S URV EY BRIEF Financial Inclusion in Ethiopia KEY FINDINGS FROM THE ETHIOPIA SOCIOECONOMIC SURVEY 2018/19 Mengistu Bessir Achew, Alemayehu A. Ambel, Helen L. Gradstein, Asmelash Haile Tsegay, Imtiaz Ul Haq, Minita M. Varghese, and Manex Bule Yonis June 2021 Integrating a financial inclusion module into a multitopic household survey like the Ethiopia Socioeconomic Survey (ESS) makes it possible to explore how different community spatial, demographic, and socioeconomic characteristics affect the financial decisions of individuals and households. In addition, the survey data underpins financial inclusion policymaking and measurement – an agenda spearheaded by the National Bank of Ethiopia through the National Financial Inclusion Strategy (NFIS) efforts. The survey collected information from households and individuals on several financial matters including current levels of access to finance based on the prevalence of account ownership, use of financial services, types of institutions used, and their proximity to the household; household and individual financial decisions about savings, credit, insurance, and payments; and financial behavior, knowledge, and attitudes. The data provides a rigorous, multidimensional picture of where the country stands in expanding access to formal financial services and reaching the NFIS goals. This brief summarizes the ESS Financial Inclusion survey report, emphasizing on key findings on account ownership, gender gap, financial behavior and knowledge of financial institutions and products.1 1 This brief is a summary of the Ethiopia Socioeconomic Survey- Financial Inclusion report. Ethiopia - Socioeconomic Survey 2018-2019 (worldbank.org) Disclaimer: the findings, interpretations, and conclusions are entirely those of the authors. They do not necessarily represent the views of the World Bank Group, its Executive Directors, or the governments they represent. 1 Financial Inclusion in Ethiopia KEY FINDINGS FROM THE ETHIOPIA SOCIOECONOMIC SURVEY 2018/19 S U R VE Y B R I E F KEY FINDINGS • In 2018/19 about 30.5 percent of • Most households save in formal adults (18 years of age and older) had financial institutions. However, an account at a formal financial informal sources such as friends institution, up from 21.8 percent in and relatives are the most important 2015/16. Financial inclusion at the sources for getting loans. household level (meaning that at least one adult in the household has • Approximately, 15.5 percent of an account) rose from 35 percent in households reported taking loans 2015/16 to 45.9 percent in 2018/19. in the past 12 months. Purchase of agricultural inputs, food and non- • The percentage of women food items are the major reasons for owning a bank account increased borrowing. from 17.5 percent in 2015/16 to 22.7 percent in 2018/19 overall, but • Majority of respondents (about the gender gap has widened from 50 percent) rely on informal 8.9 to 16.2 percentage points. More insurance arrangements like Iddir. focus on financial including women • Most respondents are aware of household members is crucial. banks; they are least familiar with • Financial inclusion is higher among insurance institutions. Financial males, those who reside in urban terms related to credit, such as areas, those more educated and collateral and credit report, are least wealthier. familiar to adults, especially those in rural areas. • About 25.6 percent of Ethiopians reported saving of at least 150 Birr • Majority of respondents (about over the last 12 months. Of those 93 percent) rely on cash and paper- who save, 72.9 percent said that the based transactions for receiving reason was to be prepared in case of and sending payments. an emergency. 