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Does financial inclusion enhance farmers' resilience to climate change? Evidence from rural Ethiopia

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  • Mebratu Negera
  • Tekie Alemu
  • Fitsum Hagos
  • Amare Haileslassie

Abstract

Financial inclusion is recognized as a vital driver of sustainable development and serves as a fundamental pillar of climate action. It is crucial to enhance the climate resilience of smallholder farmers in the face of severe and unpredictable climate shocks, which disproportionately affect them. However, the level of financial inclusion in Ethiopia remains low, and its impact on the climate resilience of smallholder farmers has not been thoroughly examined using rigorous model and comprehensive dataset. This study investigates the impact of financial inclusion on the climate resilience of rural households, using a large data set from the Ethiopian Socio‐Economic Survey. The principal component analysis was applied to construct a climate resilience index. The financial inclusion was measured using an index that encompasses three dimensions: penetration, availability, and usage. In order to address the endogenous nature of financial inclusion, an instrumental variable approach was employed, using the distance to the nearest financial institution and religion as instrumental variables. The results demonstrated a positive and significant impact of financial inclusion on the climate resilience of rural households. Therefore, the government should strengthen the provision of essential financial and related infrastructures in rural Ethiopia to improve access to financial products and services. Furthermore, it is essential for policymakers to initiate and implement financial sector reforms that ensure the availability of affordable and tailored financial services. These reforms should also prioritize the development of climate‐resilient agricultural finance, thereby contributing to the achievement of climate action goal of sustainable development.

Suggested Citation

  • Mebratu Negera & Tekie Alemu & Fitsum Hagos & Amare Haileslassie, 2025. "Does financial inclusion enhance farmers' resilience to climate change? Evidence from rural Ethiopia," Sustainable Development, John Wiley & Sons, Ltd., vol. 33(2), pages 3008-3022, April.
    • Handle: RePEc:wly:sustdv:v:33:y:2025:i:2:p:3008-3022
    DOI: 10.1002/sd.3277
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    1. Essossinam Ali, 2026. "Financial inclusion and climate change resilience in sub-Saharan Africa: a micro-level gender and households’ location-based analysis," Climatic Change, Springer, vol. 179(2), pages 1-27, February.
    2. Ozili, Peterson K, 2025. "Effect of CO2 emissions on financial inclusion through physical financial access points," MPRA Paper 125032, University Library of Munich, Germany.

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