Defining and measuring financial inclusion: A systematic review and confirmatory factor analysis

Abstract

This study re-examines the construct of financial inclusion, through a literature review and confirmatory factor analysis (CFA). First, we conduct a systematic review of definitions, measures and data sources. Second, we apply CFA to test two prominent financial inclusion indices. The CFA analysis reveals a high correlation between the ‘access’ and ‘use’ dimensions; hence, indices fail to capture the multidimensionality of financial inclusion. Existing indices tend to be biased towards measuring the supply-side and quantitative aspects of financial inclusion. The extent to which lower income individuals and smaller firms have been incorporated into the formal financial sector is not captured.