An index to measure financial inclusion

I came across this interesting paper from Mandira Sarma of ICRIER. The abstract says all about the paper:

The promotion of an inclusive financial system is considered a policy priority in many countries.  While the importance of financial inclusion is widely recognized, the literature lacks a comprehensive measure that can be used to measure the extent of financial inclusion across economies.  This paper attempts to fill this gap by proposing an index of financial inclusion (IFI).  The IFI is a multi-dimensional index that captures information on various dimensions of financial inclusion in one single digit lying between 0 and 1, where 0 denotes complete financial exclusion and 1 indicates complete financial inclusion in an economy.  The proposed index is easy to compute and is comparable across countries.

The author says financial inclusion is like banking inclusion as the focus is on to provide basic banking services. So the author uses three measures to make the index and all three are based on banking services:

  • Banking penetration – measured by number of people having a bank account
  • Availability of banking services- measured by bank outlets per 1000 and ATM per 1000
  • Usage – to check whether people use banking services or not. Measured as volume of credit and deposit as a proportion of country’s GDP 

The author says if first measure is dropped the number of countries the sample increases from 55 to 100. India ranks 29 if ranked on all three measures index and ranks 50 if only two measures are used. India ranks higher on the usage index (19) than the other two (penetration – 28, availability – 32).

Though the index has many limitations as it is strictly a banking inclusion index and not a financial inclusion index. It is a start nevertheless as we really do not know the extent of financial exclusion in any country and the relative positions.

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