Financial Inclusion Goes Beyond Just Opening New Accounts

Ethiopia’s financial inclusion ambitions should hinge on more than a surge in new accounts. While rising account numbers signal progress, they offer an incomplete picture without measuring usage, value-added services, or tangible impact. 

This article is an output of AKOFADA (Advancing Knowledge on Financial Accessibility and DFS Adoption), a project working to increase knowledge and transparency within Ethiopia’s DFS ecosystem. 

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A few winters back, I reconnected with a cousin who had been living abroad for nearly two decades. From the first moment we met, he seemed eager to reach into his pocket and pull out his phone. Oh! these diasporas and their phones were my first thoughts. Within a few hours, I recognized that he was not scrolling through social media posts on his phone but checking up on his ‘investments’. 

Upon my insistence, he explained that he was tracking prices on currencies and stocks he had invested money into. While the difference in technology adoption was of little surprise, I could not help but look at the mobile banking app on my phone with some contempt. I became fascinated with the ease with which my cousin was able to move money, obtain credit, and invest all through his phone. 

Our next few days together involved me showing him every time my bank app flashed, “The service is not available now,” while he kept trying to explain what a tick size was. We were miles apart in our financial and digital literacy. I was forced to question what I thought digital financial services meant and what they could encompass when fully developed.

A bank account opened by physically visiting a branch and later linked to my phone was apparently not the pinnacle of digital finance. It was a mere dip of the toe in a massive ocean that could profoundly sway the economic and societal destinies of millions. Financial inclusion in Ethiopia should mean more than just another bank account which is occasionally used to make payments.

Ethiopia has made remarkable strides in expanding financial inclusion over the past five years. By the end of June 2024, the number of transaction accounts surged by 31% annually to reach 272 million. Equally notable is the rise in digital accounts, with over 200 million accounts registered, including 107 million mobile money accounts. However, these figures offer only a one-dimensional perspective. For instance, excluding inactive accounts would reveal a total far lower than the reported numbers.

Consider debit cards: the Commercial Bank of Ethiopia (CBE) reported 20.7 million issued cards as of June 2024. But 32.4% were inactive. Similarly, a 2022 consumer survey found that only about half of mobile money account holders had conducted transactions in the previous month.

These examples highlight that while the total number of accounts is increasing, there is both a need and potential to deepen the financial sector.

The World Bank defines financial inclusion to mean that individuals and businesses have access to useful and affordable financial products and services that meet their needs—transactions, payments, savings, credit, and insurance—delivered responsibly and sustainably.

How Inclusive is Ethiopia’s Financial Sector?

Measuring the degree of financial inclusion is about as tricky as actually attaining it. Supply-side indicators, particularly the number of accounts or loans, can overestimate the inclusiveness of financial systems since one person can have more than one account or loan. Nonetheless, several scholarly publications have attained differing degrees of success in defining exact parameters, while a few key metrics have emerged over the years. Access, usage, quality, and impact have become prominent over the past decade as generally accepted standards in most financial circles.

Ethiopia’s case presents a unique circumstance when viewed from these lenses. For instance, access points have increased significantly, partially evident in the annual increments in the number of accounts. However, the lack of disaggregated data based on income level, geographical concentration, and frequency of use could limit the degree of nuance.

The National Bank of Ethiopia’s latest financial stability report highlights significant improvements in financial access points, including bank and microfinance branches, as well as digital touchpoints such as ATMs and POS machines.

The total number of access points surged by 64.4%, rising from 271,203 in June 2023 to 445,856 a year later. However, this figure includes around 415,000 mobile money agents, many of whom provide only one or two services—and infrequently.

In terms of access points per capita, Ethiopia recorded 782 financial access points per 100,000 adults in 2024. However, a closer look at the geographic distribution reveals stark disparities. Digital access points are heavily concentrated in urban areas, and 30.9% of the 12,476 bank branches in the fourth quarter of 2023/24 were located in Addis Ababa. With nearly a third of bank branches in the capital, the population-to-bank ratio underscores significant gaps between urban and rural areas.