2 Financial Inclusion in Ethiopia KEY FINDINGS FROM THE ETHIOPIA SOCIOECONOMIC SURVEY 2018/19 S U R VE Y B R I E F FINANCIAL ACCOUNT compared to an average of 1km distance OWNERSHIP for an urban resident. In some regions like Somali, the residents have to travel up to Account ownership at a financial institution, 42km to reach an access point. often used as a proxy for financial inclusion, Account ownership in Ethiopia also varies would allow individuals to use formal by education and poverty levels. There are financial services to save, take out a loan, substantial differences between those with transfer money, receive wages, and acquire no education and with some education; and insurance. It is defined as having an account individuals or households from the poorest and at a bank (public or private), microfinance the richest consumption quintile (Figure 1). institution, Savings and Credit Cooperative In addition, account ownership among young Organization (SACCO), mobile money adults (aged 18-24) stands at 24.1 percent as application (M-Birr and hello cash), or in compared to 32.4 percent of adults older than any other formal financial institution. About 25 years. The age gap was found out to be larger 30.5 percent of Ethiopians 18 years and among urban individuals as compared to their older had an account at a formal financial rural counterparts. institution, an impressive change from the 21.8 percent reported in three years ago. Insufficient funds to use an account effectively (48.8 percent), excessive distance to nearest Overall, financial inclusion is improving in financial institution (11 percent), and poor Ethiopia – in part due to the strategic efforts understanding of the benefits of owning an of the NFIS which included a heavy focus on account (10.7 percent) are the main reasons for increasing core infrastructures and access not owning a financial account. points, which has enabled 45.9 percent of households (where at least one member has an account) to gain access to an account an increase from 35 percent in 2015/16. Figure 1 Account ownership gaps by residence, education However, when accounting for location and consumption quintile, 2019, Percent differences, the trends depict a continuing CONSUMPTION divide between rural and urban population. RESIDENCE EDUCATION QUINTILE 100 While account ownership among urban 89.4 80 individuals stood at 58.8 percent, only 58.8 55.4 17.5 percent among the rural residents own 60 40.6 an account (Figure 1). This unequal pace of 40 31.7 17.5 financial inclusion can partly be attributed 20 15.7 17.1 to the lack of financial access points in the 0 Rural Urban No education Primary Secondary Above secondary Bottom 40% Top 60% rural areas. According to the 2018/2019 ESS Survey, average distance to a financial access point for rural dwellers is 15km as 3 Financial Inclusion in Ethiopia KEY FINDINGS FROM THE ETHIOPIA SOCIOECONOMIC SURVEY 2018/19 S U R VE Y B R I E F GENDER GAP IN FINANCIAL ACCOUNT DECISIONS OF OWNERSHIP HOUSEHOLDS & There is singificant gender differences INDIVIDUALS in account ownership. Nationally, about Key financial decisions by households and 38.9 percent of Ethiopian men are financially individuals that the ESS financial inclusion included but only about 22.7 percent of module included are savings, loans and women. While female account ownership insurance. About 25.6 percent of individuals went up from 17.5 percent in 2015/16 to saved in the past 12 months though 22.7 percent in 2018/19, the gender gap still 40.3 percent of households reported saving, expanded from 8.9 to 15.2 percentage point i.e. at least one member have saved. Saving (Figure 2). practice is higher in urban areas compared to rural. In urban areas 44 percent of Figure 2 individuals and 63.1 percent of households Trends in Gender Gap in Financial Inclusion, report having saved in the past 12 months 2016 and 2019, Percent compared to 17.3 percent of individuals NATIONAL RURAL URBAN and 29.4 percent of households in rural 80 69.3 areas. The major reason (over 70 percent 70 60 of those who saved) for saving was to be 49.9 50 prepared in case of emergency. Among the 38.9 40 savers, while 47.4 percent reported saving 30 26.4 25.8 22.7 19.4 in only in formal financial institutions (see 20 17.5 16.2 16.2 10 8.9 9.6 Figure 3), the frequency of saving was found 0 to be more consistenet and regular through 2016 ESS 2019 ESS 2019 ESS 2019 ESS informal channels like associations or Equb. Female Male Male-female gap Only 15.5 percent of households access a loan in the past 12 months, with majority The differences in account ownership are (35 percent) borrowing from relatives. Only even starker for rural women. Whileaccount 19.2 percent and 11.6 percent of borrowers ownership for rural males increased from 16 percent to 25.8 percent (a growth of Figure 3 9.8 percentage points), the same for rural Saving locations and loan sources, 2019, Percent females only grew by 2.1 percentage points and currently stands at 9.6 percent. 