Index of Financial Inclusion and its Relationship with Human Development: Comparative Study of Composite Index and Sarma Analysis

Abstract

This study to find the dimensions and weights as the best measure of the financial inclusion index by comparing the Sarma analysis with the Composite Index, then analyzing its relationship to human development. The quantitative approach uses Factor Analysis followed by Fixed Effect Model. The data sample is 217 countries grouped by income level from 2011 to 2017. It was found that Access and Usage are two essential dimensions of the financial inclusion index, with the weight of Access (0.60) greater than usage (0.4). Human development acts as an intervening variable and has a significant effect on increasing financial inclusion.

Does financial inclusion empower women in Africa?

“…For example, Kpodar and Andrianaivo (2011) and Inoue and Hamori (2016) show the positive effects of financial inclusion on economic growth in African countries; Kim et al (2018) demonstrates the same among Organization of Islamic Cooperation (OIC) countries; Rasheed et al (2016) and Demirguc‐Kunt et al (2018) for a large sample of developing countries. Sarma (2008) reports similar findings for financial inclusion in India. Financial inclusion brings large number of unbaked people into the banking network and also helps in improving their socioeconomic condition.…”

“…For example, Amidžić et al (2014) define financial inclusion as a situation in which individuals and firms are able to use basic financial services. Sarma (2008) defines financial inclusion as the process that ensures the ease of access, availability, and usage of formal financial system for all individuals in an economy. On the other hand, Camara and Tuesta (2014) defines inclusive financial system as one that maximises usage and access, while minimising involuntary exclusions.…”

“…In this study, we consider the definition of Sarma (2008) who argues financial inclusion as a process that ensures the ease of access, availability, and usage of financial services for all individuals in the economy. This definition is broadly consistent with the dimensions of financial inclusion (usage, access and quality) identified by Global Partnership for Financial Inclusion (GPFI).…”

“…Fourth, our study provides insights for policymaking through identifying the dimensions and indicators of financial inclusion with the largest impact in promoting women's empowerment. Most of the previous empirical research on financial inclusion, however, have used either an aggregated measure of financial inclusion (e.g., see Park & Mercado, 2018; Sarma, 2008) or specific financial indicators, such as number of bank branches; number of ATMs, or deposit accounts (e.g., Honohan, 2008; Neaime & Gaysett, 2018). In our analysis, we use both aggregated and disaggregated measures of financial inclusion to discern a more nuanced understanding of the effect of financial inclusion on women empowerment at different aggregation levels.…”