Construction of a composite fintech index to measure financial inclusion for developing countries

Abstract

ABSTRACT This study estimates fintech-driven financial inclusion in developing economies across three dimensions: availability, penetration, and usage. To create a new composite fintech index (FI) to measure financial inclusion, we include indicators for mobile money and internet usage, elements often overlooked in prior research. Our dataset, a balanced panel from 2011–2021, is gathered from 40 developing countries. To overcome criticism related to the arbitrary selection of weights in nonparametric methods, we utilize a two-stage Principal Component Analysis (PCA) to construct the FI. We test the robustness of our FI by employing OLS regression and the two-step system generalized method of moments (GMM) estimation techniques. Our proposed index is the first composite fintech index that is robust and powerful across measuring methods, dimensions, and fintech proxies in developing countries. This versatile index is a functional tool for policymakers to identify gaps in financial inclusion and inform policy responses. In addition, remarkable progress in fintech scores between 2011 and 2021, welcoming the mobile, internet, and agent banking era for developing countries. However, the transition to fintech presents substantial challenges, including the requirements for large-scale investment, financial literacy, and customer protection – issues that policymakers, regulators, and financial institutions need to address.