ODA BULTUM UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS

Determinants and Status of Rural Households’ Financial Inclusion in West Hararghe

Zone; In case of Chiro Woreda

Research Proposal Submitted to Department of Economics for Partial Fulfillment of the

Requirement for the Degree of Bachelor of Art in Economics

Id no

By; Eskedar Sisay 1110/13

Advisor; Tamiru G. (MSc)

Dec, 2023

Chiro, Ethiopia
Table of Contents
List of tables........................................................................................................................................................II
LIST OF ACRONYMS.....................................................................................................................................IV
Abstract...............................................................................................................................................................VI
CHAPTER ONE.................................................................................................................................................1
INTRODUCTION..............................................................................................................................................1
1.1. Background of the study 1
1.2. Statement of the problem 3
1.3. Research Questions 4
1.4. The objective of the Study 5
1.4.1. General Objective.............................................................................................................................5
1.4.2. Specific Objectives............................................................................................................................5
1.5. Scope of the study........................................................................................................................................5
1.6. Significance of the study 5
1.7. Organization of the Study 6
CHAPTER TWO................................................................................................................................................7
2.1. Theoretical Literature Review 7
2.1.1. Definition and concept of Financial Inclusion and related concept.............................................7
2.1.2 An overview of Ethiopian financial service and financial inclusion status...........................................8
2.1.3. Theories of Financial Inclusion.......................................................................................................9
2.1.3.1.1. Public Good Theory of Financial Inclusion....................................................................................10
2.1.3.1.2. Dissatisfaction Theory of Financial Inclusion................................................................................10
2.1.3.1.3. Vulnerable Group Theory of Financial Inclusion..........................................................................11
2.1.3.1.4. Systems Theory of Financial Inclusion...........................................................................................11
2.1.4. Theories of Financial Inclusion Delivery......................................................................................12
2.2. Empirical Literature Review....................................................................................................................13
2.3. Conceptual Framework.............................................................................................................................16
CHAPTER THREE..........................................................................................................................................17
RESEARCH METHODOLOGY....................................................................................................................17
3.1. Description of the study area 17
3.2. Data type, source and methods of data collection 17
3.2.1. Data type and source......................................................................................................................17
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3.3. Target population......................................................................................................................................18
3.4. Sampling techniques..................................................................................................................................18
3.5. Sample size determination........................................................................................................................19
3.6. Method of data collection..................................................................................................................20
3.7. Method of Data Analysis 20
3.8. Econometrics analysis.....................................................................................................................21
3.9. Empirical specification 22
3.9.1. Description of variables and expected sign24
4.TIMELINE AND BUDGET PLAN..............................................................................................................30
4.1. Work plan...................................................................................................................................................30
4.2. Budget plan................................................................................................................................................ 30
REFERENCES.................................................................................................................................................31

List of tables
Table 2.1 Sample size determination by proportion for each sample kebles......................................................26
Table 3.1 Summaries for description of variables and expected sign 27
Table 4.1 Monthly time table .............................................................................................................................29
Table 4.2 Budget plan of the research.................................................................................................................29
Table 4.3 Budget summary………………………………………………………………………………………………………………..............30

II
List of figures page

Figure:1. conceptual frame work………………………………………………….16

III
LIST OF ACRONYMS

IV
AFI Alliance for Financial Inclusion.

ADB Asian development bank

ATM Automatic Teller machine

DBE Development Bank of Ethiopia

EDU Educational status of the individual (respondent),

FI Financial Inclusion

FL Financial literacy (knowledge) level of the respondent

FS Family size

G2P Government to Person

GDP Growth Domestic Product

GEN Gender of the respondent,

GFI Global financial inclusion

INC Average monthly income of the respondent

IFI Informal financial inclusion

MFIs Microfinance Institutions

MO Mobile ownership of respondent

NBE National Bank of Ethiopia

NFIS National Financial Inclusion Strategies

SACCOS Saving and Credit Cooperatives Society

SME Small and Medium Enterprises

SNNPRS South Nation Nationalities People Regional State

TRU Trust of the respondent on financial institutions,

V
WBG World Bank Group

Abstract
The main objective of this study will be examining the determinants and status of rural
households’ financial inclusion in West Hararghe chiro woreda. to examine the effect of this
factors on rural household financial inclusion the researcher will be use both primarily and
secondary data source and quantitative and qualitative data types. The primary data will be
collected through individual household survey from sample households using structured
questionnaire. The secondary data will be collected from other research efforts, books statistical
report, official document from different institution. The Probability and non-probability
sampling technique will be used in attempt to select appropriate number of sample respondent.
first based on simple random sampling technique select three kebeles. secondly, due to
homogeneity of population in socio-economic activity of the societies the researcher uses simple
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random sampling technique and 97 sample respondents will be drawn randomly based on
probability proportion to size of population. The data collected from different source will be
analyzed by using both descriptive and econometrics analysis particularly binary logit model
apply to investigate the determinant of rural household financial inclusion in the study area.

Key words: Financial inclusion, Binary logit, Chiro Woreda

VII
 CHAPTER ONE

INTRODUCTION

1.1. Background of the study

Financial inclusion refers to the availability and accessibility of affordable and valuable financial
products and services for both individuals and businesses, addressing their requirements in areas
like transactions, payments, savings, credit, and insurance, with a focus on responsible and
sustainable delivery (World Bank Group 2022). Ensuring financial inclusion is a significant
concern for various stakeholders, including governments, donors, researchers, and numerous
international organizations. According to the World Bank in 2014, over 60% of regulatory and
supervisory agencies have the responsibility of enhancing financial inclusion (World Bank,
2014).

Financial inclusion is an important tool for poverty reduction and continuous economic growth
and also in order to participate in the new digital economy using financial institution with their
digital services are important and essential. Different responsible bodies such as international
institutions, governments, central banks, financial institutions, researchers, and policymakers
give more attention for financial inclusion because it is a critical socioeconomic issue (World
Bank, 2017). Most advanced and developing countries identify the existence of financial
exclusion and consider as one of the critical socio-economic concerns on their order of business
(David & Varaidzo, 2020).

