Measuring Financial Inclusion in Indonesia: Asserting the Role of Digital Financial Services

Abstract

Assessing the level of financial inclusion is crucial. However, there is still no standard measurement to capture the development of financial inclusion. Revisiting this issue, this paper proposes a new approach to estimating the financial inclusion level by building the financial inclusion index (FII) with three dimensions; access, usage, and quality, using the standard method of Principle Component Analysis (PCA). To verify the role of digital financial services (DFS) in promoting financial inclusion in Indonesia, we simulate the index calculation by including and excluding digital financial services (DFS) indicators in our exercises. The estimated FII suggested that financial inclusion in Indonesia was rapidly enhanced during the Covid-19 pandemic, primarily due to the adoption of digital financial technology. The econometric analysis uncovers the index's reliability by finding the significant structural relationship between FII and socioeconomic variables such as poverty, inequality, and human development. This method also proves the significant role of DFS in defining financial inclusion in Indonesia.