Ethiopia’s National Financial Inclusion Strategy aims to ensure that at least 70% of adults have a formal bank account by 2025. While this marks significant progress from an estimated 45% in 2020, it remains well below Kenya’s 83% nearly four years ago. However, it would surpass Nigeria’s 64% formal financial inclusion rate recorded in 2023.

Evaluating Ethiopia’s financial inclusion status through the lens of usage indicators reveals an equally striking picture. According to the World Bank, usage refers to how clients engage with financial services over time, including the regularity and duration of their interactions (e.g., average savings balances, transactions per account, or electronic payment frequency).

Ethiopia is clearly shifting toward digital financial channels. Digital transactions in Ethiopia reached 9.7 trillion birr in the past fiscal year, marking a 129% increase, according to Central Bank Governor Mamo Mihertu. CBE, the country's largest bank, processed 80% of its transactions through digital channels in the first quarter of 2024.

In terms of credit, around 4.1 million new users accessed digital credit over the year, bringing the total number of credit accounts to around 10.5 million. However, even with limited publicly available data on individual usage patterns, a stark concentration of financial services among a small segment of the population is evident. Just 0.5% of borrowers—those with credit exposure exceeding 10 million birr—held nearly 75% of all bank loans at the end of the last financial year.

The disparity extends to deposits, where a mere 0.4% of depositors controlled nearly 59% of the 2.5 trillion birr in the financial sector. Additionally, high interest rates and collateral requirements often discourage borrowers—especially SMEs—who would benefit most from financial access. Most banks charge annual interest rates of around 18%, while microfinance institutions (MFIs) average 22%. Meanwhile, digital lending services provide only small amounts with short-term repayment periods.

As would be expected, limitations in the degree of financial inclusion and its depth entail profound consequences for overall poverty and well-being. Digital finance alone could benefit billions of people by spurring inclusive growth that adds $3.7 trillion to the GDP of emerging economies within a decade, according to a 2016 report by the McKinsey Global Institute.

The results of a long-term impact study on a mobile money service in Kenya, M-PESA, found mobile money has lifted as many as 194,000 households—2% of the Kenyan population—out of poverty and has been effective in improving the economic lives of poor women and of members of female-headed households.

Financial inclusion is also a pivotal enabler of seven out of the 17 Sustainable Development Goals (SDGs). Unfortunately, the latest Multidimensional Poverty Index indicates alarming figures, as Ethiopia ranked among the five countries with the highest number of multidimensionally poor people at 86 million. While poverty rates can’t fully be ascribed to a lack of financial services, as several other factors contribute, their higher incidence in rural areas (79%) reflects geographical disparities contoured by data on financial inclusivity.

A 2023 report by GSMA estimates that mobile money has the potential to contribute $5.3 billion to Ethiopia’s GDP. According to the report, if mobile money achieves a high adoption rate with 60% of Ethiopian adults as users by 2030, it could help lift 700,000 people out of extreme poverty, add $5.3 billion to the country’s GDP, increase tax revenue by $300 million, and provide a safety net for nearly 40% of Ethiopian households during economic shocks.

Can Ethiopia Leapfrog into a Deepened Financial Sector Despite Limited Inclusion?

While the luster of a fresh skyline in Addis Ababa could give the impression of a booming industrial economy, Ethiopia is undoubtedly a country of farmers. Around 64% of households in Ethiopia are engaged in agricultural activities, while the sector employs nearly the same percentage from the labor force. However, the fate of the country’s agricultural output remains tethered to rainfall and largely traditional. A few dry seasons also mean devastation to nearly 15 million pastoralists whose livelihoods perish along with their livestock.

Borena, in the Oromia Regional State, has been particularly affected in recent years by one of the worst droughts in East Africa’s recent history, with nearly 3.3 million livestock dying; the entire community became dependent on aid. Devoid of any agricultural insurance, pastoralists will likely continue to be exposed to a similar fate whenever the sky parches of rain.

A financial inclusion strategy that does not revolve around meeting the enduring needs of Ethiopia’s farmers is bound to have limited success. Ethiopia’s financial ecosystem will have to include products and services that address the needs of the masses. Opening a bank account and occasionally making payments is no measure of genuine financial inclusion.

