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The impact of traditional and digital financial inclusion on bank profitability: Evidence from Ethiopian commercial banks

Mohammed Jatoro Arebo & Andualem Goshu Mekonnen

Prague Economic Papers2026https://doi.org/10.18267/j.pep.904article
ABDC C
Weight
0.50

What the paper says

While prior research emphasizes the socio-economic benefits of financial inclusion, its implications for bank profitability remain underexplored. This paper employs seven traditional and four digital indicators to create a financial inclusion index through principal component analysis (PCA). To capture potential nonlinearities, quadratic specifications are incorporated within a two-step system generalized method of moments (GMM) framework and validated using the Lind and Mehlum (2010) U-shape test, while Granger causality tests examine directional effects over the 2015-2023 period. Results indicate that traditional financial inclusion positively influences profitability, although the hypothesized inverted U-shaped effect is economically plausible but not statistically confirmed. Digital financial inclusion initially reduces profitability, but its squared term reveals a statistically significant U-shaped effect, indicating gains after reaching a critical threshold. Granger causality test indicates a bi-directional relationship for traditional inclusion and a uni-directional for digital inclusion. The results emphasize the need for banks to integrate cost-effective digital tools alongside traditional services. Policymakers recommended adopting supportive regulatory frameworks, enhancing financial literacy, and ensuring consumer protection to foster digital transformation without undermining profitability. An integrated and phased approach aligning financial inclusion with profitability strategies is essential for promoting a resilient and inclusive banking sector.

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https://doi.org/https://doi.org/10.18267/j.pep.904

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@article{mohammed2026,
  title        = {{The impact of traditional and digital financial inclusion on bank profitability: Evidence from Ethiopian commercial banks}},
  author       = {Mohammed Jatoro Arebo & Andualem Goshu Mekonnen},
  journal      = {Prague Economic Papers},
  year         = {2026},
  doi          = {https://doi.org/https://doi.org/10.18267/j.pep.904},
}

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The impact of traditional and digital financial inclusion on bank profitability: Evidence from Ethiopian commercial banks

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Evidence weight

0.50

Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40

F · citation impact0.50 × 0.4 = 0.20
M · momentum0.50 × 0.15 = 0.07
V · venue signal0.50 × 0.05 = 0.03
R · text relevance †0.50 × 0.4 = 0.20

† Text relevance is estimated at 0.50 on the detail page — for your query’s actual relevance score, open this paper from a search result.