Assessing Countries’ Financial Inclusion Standing — A New Composite Index

Abstract

This paper leverages the IMF's Financial Access Survey (FAS) database to construct a new composite index of financial inclusion. The topic of financial inclusion has gathered significant attention in recent years. Various initiatives have been undertaken by central banks both in advanced and developing countries to promote financial inclusion. The issue has also attracted increasing interest from the international community with the G-20, IMF, and World Bank Group assuming an active role in developing and collecting financial inclusion data and promoting best practices to improve financial inclusion. There is general recognition among policy makers that financial inclusion plays a significant role in sustaining employment, economic growth, and financial stability. Nonetheless, the issue of its robust measurement is still outstanding. The new composite index uses factor analysis to derive a weighting methodology whose absence has been the most persistent of the criticisms of previous indices. Countries are then ranked based on the new composite index, providing an additional analytical tool which could be used for surveillance and policy purposes on a regular basis.

Measuring financial inclusion: a composite FI index for the developing countries

“…In this study, the weights are drawn from available data, rather than relying on the researcher's discretion. Recently, from the perspective of policymakers, the degree of FI is measured from three main dimensions: access, use and quality of financial services (Mialou et al, 2017;World Bank [2] Ahamed and Mallick (2019) ignored this dimension when developing a FI index. In previous years, in developing countries, policymakers often used a variety of indicators of financial sector outreach to take stock of the state of FI.…”

Financial Inclusion in Asia-Pacific

“…Index construction follows the process set out in Mialou et al (2017). 1 The data is first normalized for scale invariance, by expressing each variable relative to its maximum value across countries.…”

“…See alsoSvirydzenka (2016). 2 Financial inclusion dimensions discussed in the literature include: usage and access (Chakravarty and Pal, 2010); accessibility, availability, and usage of banking services(Sarma, 2012); outreach, usage, and quality of financial services(Mialou et al, 2017); and usage, barriers, and access(Camara and Tuesta, 2014).appendix 2. Financial inclusion indices for Asia-Pacific Country Analysis 55 ©International Monetary Fund.…”

Defining and measuring financial inclusion: A systematic review and confirmatory factor analysis

“…The ‘cost’ dimension of financial inclusion is usually described as comprising the monetary and nonmonetary costs of accessing and using financial services, such as bank fees or proximity (Arora, 2010). Finally, the ‘quality’ dimension assesses whether financial services meet consumers' needs and, more importantly, how well informed and protected consumers are (e.g., Amidžić, Massara, & Mialou, 2014; Mialou et al, 2017; Queralt, 2016).…”

“…Our approach contributes to and builds on alternative approaches in the literature. Mialou et al (2017) use FA to derive the weights for their index of financial inclusion, which captures the ‘use’ and ‘outreach’ of financial services. Similarly, Cámara and Tuesta's (2014) two‐stage PCA is concerned with deriving the weights for an alternative index, which measures the ‘usage’, ‘barriers’ and ‘access’ to formal financial services.…”