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.

The role of financial inclusion in improving household well‐being

“…A FII was constructed based on four dimensions identified in the literature: availability, accessibility, usage and quality of financial services (Triki & Faye, 2013). In the finance literature, the common practice is to use principal component analysis (PCA) to construct the index (see, e.g., Ahamed & Mallick, 2019; Bali et al, 2014; Cámara & Tuesta, 2014; Ellul & Yerramilli, 2013) as it minimizes the problems of multicollinearity and over‐parameterisation in the context of multifaceted measures of financial inclusion (Ahamed & Mallick, 2019; Pesqué‐Cela et al, 2021). In this paper, each indicator was either a binary or ordinal variable and was not standardized since they did not have different units of measurement.…”

“…The absence of an all‐encompassing financial inclusion measure in these studies may have led to an underestimation or overestimation of the actual impact of financial inclusion on welfare outcomes. The vast microfinance literature where financial products such as loans, savings and insurance are used as measures of financial inclusion (Banerjee et al, 2015; Crépon et al, 2015; Morduch, 1998; Pesqué‐Cela et al, 2021; Stewart et al, 2010; van Rooyen et al, 2012) and other alternative measures are used by various authors. Aguila et al (2016) use ownership of bank account as a measure of financial inclusion; Finkelstein et al (2012) use access to health insurance; Gyasi et al (2020) use bank account ownership, savings with a bank, use of automated teller machines (ATMs), access to credit, ownership of a mobile money account and usage of a formal account; Zhang and Posso (2019) and Ajefu et al (2020) both use ownership of bank account, access to credit and access to insurance.…”

Socio‐economic determinants of financial inclusion: An evaluation with a microdata multidimensional index

“…First, while aggregated information can be useful for a cross‐country and over‐time comparison, it can also give an incomplete picture of FI (Klapper & Singer, 2017; Pesqué‐Cela et al, 2021; Zhang & Posso, 2019). One example is the number of ATMs and bank branches per 100,000 adults (or 1000 km 2 ).…”

Dynamic Nonlinear Connectedness between the Financial Inclusion, Economic Growth, and China’s Poverty Alleviation: Evidence from a Panel VAR Analysis

“…ey measure the comprehensive index of financial inclusion primarily from three dimensions of permeability, availability, and effectiveness. However, Pesqué-Cela et al [92] systematically reviewed this and concluded that there is no universal financial inclusion indicator system, and indicators should be flexibly adjusted according to the actual conditions of different countries. Based on this, this study inherits the research ideas of the abovementioned literature and constructs an indicator system for the development of financial inclusion in China from four dimensions: geographic penetration, population penetration, service availability, and effective use.…”