Financial Inclusion and Human Development: A Cross-country Evidence

Abstract

Of late, financial inclusion has assumed a development policy priority in many countries. To consider the importance of the same, this study attempts to compute a comprehensive, cross-country index of financial inclusion (IFI), and use it to measure progress of financial inclusion in 68 countries from 2004 through 2008, to 2012. With the mean IFI value upgrading from 0.292 (low inclusion level) in 2004 to 0.332 (medium inclusion level) in 2012, the article exhibits a general improvement in the extent of financial inclusion for the period. Indicated by a diminution in the coefficient of variation (CV) of IFI from 0.853 in 2004 to 0.703 in 2012, the results also evidence convergence in IFI values. Seeking to measure the relationship between financial inclusion and human development, the article finds a strong and significant correlation between the two. Additionally, not only the Human Development Index (HDI) but also the income level of countries seems to show a movement, in tandem with the extent of financial inclusion evidenced by them. As an all-inclusive measure of socio-economic development, an IFI-incorporated HDI (modified HDI) has additionally been computed for the year 2012. The same has been employed to compare the extent of socio-economic development of the countries, as shown by HDI alone, and also by the proposed measure. Modified HDI, by capturing the vitality of ‘financial availability and access by all’, has been noted as an improved measure of socio-economic development over HDI. In addition, the study suggests removal of the stumbling blocks of financial illiteracy and technological backwardness to extend financial services to the unbanked masses. Financial inclusion is therefore a road that countries need to transverse to become global harbingers of development and prosperity.