One of the World Bank's 2020 plan was achieving universal financial inclusion. At end of 2017
and at the beginning of 2018, in order to make financial inclusion well-known agenda in the
world, more than 50 countries have given more emphasis on financial inclusion dedication
(Demirguc-Kunt et al., 2018). National Financial Inclusion Strategies (NFIS) applied by
Ethiopia and other countries in the world to insure financial inclusion commitments. NFIS refers
to a platform or way of actions to achieve financial inclusion based on the agreement at the
national or sub-national level. It is also techniques that can be implemented to meet the goals of
reducing and eliminating poverty, inequality, and unemployment (world bank group 2017).

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 Empirical data indicates that financial inclusion as a method that can help to accomplish
financial development and economic growth, reduce income and bring households out of poverty
(Demirguc-Kunt and Levine, 2008). In addition to direct benefit financial inclusion have indirect
role by making consumption smooth, protect shocks like nature disaster and economic
challenges (David & Varaidzo, 2020).

The study of Mhlanga & Dunga (2020) and David (2021) shows that global development
challenges, global financial crises, and other unknown challenges that threaten human prosperity
require an all-inclusive approach to implementing policies to improve financial inclusion. This is
because financial inclusion is critical not just for stimulating economic growth, which is critical
for pulling households out of poverty, but also for closing income inequality gaps (Beck et al.,
2009).

Demirguc-Kunt and her team contend that the financial sector fosters economic growth and
advancement by facilitating the transfer of funds from surplus to deficit areas of the economy
through financial institutions. This crucial role of financial inclusion helps alleviate poverty and
inequality by enabling households to save, stabilize spending patterns, and handle financial risks.
They assert that even modest amounts of financial assets can act as a buffer against economic
upheavals and potential income loss. Conversely, individuals who lack financial inclusion cannot
take advantage of savings or wealth-building opportunities like earning interest or securing
advantageous credit. (Demirguc-Kunt et al., 2018).

The Ethiopian government's National Financial Inclusion Strategy aims to increase financial
inclusion in the country from 22 percent in 2014 to 66 percent by 2020. Financial inclusion
strategy is also one of the second Ethiopia Growth and Transformation Plan (GTP II) plan, which
aims to eliminate poverty, reduce inequality, and achieve full employment, decent work, and
sustainable livelihood. NFIS identifies as a priority to continuously broaden access to banking
services to poorer people and lower costs through a combination of competitive pressures and
reducing other infrastructure costs (NBE ,2017).

This study, specifically conducted in Chiro zuria woreda, is based on the premise that in order to
gain a deeper understanding of financial inclusion, it is essential to first quantify it in a
comprehensive manner, and subsequently analyze the effect of socio-economic and demographic

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factors, or demand-side factors, on financial inclusion. Using primary data collected from Chiro
zuria woreda, the study will investigate the main determinants of financial inclusion and assess
their influence on financial inclusion.

1.2. Statement of the problem

According to Clamara and his colleagues’ study, for any nation ensuring financial inclusion is
crucial for driving sustainable economic growth and enhancing societal well-being. Developing
inclusive financial systems remains a complex topic for researchers, policymakers, regulators,
and financial organizations, especially in developing countries and emerging markets where
banking penetration rates are comparatively lower. Such low rates are primarily attributed to
conventional factors like gender, residing in rural regions, having lower income, and limited
education (Clamara et al., 2014).

The National Bank of Ethiopia's report disclosed that, as of March 2017, there were 19.3 million
bank accounts, 11.4 million microfinance accounts, and approximately 1.8 million savings and
credit cooperative society (SACCOs) accounts. Despite this, around 56% of adults over the age
of 18 do not have accounts and instead rely on informal methods for saving, borrowing, and
obtaining financial security. Moreover, while 48% of adults over 18 years old save money, just
14% do so in a formal financial institution. Similarly, only 7% of the 44% of adults who borrow
money do so from formal financial institutions. Overall, the report indicates that the majority of
Ethiopian adults are excluded from utilizing formal financial institutions (NBE, 2017).

One of the main factors driving financial inclusion in Ethiopia is individual traits, such as age,
gender, education, self-assurance, and financial knowledge (Beza et al., 2020; Gashaw and Gebe,
2017). There have been limited studies conducted in Ethiopia regarding this topic. Some notable
examples include investigations by Ismael & Mohammd (2021), Andualem & Rao (2017), Beza
et al. (2020), Mekuanint et al. (2019), and Tekeste (2020), which explored financial inclusion in
regions such as Afar, Jimma, and East Gojam from various angles.

While, the majority of previous research explores the factors influencing financial inclusion by
encompassing both urban and rural areas, there is a notable disparity in understanding the
specific determinants of financial inclusion within rural households. Given that financial services
are predominantly concentrated in urban regions due to this reason, data collection has primarily

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focused on these areas. However, this approach overlooks the substantial differences in
developing financial inclusion between rural and urban communities, as well as the distinct
challenges and opportunities presented within the rural-urban economic system. As a result, there
is a significant knowledge gap in comprehending the unique factors affecting the financial
inclusion of rural households, which is further exacerbated by the ongoing and widening
discrepancies in infrastructural quality between urban and rural communities. Rapid economic
growth can be challenging without expanding financial inclusion in rural regions, where a
significant number of people live. It is essential to recognize the crucial elements and limitations
of financial inclusion in rural areas to promote its advancement. Therefore, this study that will be
conducted currently, focus on only rural area by taking evidence from Chiro zuria woreda.

The previous researcher divides the determinants of financial inclusion in two broad categories.
These are the demographic and socioeconomic in one group and institutional factors in another
group. Unlike the previous research, this study will be focus on demographic and socioeconomic
determinants of financial inclusion because previously, most researchers focus on institutional
factors but only a few researchers have conducted a study by taking socioeconomic and
demographic determinants. for example, Abdurrahman (2022) conduct their study by focusing
on demographic and socioeconomic determinants but they missed some variables like; mobile
ownership, family size, having close contact with others (with who have an account) that affect
rural household financial inclusions. Hence, by considering the above research gap, this study
will be focus on what is the essential Determinant and status of rural household Financial
Inclusion in west Hararghe; evidence from Chiro zuria woreda.

