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Abstract
The aim of this study is to develop a composite index for financial inclusion. It is a multi-dimensional index as financial inclusion is based on many different aspects of financial systems. This study is an effort to develop a more appropriate, significant and accurate index using more indicators of financial inclusion. The index is developed using indicators on bank accounts, bank branches, number of ATMs, number of POS terminals, number of credit cards, number of debit cards, borrowings, savings, credit purchases, deposits, withdrawals, credit card usage, debit card usage, internet usage and mobile usage for transactions. This study is carried out with the objective of improving the number of variables and assigning weights for the variables methodologically. Accordingly, the composite index for financial inclusion is developed by using the correlation matrix of the variables to derive the weights and then taking the arithmetic mean of the dimensions. The results of the index developed are compared with the countries’ income classification, literacy rate, Gini coefficient and the OECD country representation. The analysis shows that the index is developed with more relevant indicators or that the variables well represent the countries’ financial inclusion. This index can be used as an indication of the country’s financial inclusion and will give a better representation of the financial inclusion ranking of the country and hence, can be used to measure the development of financial inclusion of a country.
Highlights
Financial Inclusion (FI) has become a subject of considerable interest developed in the last decade, among many stakeholders of economies, mainly researchers and policy makers
The development of Index of Financial Inclusion (IFI) starts with analyzing the correlation matrix for all the variables (Annexure I and II) to define the values for the sub dimensions and the results are tabulated below
The formula derived for the dimension ‘ACCESS’ is; Generalized Variable Coefficient (GVC)
Summary
Financial Inclusion (FI) has become a subject of considerable interest developed in the last decade, among many stakeholders of economies, mainly researchers and policy makers. It is fast becoming an important aspect in financial systems developments and thereby in economic development, at a rapid rate. Financial exclusion can be either voluntary, due to not having an interest or need, or because of cultural or religious reasons It can be involuntary, due to insufficient income, high risk profile, discrimination, market failures and imperfections. Policy initiatives must first focus on involuntary exclusion as it can be addressed by appropriate economic programs and activities, which can be designed to increase income levels and correct market failures and imperfections. It is required to take initiatives to improve the interest of people towards financial activities (which improves financial intermediation) and to consider cultural and religious aspects in financial activities (well-known example is Sharia law in financial intermediation)
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