Paper
Measuring Financial Inclusion: A Multidimensional Index
Designing a multidimensional financial inclusion index
40 pages
This paper uses demand and supply information to measure the extent of financial inclusion in 82 developed and less-developed countries in 2011. It postulates that the degree of financial inclusion is determined by three dimensions: usage, barriers, and access to financial inclusion. The paper assigns weights to the dimensions endogenously by employing a two-stage principal component analysis. It also identifies two problems in the existing indices. First, these indices rely only on supply-side country level data and come up with inaccurate readings, and second, the existing indices used are criticized for lack of scientific rigor because exogenous information is imposed. The index developed in this paper aims at overcoming these two limitations. The paper covers:
- Description of the data and the rationale for the chosen indicators as well the use of sub-indices that measure financial inclusion dimensions;
- Methodology that the paper uses for constructing the composite index from multi-dimensional data;
- Discussion on the results of the sub-indices as well as the composite financial inclusion index;
- Analysis of the robustness of the multidimensional index developed in the paper;
- Concluding remarks and policy recommendations.
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