Additionally, to the best of my knowledge no known study has been undertaken to examine the
Determinants and status of rural household Financial Inclusion in Chiro zuria woreda. due to this
reason, the level of financial inclusion is specifically unknown based on the information
available for the researcher in the study area and research organization. So, knowing the level of
financial inclusion is important in order to address any gap regarding with financial service in the
study area.

1.3. Research Questions

The research will be able to answer the following questions: -

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 1. What are the determinants and status of rural household financial inclusion in the study
area?
2. what is the level of household’s financial inclusion in rural areas of Chiro zuria woreda?
3. Which variables are statistically significant?

1.4. The objective of the Study

1.4.1. General Objective

 The general objective of the study is to examine the determinants and status of rural
household financial inclusion in West Hararghe: evidence from Chiro woreda.

1.4.2. Specific Objectives

Specifically, the study will be achieved the following objectives:
 To examine the factors that influence rural household financial inclusion in the study
area.
 To identify the level of rural households’ financial inclusion in the study area.
 To identify which variables are statistically significant.

1.5. Scope of the study

The scope of this study will be limited to examine the determinants and status of rural household
financial inclusion in West Hararghe by using evidence from rural areas of Chiro Woreda. The
study will be measured financial inclusion based on account ownership of households in the
formal financial institutions. The scope of this study also will be limited in Chiro woreda, there
are 39 rural kebeles and three kebeles will be considered as the target population of this study
and 97 sample respondents will be taken as samples for the study.

1.6. Significance of the study

The main contribution of this study will highlight the major socioeconomic and demographic
variables that determine the rural household financial inclusion in the study area. This proposal
will have valuable information on the general outlook of financial inclusion, particularly in Chiro
Chiro woreda. In addition, the paper might give certain information about the problem of
financial inclusion. Promoting access to financial institution operations necessitates addressing

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market failure issues such as moral hazard and information asymmetry, which cause individuals
to be suspicious of the financial sector.

It is also significant in defining problems of rural household financial inclusion. Additionally,

the research will have different importance in the future. Firstly, the researcher will be acquired
significant experience in conducting research for the next time. Secondly it will help other
researchers who want to conduct their researches on similar topic, as a reference. Finally, any
responsible body to address such problems, they can use it as an input in finding solutions.

1.7. Organization of the Study

This study will organize within five chapters. The first chapter will be concerned with the
introduction parts such as background of the study, statement the problem, objective of the study,
scope, and significance of the study. The second chapter deal about review of related literature
and the third chapter deals with research method. The fourth chapter will be contained data
analysis and presentation and the last chapter will be contained conclusion and recommendation.

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 CHAPTER TWO

RELATED LITERATURE REVIEW

2.1. Theoretical Literature Review

2.1.1. Definition and concept of Financial Inclusion and related concept

Financial inclusion is defined as people and businesses having access to and using formal
financial services, those who do not have such access are termed financially disadvantaged. The
World Bank defines financial inclusion as the individuals and enterprises having access to usable
and affordable financial products and services that fit their needs - transactions, payments,
savings, credit, and insurance delivered responsibly and sustainably (World Bank, 2014). While
the Asian Development Bank, (2012) stated it is ready access for households and firms to
reasonably priced financial services (Asian development bank, 2012).

Alliance for Financial Inclusion (AFI),( 2010) The Consultative Group to Assist the Poor's
(CGAP)'s vision is for "a world where everyone can access and effectively use the financial
services they need to improve their lives [that] does not mean developing separate financial
markets for the poor". Finally, Chakravarty & Pal (2013) defined financial inclusion as the
process of ensuring access to appropriate financial products and services needed by vulnerable
groups such as weaker sections and low-income groups at an affordable cost fairly and
transparently by mainstream Institutional players. The World Bank definition emphasizes the
actual use of financial services, whereas the other definitions emphasize potential usage
(Chakravarty & Pal (2013).

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2.1.1.1. Financial institution

A financial institution refers to an organization that deals with monetary transactions, such as
deposits, loans, investments, and currency exchange. These institutions play an essential role in
the economy by facilitating the flow of funds between savers, investors, and borrowers. Financial
institutions can be broadly categorized into formal and informal institutions. The formal financial
sector in Ethiopia comprises commercial banks, microfinance institutions, insurance companies,
and various governmental financial institutions. The Ethiopian National Bank is the central
regulatory authority overseeing the operations of the formal financial institutions in the country.
Informal financial institutions in Ethiopia are an essential component of the financial landscape,
especially for rural and low-income populations. These institutions include community-based
financial initiatives such as iddirs, iqqubs, and informal savings groups. Iddirs are traditional
burial societies that also provide financial support during emergencies, while iqqubs are rotating
savings and credit associations (Aredo, 2010).

2.1.1.2. Financial literacy

Financial literacy refers to the knowledge and understanding of financial concepts, products, and
services. It enables individuals to make informed and effective decisions about their personal
finances, including managing money, budgeting, saving, investing, borrowing, and using
financial services. In the Ethiopian context, financial literacy is a vital yet relatively low
component of financial inclusion. According to the National Bank of Ethiopia's Financial
Inclusion Strategy, improving financial literacy will contribute to reducing informality and
promoting financial stability (NBE, 2017).

