Measuring Financial Inclusion in Developing Economies: A Multidimensional Index

Abstract

Financial inclusion is a major policy concern especially in developing economies. However, an established measure of financial inclusion is still absent. This paper aims to fill this gap by measuring and examining the level of financial inclusion in 66 developing economies. A Financial Inclusion Index (FII) was constructed, incorporating five indicators (ATM, Bank, Other Financial Institutions, Deposits and Loans) for 2013 until 2019. Two-staged Factor Analysis was employed for weights assignment. The results showed that the average level of financial inclusion in developing economies was low but with significant variation among group of countries. A lower level of financial inclusion was observed among the African countries as well as the low-income and lower-middle income countries. The paper also analysed the relationship between financial inclusion and economic development. The findings showed that more developed economies had higher income and thus, higher financial inclusion. While the index is valid and reliable to be used for comparison among developing economies, the study was unable to include indicators of mobile and internet banking due to data constraints. Despite this caveat, the findings of this study will be useful for policymakers in shaping financial inclusion policies. Keywords: financial inclusion, financial inclusion index, economic development, factor analysis

Financial inclusion and inflation in Southeast European countries

“…The results of the first-stage PCA used for FII construction are presented in Table 5. Dimensions extracted for the researched SEE countries, "access" and "usage and availability", are consistent with the dimensions extracted by Borhan et al, (2021).…”

“…Based on the previous research and taking into account the availability of data, eight indicators were identified to be included in FII construction. The FII was created according to the methodology used by Sarma (2008Sarma ( , 2010Sarma ( , 2012, Amidzic et al (2014), andBorhan et al (2021).…”

“…;Goel & Sharma (2017);Park & Mercado (2018); Nguyen, (2021);Borhan, Muda & Mohamad, 2021;Gupte, Venkataramani and Gupta (2012), and data availability for SEE countries.…”

“…2.2.1. Construction of financial inclusion indexFor constructing a multidimensional FII for SEE countries, the exploratory two-stage PCA was used as suggested byAmidzic et al (2014),Cámara and Tuesta (2018),Park and Mercado, (2018),Nguyen (2021), andBorhan et al (2021). As proposed bySarma (2008) and used byAmidzic et al (2014), …”

Measuring Financial Inclusion in Southeast European Countries Using Multidimensional Index of Financial Inclusion

“…Grouping is done prior to deploying factor analysis. The majority of researchers (Sarma 2008, Sarma 2012, Amidzic, et al 2014, Sarma 2016, Camara & Tuesta (2018, Goel & Sharma (2017) Park & Mercado (2018), Nguyen, (2021) use three dimensions: access (or penetration), availability and usage, Borhan et al, (2021) use two dimensions (access and usage) while Gupte, et al (2012) use as many as four: outreach (penetration and accessibility), usage, ease of transactions, and cost of transactions. Camara & Tuesta, (2018) even introduce the barriers dimension.…”