Comment on "Measuring Digital Financial Inclusion in Emerging Market and Developing Economies: A New Index"

Abstract

A recent Asian Development Bank (ADB) report reveals that the global digital sector expansion would allow Asia and the Pacific to generate an economic dividend of more than $1.7 trillion per year, and create 65 million new jobs annually over the next 5 years (Asian Development Bank (ADB), 2021). In the finance sector, accelerated digitalization can potentially close the persistent financial inclusion gap between the rich and the poor, especially in developing countries. To empirically examine digital-based financial inclusion, Khera et al. (2022) develop a novel, comprehensive index of digital financial inclusion for 52 emerging and developing economies for 2014 and 2017. The index is constructed by combining the widely used cross-country data on financial inclusion and related aspects. Essentially, Khera et al. determine striking “digital leapfrogging” patterns in financial services. Countries in Asia and the Pacific as well as Africa have increasingly accelerated digital financial inclusion compared to other regions (Kera et al.’s Figure 2). In the wake of rapid digitalization, if the index is extended beyond 2020, it will offer valuable information to determine the impact of COVID-19 and identify suitable “build-better” policies for a desirable new normal.

Although Khera et al. and its database are significant, certain issues remain. First, Khera et al. can potentially strengthen the interpretation and analysis of each chart. For example, Khera et al. may discuss potential determinants of differentiated trajectories of the nexus between traditional financial and digital financial inclusion, as demonstrated in their Figure 4. While I agree with Khera et al. that these diverse patterns could be driven by substitution between traditional and digital financial services, they could have verified whether the upper-left group in their Figure 4 corresponds with an initially low level of traditional financial system.

Second, according to the list of variables employed, the new index seems to miss the popular use of digital financial transactions in the real world. For example, the poor in developing economies are already using mobile phone apps to receive or send money bilaterally, pay for online and offline purchases and transactions, for loan repayments and savings, and mobile phone recharge load.

Third, although the digital divide could drive financial exclusion of the poor, these heterogeneities of digital financial access or use are not considered in the index. The lack of financial and digital literacy could widen the initial digital gap between the rich and the poor. In addition to within-country gaps, digital divide can emerge across countries at an aggregate level, and it will be useful to show, for example, the distribution of the index in Khera et al.’s Figure 1 by subregions in Asia.

Fourth, the index may need to directly incorporate information regarding access to necessary infrastructure (Khera et al., 2021). For instance, given that a large proportion of workers and the self-employed receive salaries and payments in cash, to transform cash into digital money, access to digital outlets such as financial kiosks at convenience stores, is indispensable for digital financial transactions.¹ To refine the index, there are cross-country data on digital platform penetration and network readiness (Asian Development Bank (ADB), 2021).

Finally, the lack of appropriate laws, rules, and regulations for data privacy and cyber security could lead to mistrust, undermining effective digital financial inclusion. According to the Global Risks Report of the World Economic Forum (2020), 76.1% of respondents identified cyber security as the top five risks in 2020. It is imperative to incorporate these aspects in relation to the quality of governance. These issues should impel further refinement of the index in the future.