Developing a Multidimensional Financial Inclusion Index: A Comparison Based on Income Groups

Abstract

The aim of our paper is to construct a multidimensional financial inclusion (FI) index to measure the level of FI in 91 countries across different income groups. In order to address our research problem, we use the principal component analysis method. This approach addresses the criticism of the arbitrary selection of weights and reflects the degree of financial inclusion in depth. The data are drawn from the International Monetary Fund (IMF) Financial Access Survey (FAS), the World Development Indicators (World Bank) and the Global Findex Database during the period of 2004–2020. This paper is the first to consider so many indicators of financial inclusion (13 indicators), belonging to three different dimensions of FI, in order to take into account the maximum number of aspects related to this concept. In addition, unlike previous work, this paper considers both developing and developed countries, which makes it possible to identify differences between them. The proposed index has some advantages. First, it is robust, comparable across countries and has good predictive power in tracking household microeconomic indicators (accounts and savings). It is also well correlated with macroeconomic variables such as literacy rate, poverty, GINI index, real interest rate and employers. Second, our results clearly show that, as a country’s income level grows higher, its level of financial inclusion also grows higher.