A Measurement of financial Inclusion -Index Development and its Relationships

Abstract

The aim of this study is to develop a composite index for financial inclusion. It is a multi-dimensional index as financial inclusion is based on many different aspects of financial systems. This study is an effort to develop a more appropriate, significant and accurate index using more indicators of financial inclusion. The index is developed using indicators on bank accounts, bank branches, number of ATMs, number of POS terminals, number of credit cards, number of debit cards, borrowings, savings, credit purchases, deposits, withdrawals, credit card usage, debit card usage, internet usage and mobile usage for transactions. This study is carried out with the objective of improving the number of variables and assigning weights for the variables methodologically. Accordingly, the composite index for financial inclusion is developed by using the correlation matrix of the variables to derive the weights and then taking the arithmetic mean of the dimensions. The results of the index developed are compared with the countries’ income classification, literacy rate, Gini coefficient and the OECD country representation. The analysis shows that the index is developed with more relevant indicators or that the variables well represent the countries’ financial inclusion. This index can be used as an indication of the country’s financial inclusion and will give a better representation of the financial inclusion ranking of the country and hence, can be used to measure the development of financial inclusion of a country.