Research and development into leveraging technology to explore ways of leapfrogging into the frontiers of financial services will prove highly impactful. Several ongoing efforts already entail massive potential if parsed through strategically.

The rollout of national digital ID (Fayda) over the next few years presents an opportunity to overcome barriers attached to expanding insure-tech across Ethiopia.

In April 2024, Kenyan insurtech firm Pula made its first payout of 39.4 million birr to 51,000 smallholder farmers in Ethiopia. Pula’s Area Yield Index Crop Insurance Payout, implemented during the 2023 Meher season, insured over 122,000 farmers against climate risks.

Ethio-Danish company Jamii.one has also shown insuretech’s possibilities with a product that relies on traditional communal groups (Edir) to provide insurance access to over 160,000 Ethiopians. How impactful will a new bank account be for an Ethiopian farmer if it does not yield insurance, an affordable credit line, or some way to improve the produce?

Leveraging technology and endorsing innovation could also yield significant gains in terms of nurturing an investment-oriented mindset across the country while fostering financial inclusion.

The rapid expansion of internet access across Ethiopia and the rise of artificial intelligence could help introduce investment opportunities for the masses. Safaricom has demonstrated massive potential in Kenya through its service, Mali. The service allows MPESA customers to invest in Unit Trust from as low as KSH 100 and earn daily interest through a Money Market Fund.

The Ethiopian Capital Market Authority (ECMA) has paved the way for innovative financial firms to establish robo-advisory services, offering automated investment management and algorithmic financial advice to retail investors.

Securities Robo-advisors are digital platforms that utilize algorithms and AI tools to automate investment processes, making them ideal for individuals with limited financial experience or smaller investment amounts. Integrating robo-advisors with mobile money platforms is an avenue that can be followed in Ethiopia.

Even Ethiopia’s housing shortfall, with around 160,000 formal units built annually while close to half a million homes are needed, could be tackled through financial sector innovation. Digital mortgage platforms have become popular across Europe, with simplified online tools fueling a surge in recent years. IN 2022, mortgage loans constituted a massive 79% of the total number of loans issued to European households. The South African-based Standard Bank Group has allowed its customers to process and track mortgage loans through digital platforms.

As a latecomer into the digital financial services landscape, Ethiopia can extract several insights from the experiences of other countries. The acceleration of innovations in artificial intelligence, machine learning, and computing power could lay the groundwork for realizing the twin goals of financial inclusion and deepening. Sandboxes like the one established under ECMA signal the abundance of potential in financial sector innovation.

Possible Approaches to Synergizing Inclusion and Deepening in Ethiopia’s Financial Sector

Technology has already proven to be a powerful force in Ethiopia for accelerating basic financial access. Non-bank entities have emerged providing a variety of financial services to previously excluded segments of the population. However, some of these firms have struggled to break into the market due to the absence of a legal framework capable of addressing their needs.

It has been five years since the first Payment Instrument Issuer directive, and only four companies have obtained a permit. While it's important to balance regulation in advancing innovative financial services, bureaucratic challenges should not stifle possible headway in experimenting with new financial services. Regulatory necessities can also be met by enhancing efficiency and capabilities through greater use of technology.

Ethiopia can also jolt digital financial services innovation by allowing private sector actors to chime in as attaches on currently ongoing projects. Each person registered for the Fayda digital ID can automatically be provided with a varied set of new DFS services. A farmer would be willing to get a bank account or a digital ID if he/she recognizes the potential to be protected when disaster befalls the livestock or crops. Even urbanites could benefit from retail investment opportunities in Ethiopia’s capital market if afforded the tools and regulatory nod.

Ethiopia’s financial inclusion ambitions will be pinned on more than just a wave of new accounts. While account registration numbers signal some progress, it is an incomplete metric without assessing usage, value addition, or impact. How many bank accounts does a person really need before starting to ask what it offers beyond storing money and making payment? Using cases tailored to local contexts will prove pivotal in realizing an inclusive and deepened financial ecosystem.