Banking competition and financial inclusion: Evidence from Ethiopia

Abstract

The recent literature on financial inclusion has demonstrated the importance of several characteristics of the local and national infrastructure, including the physical proximity of local banking services. However, inclusion may also depend on another characteristic of the banking sector: the number of different banks operating in the local area. If more banks are operating in the area, there is likely to be a higher level of competition, lowering costs to customers. Using data from Ethiopia, we show that, conditional on the proximity of a household to banking services, the number of local banks is strongly associated with the probability that the household will have access to those services. Further statistical analysis suggests that this may be a causal effect. Our results indicate that promoting competition in the banking sector is likely to raise the level of financial inclusion.