80 68.5 60 47.4 Although access to financial services is 40 34.5 31.5 improving, the widening gender gap highlights 20 18.1 a need for policymakers to now prioritize 0 SAVING LOAN efforts around further including women within Informal Formal Both the financial sector in order to meet NFIS goals. 4 Financial Inclusion in Ethiopia KEY FINDINGS FROM THE ETHIOPIA SOCIOECONOMIC SURVEY 2018/19 S U R VE Y B R I E F Figure 4 KNOWLEDGE OF Loan sources, 2019, Percent FINANCIAL SERVICES AND PRODUCTS Relatives 35 Knowledge of financial services and their SACCOs 19.2 benefits can help drive account ownership and Neighbor 13.3 Microfinance institutions 11.6 then access to financial services. The survey Government 11.2 finds a mixed picture in knowledge of financial Money lender 2.9 services and products (Figure 5). On financial Grocery/Local Merchant 1.9 NGO 1.8 institutions, most respondents are aware of OTHER 1.2 publicly owned banks. This might be expected Employer 0.8 due to the long history of service and largest Bank (Commercial) 0.7 coverage of the publicly owned Commercial Religious institutions 0.4 Bank of Ethiopia. Insurance agencies, SACCOs 0 10 20 30 40 and interest-free banking are less known, despite higher usage, among rural adults than turned to formal channels like SACCOs and urban adults. Financial terms related to credit, MFIs, respectively (Figure 4). Women were such as collateral and credit report, are least found to be more reliant on relatives for loans familiar to adults. (43.8 percent vs 32.5 percent men). Purchase of agricultural inputs, food and non-food Figure 5 items are the major reasons for borrowing. Knowledge of financial institutions, services and products, 2019, Percent Only 7.8 percent of individuals have formal insurance coverage. However, informal Public banks 85.2 insurance coverage much is more widespread. Interest 62.6 For example, about 50 percent reported having Private banks 56.9 49.6 an Iddir membership. SACCO Inflation 37.2 Interest free banking 30.0 ATM 29.3 Insurance 24.8 Collateral 24.3 Money tranfer 19.0 Mobile money agent 13.8 Bank agent 12.8 Credit report 10.1 0 10 20 30 40 50 60 70 80 90 5 Financial Inclusion in Ethiopia KEY FINDINGS FROM THE ETHIOPIA SOCIOECONOMIC SURVEY 2018/19 S U R VE Y B R I E F DIGITAL payments to digital means to move towards FINANCIAL SERVICES digitalization. Out of all adults who reported having a bank account, only 28.8 percent An overwhelming majority, 93 percent of own an ATM / Debit card, and 11.1 percent individuals, reported receiving government own a mobile money product (a significant payments (including wages, transfers) in cash. improvement since 2015/16 when only 15 and Among the urban populace, usage of non-cash 5 percent of account holders had used ATM/ channels (like formal accounts) for payments Debit card and Mobile money products, was found to be 16.7 percent while the same respectively). Yet there is significant potential, for rural areas was only 1.2 percent. These especially for mobile money, given 37.8 percent trends leave a significant opportunity to shift of adults have access to mobile phones. BOX 1 SURVEY METHODOLOGY The Ethiopia Socioeconomic Survey (ESS) 2018/19 interviewed 6,770 households in all areas of the country. The sample is representative at region level. It is also representative at rural and urban levels. ESS is a multi-topic household survey. It includes Agriculture, Household, and Community questionnaires. Several household demographic and socioeconomic variables were collected at individual, household and community levels. The Financial Inclusion module was incorporated into the household questionnaire. The module asked about savings, insurance, credit, banking practices, financial knowledge, and financial capability. The questionnaires were fielded at different times. The financial inclusion module was fielded with the other Household module and was fielded in June-August 2019. Eligible individual respondents for the financial inclusion module were household members 18 years and older at the time of the survey—14,862 responded. More than 99.5 percent responded for themselves; only 75 individuals were not available at the time of the survey. The credit and loan questions were asked at the household level, and the most knowledgeable household member responded. 6