Finance and Poverty in Ethiopia: A Household Level Analysis

This paper attempts to establish a link between access to finance and poverty in Ethiopia. It uses household panel data from urban and rural Ethiopia. Empirical findings from the study would help in developing finance policies to address poverty reduction. The paper tests the importance and impact of access to credit on poverty, consumption smoothing and population welfare. It also examines the possibility of a poverty trap due to financial markets imperfections. The paper finds that:

• Lack of financial access coupled with low endowment may lead to self perpetuating poverty;
• Households with low endowment and limited financial access tend to invest in low risk areas and earn low return;
• Households with borrowing constraints find consumption smoothing difficult;
• Access to credit reduces absolute poverty;
• Finance impacts poverty by aiding consumption smoothing and helping the poor to escape the poverty trap.

Promoting the financial sector is a desirable pro-poor policy as it eases liquidity constraints. In addition, enabling access to credit facilities for the rural poor can be an important intervention area for poverty reduction.