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

Abstract

Khera et al. (2022) provides a novel measurement of digital financial inclusion using a three-stage principal component approach (PCA) for 52 emerging market and developing economies. Based on this new index, they have found that the adoption of digital financial services has been a key driver of financial inclusion, and countries/regions in Africa and Asia and regions have achieved greater progress. They also warn against a digital divide and call for policies to close the gap.

The novelty of this new index rests on three characteristics: it is focused; it is comprehensive, and it utilizes the PCA approach. This index focuses on the payment aspects of financial inclusion, and considers the “access” and “usage” aspects of both digital and traditional aspects of financial inclusion. The three-stage PCA approach first extracts the supply-side and demand-side aspects of financial inclusion for both traditional and digital financial services, then extracts the principal components of the access and usage indices for the traditional and digital financial inclusion, respectively, and finally builds up a comprehensive index encompassing all these subcomponents.

The constructed index provides a good chance to measure the level of the adoption of digital financial services in a specific country, and hence provides an instrument for evaluating the policy implications of financial inclusion, especially digital financial inclusion. For example, the subindex provides a chance to evaluate the severeness of the digital divide and the risk of financial exclusion. The indices show wide variations in digital financial inclusion across countries, whether it is mainly driven by a reluctance in constructing more digital financial infrastructure due to financial constraints, or a distrust of digital technology will need further investigation.

Overall, this index has great potential for deepening our understanding of the relationships between comprehensive financial inclusion, digital financial inclusion as well as traditional financial inclusion. In this aspect, Khera et al. (2022) may wish to provide more discussions so that the importance of subindices can be better appreciated. For example, Khera et al.’s Figures 1 and 2 indicate that African countries excel in digital financial inclusion, so it would be insightful to explain which of the access and the usage components are relevant in promoting the development in digital financial inclusion. Another example is Khera et al.’s Figure 3 that contains the interesting finding, namely, for countries with low traditional financial inclusion, the variance of traditional financial inclusion is larger than the variance of countries with high-traditional financial inclusion. This implies that efforts in pursuing digital financial inclusion vary more in countries with low levels of traditional financial inclusion.

Some additional empirical evidences may also help to convince readers about the validity of this index. For example, Khera et al.'s (2022) Figure 3 ranks Mongolia as the most advanced country in terms of both comprehensive as well as digital financial inclusion, and their Figure 4 shows that Ghana ranks No. 1 in improvements of digital financial inclusion. Presentations of some statistics about access and usage, and the development in traditional financial inclusion between 2014 and 2017 of these two countries would be helpful.

Some robustness checks may also help readers and users to appreciate the importance of this index. For example, one way to construct the index is to apply the PCA approach to all the variables in one stage instead of in three stages. Such a strategy can avoid the prediction errors caused by treating the first-stage and second-stage indices directly as raw data, and can also provide readers with a broader view about the financial inclusion status quo.