2.1.2 An overview of Ethiopian financial service and financial inclusion status

Ethiopia's formal financial services have come a long way since their inception in 1905 with the
establishment of the Bank of Abyssinia, which was supported by the Ethiopian government and
the National Bank of Egypt, then under British control. The banking system took shape after
Italy's exit in the 1940s, leading to the creation of the State Bank of Ethiopia in 1942. The
financial landscape began to change when several foreign and private banks started competing
with state-owned commercial banks but faced nationalization and amalgamation into a single
government-owned mono-bank in 1976 (NBE, 2021).
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Today, Ethiopia's financial sector comprises the National Bank of Ethiopia (NBE), commercial
banks (both public and private), the Development Bank of Ethiopia (DBE), savings and credit
cooperative societies, insurance companies (public and private), and microfinance institutions
(owned by regional governments, NGOs, associations, and individuals). According to recent data
from the National Bank of Ethiopia (2022), there are 30 banks (28 private and 2 public), 18
insurance companies (1 public and 17 private), and 41 microfinance institutions (11 public, 13
privates, and 17 NGOs) in the country (NBE, 2022)

Between 2019 and 2022, Ethiopian banks opened 3,380 new branches, bringing the total to
8,944, up from 5,564. Despite this growth, Ethiopia remains under-banked compared to other
Sub-Saharan African countries, with a bank branch to population ratio of 1:11,516. Additionally,
financial institutions, particularly insurance companies and bank branches, are disproportionately
concentrated in the capital, Addis Ababa, while rural areas are largely underserved. Saving and
credit cooperative societies and MFIs, intended to serve these areas, are often weak and struggle
to offer sustainable services (NBE, 2022).

As of March 2016, there were 19.3 million bank accounts, 11.4 million microfinance accounts,
and approximately 1.8 million saving and credit cooperative societies’ accounts for Ethiopian
adults over the age of 18. Approximately 56% of these adults did not have formal financial
accounts, relying on informal means to save, borrow, or insure themselves against risks. Around
48% of adults saved money, but only 14% used formal financial institutions for saving, and
while 44% of adults borrowed money, a mere 7% took loans from formal financial institutions.
This data highlights the significant financial exclusion faced by most Ethiopian adults when it
comes to using formal financial services (NBE, 2017).

2.1.3. Theories of Financial Inclusion

Ozili, (2020), Develop new theories that support financial inclusion. These theories are divided
in to theories of financial inclusion beneficiaries, theories of financial inclusion funding, and
theories of financial inclusion delivery or categorized into demand-side theories and supply-side
theories from an economic perspective.

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2.1.3.1. Theories of Financial Inclusion Beneficiary

2.1.3.1.1. Public Good Theory of Financial Inclusion

According to the public good theory of financial inclusion, (I)providing formal financial services
to the entire population and (ii) guaranteeing that everyone has unrestricted access to finance
should be viewed as a public good for the benefit of all members of the population. Individuals
cannot be barred from utilizing formal financial services or from having access to financial
services because they are a public good. Individuals will have access to essential financial
services without having to pay for them. Access to financial services by one person does not
imply that it is unavailable to others, implying that all members of the population can be brought
into the formal financial sector and everyone will benefit. According to this view, everyone in
the population benefits from financial inclusion, and no one is left out. According to the public
good principle, any individual or small business that opens a formal bank account will be given
free debit cards and will be able to use Automatic Teller Machine (ATM) machines without
paying a transaction fee. Financial service providers, such as financial institutions, will also have
to absorb the expense of providing financial services as a sunk cost of doing business. In
addition, the government can provide financial institutions with subsidies to help them deal with
any cost issues that may occur as a result of providing free financial services (Demirguc-Kunt et
al., 2015).

A government may even offer all residents a lump-sum cash deposit into their bank accounts,
with the only qualification being that they have a formal bank account. A government may even
offer all residents a lump-sum cash deposit into their bank accounts, with the only qualification
being that they have a formal bank account. When financial inclusion is considered a public
benefit, individuals who are unable to pay their debts and satisfy their necessities on a micro
level will have a chance to become economically empowered (Ozili, 2020).

2.1.3.1.2. Dissatisfaction Theory of Financial Inclusion

Dissatisfaction Theory of Financial Inclusion is a theoretical framework that attempts to explain
the potential reasons for dissatisfaction among individuals and households with formal financial
services, and how this dissatisfaction may contribute to the persistent levels of financial

10
exclusion (Sarma & Pais, 2011). The theory posits that an individual's decision to engage with
formal financial institutions, such as banks, is influenced by their level of dissatisfaction derived
from elements such as access, availability, affordability, and appropriateness of the provided
financial services (Sarma & Pais, 2011).

Individuals who have previously been boarded may become dissatisfied for a variety of reasons,
including financial fraud, debit/credit card fraud, financial theft, long waiting hours before
depositors can withdraw funds, payments taking too long to clear, high transaction costs,
excessive bank charges, and so on. (Ozili, 2020).

2.1.3.1.3. Vulnerable Group Theory of Financial Inclusion

The vulnerable group theory of financial inclusion asserts that a country's financial inclusion
activities or programs should be directed toward the most vulnerable members of society, such as
the poor, young people, women, and the elderly, who are the most affected by economic
hardship and crises. Because vulnerable people are disproportionately affected by financial crises
and economic recessions, it makes sense to bring them into the official financial sector. A
government-to-person (G2P) social cash transfer into vulnerable people‘s formal accounts is one
approach to do this. Making G2P social cash transfer payments to poor people, young people,
women, and the elderly will encourage other poor people, young people, women, and the elderly
to join the formal financial sector and open a formal account to benefit from the social cash
transfer benefits, thereby increasing the rate of financial inclusion for vulnerable groups. The
theory implies that it identifies some members of the population as vulnerable, implying that
financial inclusion efforts should be directed at these individuals (Ozili, 2020).

2.1.3.1.4. Systems Theory of Financial Inclusion

System theory of financial inclusion emphasizes the importance of a holistic approach in
understanding and promoting access to financial services for all individuals and businesses. This
approach acknowledges the complex interactions between various elements such as financial
institutions, regulatory frameworks, technological infrastructure, and socio-economic factors. By
focusing on the entire system and its interdependencies, it aims to identify and address barriers to

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financial inclusion, boost economic growth, and reduce inequalities in society (Meadows, 2008;
Sarma, 2020).

A substantial change at the entire system level, on the other hand, such as replacing the present
national financial inclusion strategy with a completely new plan, does not always imply a change
in the existing sub-systems, because a sub-system modification must be done at the sub-system
level. According to the theory, financial inclusion will increase the efficiency and effectiveness
of the sub-systems it relies on, and the success or failure of a financial inclusion agenda will be
determined by the efficiency and effectiveness of the sub-systems. However, from a systems
theory perspective, the existing sub-systems (economic, financial, and social) in a country are the
ultimate beneficiaries of financial inclusion (Ozili, 2020).

