Barriers to Access to and Usage of Financial Services in Ethiopia

Abstract

We study the interplay between financial exclusion and barriers to inclusion. Our model shows that financially excluded individuals are exposed to barriers to inclusion that prohibit their access to financial services even in absence of voluntary exclusion. We call these situation “involuntary exclusion,” since people lack access to and use of financial services due to barriers to inclusion that are otherwise overlooked social exclusion. We show that barriers to inclusion are more likely to occur when lack of access to physical point of financial services, poverty, lack of credit, prohibitive fixed cost of transacting at financial institution, legal and regulatory barriers and low competition among financial institutions. We analyze financial exclusion as a function of barriers to inclusion, examining the trade-off between unbanked adults and barriers to banking. We verify the model’s prediction that financial exclusion is more likely to occur among low income individuals in which assets holdings are low, as well as individuals who are too far away from physical point of access and those individuals who cannot afford bank fixed charges, than others. We also show that individuals are more likely to be financially excluded (relative to others) in low income groups in which barriers to inclusion are more frequent.