access to banks can help reduce poverty in Ethiopia. Even if scarcity of private financial resources on its own is an obstruction, several other barriers to access and save in financial institutions exists. To improve the requisites for economic development by enabling access to basic banking services to more people and implement development agendas, this paper will present the effect of a higher presence of commercial banks. Using panel data uniquely identifying individuals in Ethiopia observed in two periods, we have studied the relationship between the higher presence of commercial banks and household expenditure. From this procedure it appears that gaining access to a commercial bank has a substantial impact on the household level consumption. The finding show that communities with physical access to a bank have significantly higher consumption levels than communities with no bank, suggesting considerable benefits for the overall economy.