2.1.4. Theories of Financial Inclusion Delivery

2.1.4.1. Community Echelon Theory of Financial Inclusion

The Community Echelon Theory of Financial Inclusion is a theoretical framework that

emphasizes the role of communities in promoting and sustaining financial inclusion for
marginalized and low-income individuals. According to this theory, local communities play a
significant role in enhancing access to financial services and products by building trust, raising
awareness, and facilitating connections between formal and informal financial systems
(Financial Inclusion Consulting, 2019).

The values of its leaders and members are heavily influenced by the community. Community
members have faith in their leaders and think that they will make decisions that benefit them,
while community leaders ensure that the decisions, they make represent the community's values
and ethos. Because of their close cultural links, community leaders can push their members to
participate in the official financial sector. Community leaders can urge their members to
participate in the formal financial sector if they modify their views and preferences about it.
Because communal outcomes are mostly determined by community leaders' preferences, views,
and other eccentricities, it makes sense to provide financial inclusion to community members
through their communal leaders (Ozili, 2020).

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2.1.4.2. Public Service Theory of Financial Inclusion

according to the public service theory, is a public responsibility that governments owe to their
residents, and citizens expect the government to promote financial inclusion for them. According
to this notion, the government should provide financial inclusion to all citizens, including the
financially excluded, through public institutions. According to this view, only the government is
responsible for achieving financial inclusion, which entails bringing all members of the
population into the formal financial sector and providing them with access to formal financial
products and services (Ozili, 2020).

2.1.4.3. Special agent Theory of Financial Inclusion

According to the special agent theory of financial inclusion, delivering financial inclusion to the
excluded population can be hampered by complex issues and technicalities related to the nature
of the community, its people, or its geography; thus, specialized agents are needed to deliver
financial inclusion to members of excluded communities. The Special Agent Theory of Financial
Inclusion focuses on the role of special agents (e.g. governments, NGOs, and financial
institutions) in promoting access to financial products and services for the underserved or
excluded population. These agents act as intermediaries, fostering connections between
individuals and financial systems, improving trust, reducing risks, and ultimately leading to
increased social welfare (Karlan et al., 2016).

2.1.4.4. Financial Literacy Theory of Financial Inclusion

According to the financial literacy hypothesis of financial inclusion, financial inclusion should
be realized through education that improves citizens' financial literacy. Financial literacy,
according to this notion, increases people's willingness to participate in the formal financial
system (Ozili, 2020).

2.2. Empirical Literature Review

Desalegn and Yemataw (2017) carried out research on financial inclusion in Ethiopia and
discovered a strong connection between higher levels of financial inclusion and factors such as
improved education, financial literacy, and gender, age, living in urban areas or the capital city,

13
and a preference for formal financial services. The study also highlighted that both involuntary
and voluntary exclusions are higher in Ethiopia.

Getnet (2014) studied financial inclusion, regulation, and inclusive growth in Ethiopia and
found that despite significant progress over the past decade, financial inclusion remains quite
low. One major obstacle to improving financial inclusion is the limited physical accessibility to
financial services. The National Bank of Ethiopia (NBE) has recently discouraged the entry of
new financial institutions into the sector by increasing the required paid-in capital for both
commercial banks and microfinance institutions (MFIs). Furthermore, recent financial
regulations have led to banks adopting extremely conservative lending policies, which have
negatively impacted access to existing banks. However, these policies may help to lower future
non-performing loans for banks, which is a positive outcome.

Gashaw and Gebe's (2017) research utilized LSMS (Ethiopia Socioeconomic Survey) data and a
probit model to examine financial inclusion in Ethiopia. They found that only around 25% of
Ethiopian adults have a formal account. Higher levels of financial inclusion in the country were
associated with better education, financial literacy, age, gender, urban living, residing in the
capital city, and a preference for formal financial services. The study also revealed that the rate
of both involuntary and voluntary exclusion was higher in Ethiopia compared to other countries.

Tekeste and Hossein (2020) conducted a study on financial inclusion in Ethiopia, which
revealed that the country's financial inclusion was less successful than that of other East African
countries based on secondary data. The research showed that Ethiopians are more inclined to use
informal saving clubs as opposed to professional financial institutions. This preference,
combined with issues such as unemployment and low income, hinders the implementation of the
financial inclusion strategy.

The study by Desalegn (2021) explores the determinant factors that influence financial inclusion
among Ethiopian small and medium businesses. The study used an explanatory research design
and a mixed research approach, incorporating both primary and secondary data sources. The
study uses a multivariate linear regression model in particular. The study's findings show that
supply-side factors, demand-side factors, market potential, and collateral requirements all have a
favorable impact on a company's ability to obtain financing. Institutional framework elements,

14
on the other hand, have a detrimental impact on a firm's ability to obtain financing. According to
the findings, the rate of interest charged by financial institutions should be evaluated for
harmonization to provide access to funding for small and medium-sized businesses. Before
granting lending access to small and medium-sized businesses, financial institutions should
consider giving training.

Esmael & Mohammd (2021). Investigate the factors that influence financial inclusion in the Afar
region. The binary logistic regression model was used to evaluate primary data, and they
discovered that age, use of account and financial literacy are all positively and significantly
connected to financial inclusion. Barriers (lack of access to financial service, lack of
documentation) and income, on the other hand, have a negative and considerable impact on
financial inclusion.

Andualem & Rao (2017). Examine Ethiopia's Financial Inclusion. The main factors influencing
this include a lack of funds, distance, expense, and documentation requirements. Poor people,
teenagers, rural inhabitants, and women appear to have more difficulty accessing financial
services in this jurisdiction.

In East Gojjam, Ethiopia, Beza et al. (2020), did a study on Determinants of Financial Inclusion.
The results were analyzed using primary data and a binary logistic regression model. Income,
residency, financial literacy, documentation, trust, knowledge, accessibility, and availability all
have a substantial impact on financial inclusion, according to the findings. Documentation, trust,
awareness, and accessibility are the most important. Sex, age, education, occupation, family size,
infrastructure, and deposit rate, on the other hand, have no bearing on financial inclusion.

