Financial inclusion and stability in Ethiopia using bank-level data: A two-step system GMM estimation

Abstract

This study makes three key contributions. First, it provides the first empirical analysis of the FI-stability nexus in Ethiopia. Second: (i), it develops a multidimensional FI index; (ii), explores both linear and nonlinear relationships, and (iii) examines macroprudential regulation as a moderating factor. Third, it tests causality, offering policy insights. To enhance stability while mitigating risks, policymakers must balance FI expansion, enforce regulatory frameworks, and implement targeted capital requirements. Regulators should strengthen consumer protection and financial literacy, while banks must optimize outreach, manage credit risk, and ensure prudent asset allocation and liquidity management to sustain financial stability.