Mekuanint et al.(2019). Using primary data and both logit and probit econometrics model to
analyze the results, they conducted a study on financial inclusion and its drivers among families
in the Jima zone of Oromia regional state, Ethiopia. The findings show that financial inclusion is
positively correlated with age, education, financial literacy, and income, whereas financial
inclusion is adversely correlated with distance to the nearest supplier of financial services.

15
 2.3. Conceptual Framework
Based on the review of theoretical and empirical literature, the researchers have developed a
conceptual framework that outlines the factors contributing to financial inclusion in rural
households. They have used account ownership in financial institutions as an indicator of
financial inclusion. The factors that have been derived from prior studies include age, gender,
income, education, financial literacy, distance, informal financial institutions, mobile ownership,
family size, trust, and marital status, as key determinants of financial inclusion.

Figure 1: conceptual frame work of the study

Gender

Age

Income

Education

Family size

Financial inclusion Marital status

Distance

Having close contact

16 Financial literacy
Trust

Mobile ownership
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1. Description of the study area

The study will be conducted in Chiro town. It located in oromia region in eastern Ethiopia in
west hararghe zone. It is far 326km from Addis Ababa the capital city of Ethiopia and 225km
from Adama city.

Based on figures from the central statistical agency in 2017, Chiro woreda the total population is
around 56900.

3.2. Data type, source and methods of data collection

3.2.1. Data type and source

Quantitative and qualitative data will be collected from different sources through various
methods. These include both primary and secondary data sources. The importance of collecting
and considering both primary and secondary sources through qualitative and quantitative
methods of data collection is to complement and supplement the diverse data generate from
different sources which in turn is used to make the data and the result of the research reliable.
Research data will be collected from various sources depending on the objective of the study and
type of data to be analyzes.

17
Both primary as well as secondary sources of data will be used. In this study secondary data will
be obtained from related published journals, online articles, books and international conference
papers for the purpose of literature review. On the other hand, primary data will be collected by
administering well- structured questionnaire/ schedule to the target respondents. The
questionnaire includes both closed ended and open-ended questions, however, majority of the
questions are closed ended.

3.3. Target population

The target population of the study will be included all individual households, who live in 3
kebeles (kebele 01, kebele 02 and kebeles 03). The total number of households in these three
kebeles is 3675.

3.4. Sampling techniques

The study will employ house hold survey method, however due to finance, time and effort
constraints; total coverage of the entire population is not practical. Probability and non-
probability sampling technique will be used in attempting to select appropriate number of sample
respondent. First, Chiro woreda will be selected based on purposive sampling technique for
study area because, its proximity to the researcher that allows for convenient access to
information and reduced logistical challenges. Additionally, focusing on this region aligns with
the aim of the study that focuses on rural area, which is to explore and understand the financial
inclusion of rural households. Which means high percentage of rural household found in this
study area that face financial inclusion problem than urban area? Lastly, to the best of my
knowledge, there is no well-known study undertaken in this study area.

Secondly, by using simple random sampling technique select three kebeles namely, kebele 01,
kebele 02, and kebele 03 Chiro woreda. This is due to homogeneity of households in socio-
economic activity the researcher will use simple random sampling technique to get more precise
estimate and an appropriate representative kebeles. In the simple random sampling technique,
each kebeles chosen randomly by chance and also this sampling method is more preferable for

18
homogeneous population which have similar Way of life Chiro woreda and all the kebele's are
almost living the same way of life.

Thirdly, based on a complete list of names of all households from each kebele administration
office, 22, 45 and 30 sample respondents will be selected randomly from 01, 02 and 03
respectively using probability proportional to size technique.

3.5. Sample size determination

In order to determine the sample size (n) the researcher will use the following formula which is
developed by Yemane Todaro (Yemane, 1967).

n=N/1+(N) e2

where; n= sample size

N= total number of populations

e= expected error that the researcher will be committed when gathering data’s (10% level of
significance or 90% level of confidence).

The number of population size of households in each kebeles from 3675 total target households
in the three kebeles. 830 from kebele 01, 1705 from kebele 02 and 1140 from kebele 03 based on
our survey will be conducted for this study.

n=3675/(1+3675(0.1)2)

Therefore; n=3675/(1+36.75)=97

Table 2.1: Sample size determination by proportion for each sample kebeles

No Kebeles No of population Proportion Sample size

1 01 830 23% 22

2 02 1705 46% 45

3 03 1140 31% 30

19
From kebele 01, (830*97/3675) =22

From kebele 02, (1705*97/3675) =45

From kebele 03, (1140*97/3675) =30, respondents will be randomly selected.

3.6. Method of data collection

In this study, primary and secondary data collection method will be used. Individual Household
Survey is a typical method to collect primary data from the sample respondents. A structure
questionnaire that has involved both closed and open-ended questions is construct and employ to
generate data from the respondents. Individual Household survey will be conducted through
face-to-face interview between the respondent and the interviewer. Individual Households will
appropriate respondents for the questionnaire design for the survey. The main types of data
collect from household survey will persons demographic, socio-economic and behavioral
characteristics. Individual Household survey will be facilitated by well train enumerators under
the close supervision of the researcher. Before the actual household data collection, training will
be organized to enumerators on how to manage the whole individual survey task, interview and
fill the questionnaire. Pretest will be conducted prior to the household survey. That will help the
researcher to know whether there is a need to modify the questionnaire based on the feedback
from the pretest. Secondary data gives information that can not be will obtained from primary
data and it is mainly will be gathered from sources such as existing literature reports, seminar
paper, books magazine’s, publication among others, internet and past studied researches.

3.7. Method of Data Analysis

The researcher will use both descriptive statistics and econometrics model in order to achieve the
objective of this study. Based on survey data, demographic and socio-economic characteristics of
sample of individual households will be described with respect to financial inclusion by
employing descriptive statistics. The descriptive statistics like, mean, standard deviation,
maximum, minimum, frequency and percentage will be used to examine and understand
determinants and status of rural household financial inclusion in the study area. Logit model of
econometrics analysis will be employed to identify the determining factors of rural household
financial inclusion in the study area.
20
3.8. Econometrics analysis
Logit model is used to estimate dependent dichotomous variables. Although linear probability
model is the simplest method, it is not logically attractive model, in that it assumes that the
conditional probability increases linearly with the value of explanatory variables. Unlike linear
probability model, logit model guarantees that the estimated probabilities increase but never step
outside the 0 - 1 interval and the relationship between probability (Pi) and explanatory variable
(Xi) is nonlinear (Gujarati, 1998).

The selection of the logit model over other competing models for identifying the determinants
and status of rural household financial inclusion in West Hararghe can be justified on several
grounds. Firstly, the logit model is particularly suited for binary outcome variables, like financial
inclusion, where the dependent variable takes two values, i.e., either a household is financially
included or excluded (Alemu, 2013). This aligns with the goal of understanding the factors that
influence rural households' decisions to participate in financial systems. Secondly, the logit
model offers robust and easily interpretable results as it provides estimated probabilities of the
households being financially included, given a set of explanatory variables. This allows for clear
identification of the factors that influence financial inclusion as well as quantification of their
marginal effects (Hosmer et al., 2013). Furthermore, the logit model is less sensitive to
multicollinearity issues and distributional assumptions as compared to other models like the
linear probability model (LPM), which can lead to biased estimates (Hosmer et al., 2013)..
Overall, when the dependent variable is categorical (binary) and the independent variables are
metric or non-metric, binary logistic regression is appropriate (Hair et al., 2010).21Thus, a
logistic model was used to identify the determinants and status of financial inclusion and to
assess their relative importance in determining the probability of being financially included.

The functional form of Logit model is specified as follows, Gujarati (1998) an empirical model
for factors affecting financial inclusion of individual household can be specified as follow:

G is a function taking on values strictly between 0 and 1. That means, 0≤ G (Zi) ≤1, for all real
numbers Zi. This ensures that the predicted probability (Pi) strictly lies between 0 and 1. For
Logit model, G (Zi) is defined as follows:

21
G (Zi) = Pi= ....................... (1)

Therefore,

Pi = , where Zi = β0 + β1Xi. ............................................... (2)

If Pi is the probability of households being financially included and 1-Pi is the probability of
households being financially excluded, the probability of being included and the probability of
being excluded can be written as:

Pi = ................................................. (3)

1-Pi = ................................. (4)

Take the ratio of the probability of being financially included (Pi) and the probability of being
financially excluded (1-Pi) and the resulting ratio is called odds ratio and can be written as:

= ................................................................ (5)

Take the natural log of the above odds ratio and the resulting equation is called logit.

................................................................ (6)

................................................................ (7)

Where, Li is called Logit which is linearly related with Xi.

Xì is the explanatory variables.

22
3.9. Empirical specification
Logit and probit models are popular statistical techniques in which the probability of a
dichotomous outcome (such as included or excluded) is related to a set of explanatory variables
that are hypothesized to influence the outcome (NEUPANE et al., 2002). Following GUJARATI
(1999), the logistic regression model characterizing financial inclusion by the individual sample
households is specified as:

Pi=F (α+βxi) =

Where:

Subscript i denote the ith observation in the sample,

Pi is the probability that an individual would make a certain choice given xi,

E is the base of natural logarithms and approximately equal to 2.718

Xi is a vector of exogenous variables

And are parameters of the model (β1, β2 ...βk are the coefficients associated with each
explanatory variables X1, X2 .......Xn and)

The above function can be rewritten as:

FI=ln [Pi/ (1-Pi)] =βo+β1x1+β2x2i+β3x3i+.... +β12x12i+ei

FI=βo+β1GEN+β2AGE+β3EDU+β4INC+β5DIS+β6FL+ β7TRU+ β8MRS+ β9MOBOWN +

β10FS+β11HCC+ui

Where;

 FI is the dependent variable (financial inclusion),

 β0 is the constant term of the model,
 β1−β12 denotes the regression coefficients of the model,
 GEN=Gender of the respondent,
 AGE=Age of the respondent,

23
  INC=Average monthly income of the respondent,
 EDU=Educational status of the individual (respondent),
 DIS= Distance from financial institution branch,
 FL= financial literacy (knowledge about financial service and product) of the
respondent,
 TRU= Trust of the respondent in financial institutions,
 MRS=marital status
 MO=mobile ownership of individual household,
 HCC=having close contact
 FS=Family size
 Ui =is the error term.

3.9.1. Description of variables and expected sign

Dependent variable

In this research, the dependent variable is Financial Inclusion (FI), which refers to the use
of one or more financial products and services as indicated by having an account with a
financial institution. Account ownership is considered the primary indicator of financial
inclusion since it is typically the first step towards entering the formal financial sector for
most individuals. Possessing a formal account enables the transfer of wages, remittances,
and government payments, as well as promoting formal savings and access to credit.
Accounts also provide a straightforward and consistent metric for measuring financial
inclusion across different countries (Demirguc-Kunt & Klapper, 2013). The dependent
variable is binary, meaning an individual has an account with a financial institution
(included), represented by '1', or does not have an account (excluded), represented by '0'.

Independent variables

Gender (GED): This is a binary variable that represents the sex of an individual. A value
of 0 means the respondent is male and 1 means the respondent is female. Studies have
shown that being female can be a barrier to accessing and using various financial services.
As such, it has a negative impact on a person's financial inclusion status.

24
Age (AG): Age is a continuous variable representing the number of years an individual
has lived. Older people tend to use more financial services, possibly due to stable incomes
and the need to save for old age or other expenses. On the other hand, young households as
compared to old households has greater tendency to migrate to urban areas and which in
turn has better perception about formal financial institution and also young households are
more productive than old households and in turn has greater income than its counterparts.
Consequently, age is anticipated to have a positive or negative effect on financial
inclusion.

Income (INC): This continuous variable refers to a person's average yearly income
measured in birr. It is theorized that as income rises, so does financial inclusion.
Individuals with higher incomes have more resources to invest, save, and use formal
financial services. This is because formal financial services often require a minimum level
of income or assets to qualify for these services. Therefore, individuals with higher
incomes are more likely to have access to a wider range of financial services and products,
such as bank accounts, credit, and insurance, which can help to improve their financial
well-being and increase their likelihood of using formal financial services. Thus, income is
anticipated to have a positive and significant effect on financial inclusion.

Education level (EDU): This categorical variable indicates a person's highest level of
education. Research suggests that financial inclusion increases with education level. Education
can increase financial literacy and knowledge, which can lead to greater understanding and use
of formal financial services. Additionally, education can provide individuals with the skills and
resources needed to manage their finances effectively, which can improve their financial well-
being and increase their likelihood of using formal financial services. Implying that education is
hypothesized to have a positive influence on financial inclusion.

Distance (DIS): This continuous variable represents the distance between a respondent's
residence and the nearest financial institution branch in kilometers. Longer distances may
discourage people from opening accounts or accessing financial services, leading to lower
odds of financial inclusion. Therefore, distance is expected to have a negative impact on
financial inclusion.

25
Financial literacy (FL): This binary variable measures a respondent's understanding of
financial products and services. Those considered financially literate are given a value of
1, while those deemed illiterate receive a value of 0. Having adequate financial knowledge
and skills is necessary for financial inclusion, making it likely that this variable have a
positive effect.

Trust (TRU): This binary variable gauges how much customers trust and rely on
financial institutions, with a value of 1 indicating trust and 0 suggesting a lack thereof.
Lack of trust in banks or financial institutions can hinder financial inclusion, so a positive
coefficient is expected for this variable.

Marital status (MRS): This binary variable designates whether a respondent is married (1) or
unmarried (0). Unmarried respondents may be divorced, separated, or never married. Evidence
suggests that married individuals are more likely to be financially included than their unmarried
counterparts, individuals who are married may have greater access to financial resources and
support, which can increase their ability to use formal financial services. Additionally, married
individuals may have more stable and reliable sources of income, which can make them more
attractive to financial institutions and increase their access to credit and other financial services.
Which leads to the assumption that marital status is hypothesized to have a positive and
significant effect on financial inclusion?

Family size (FS): This continuous variable entails the number of people in a household at
the time of data collection. If a family is large in size, it may be less likely to be financially
included, and a negative relationship between family size and financial inclusion.

Mobile ownership (MO); it is an independent variable that represents the proportion of

the population who own a mobile phone or have access to one. This variable can be
represented as a binary variable (1 for mobile owners and 0 for non-mobile owners).
Mobile phones have been found to enhance financial inclusion by enabling individuals to
access and use financial services easily and cost-effectively. In this regard, an increase in
mobile phone ownership may lead to higher levels of financial inclusion as more
individuals gain access to financial services through their mobile devices. Expected sign
from the coefficient of this variable is positive.

26
Having a close contact (HCC); knowing another person with an account can positively affect
rural household financial inclusion in the study area, it may lead to increased awareness about
financial options, access to resources, and sharing of experiences. This exposure can encourage
individuals to understand the benefits and options available to them, particularly in remote areas
where formal financial services might not be adequately promoted or easily accessible. Having a
close contact - such as a friend or family member - that actively uses an account, can act as a
catalyst for driving financial inclusion by fostering a sense of trust and familiarity in the banking
system, enabling collective learning, and possibly motivating households to enroll in formal
financial institutions. As a result, it can help promote a more financially inclusive environment in
rural Ethiopia. Therefore, having close contact with others is expected to have a positive impact
on rural household’s financial inclusion.

Table 3.1: Summary of variable and their expected sign

Number Variable name Short name Variable Cod and Expected sign
type description of
variable

1 Financial FI Dummy If an individual is

inclusion financially
included =1, if
excluded =0.

2 Age of individual AGE Continuous Year Positive/negative

household

3 Sex of individual GEN Dummy If household are

male= 1 If negative
household are
female = 0

4 Family size FS Continuous The number of

households live
27
 together Negative

5 Education level EDU Dummy If individuals are Positive

of an individual. literates =1
If individuals are
illiterates = 0

6 Trust on financial TRU Dummy If an individual Positive

institution trust financial
institution = 1,
Otherwise = 0.

7 Financial literacy FL Dummy If an individual has Positive

knowledge about
financial institution
=1, if haven’t =0

8 Mobile phone MO Dummy If an individual has

ownership mobile =1 Positive
Otherwise = 0

9 Marital status MS Dummy If individuals are

married = 1, Positive
unmarried = 0

10 Distance Dis Continuous Distance from Negative

individual
residence to
financial institution
in kilometers.

11 Income Inc. Continuous Income of an Positive.

28
 individual per year

12 Having close HCC Dummy 1 if a household Positive

contact have close contact,
otherwise 0

3.9.2 Ethical Consideration

The researcher will try to follow certain standard or consideration. These include informing the
participants about the purpose of researches, voluntary participation. Confidentiality, avoiding
dependent relationship and asking for approval. In the research, all participants were informed
about the purpose and duration of the interview. The research also conducts getting full
willingness and consent from the participants.

29
4.TIMELINE AND BUDGET PLAN

4.1. Work plan

This research will be conducted in 2023 based on the following time breakdown for each
activity.
Table4.1. Monthly time table

Research phases Oct. Nov. Dec. Jun.

1 Selection and approval of title 

2 Survey on the financial inclusion population 

3 Development and approval of proposal 

4 Data collection and analysis  

5 Writing the final paper 

6 Printing and submission the final paper 

7 Approval of the final paper 

4.2. Budget plan

Table 4.2. Budget plan of table

Item Unit Quantity/duration Unit cost Total cost

Internet per package Monthly unlimited 1000 birr 1000 birr

30
 package

Telephone Per card 2 per 50 birr card 50 birr 100 birr

Flash 1 flash 1 flash 450 birr 450 birr

Paper Per note book 50 sheets 2 birr 100 birr

Pen per pen 2 20 birr 40 birr

Printing Per page 43 8 birr 361 birr

Transport ▬ ▬ ▬ 150 birr

Total 2201 birr

31
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34