Measuring A Composite Financial Inclusion Index in Lower-Middle Income Countries

Abstract

This study suggests a composite index of financial inclusion (FI) for financial development, based on three key dimensions: penetration, availability, and usage in lower-middle income countries. The methodology uses principal component analysis PCA to exploit a composite index of financial inclusion and test its impact of new components on financial development. On the secondary data of financial access from the sources of FAS-IMF and WB-Findex, the research result is found that there are two new components of overall financial inclusion: the traditional financial inclusive index (TFI) includes three traditional dimensions: traditional penetration (TP), traditional availability (TA), and traditional usage (TU); and the digital financial inclusive index (DFI) includes three digital dimensions: digital penetration (DP), digital availability (DA), and digital usage (DU). The research findings give the empirical evidence that the digitalized level of financial inclusion is quite weak in lower-middle income countries. The research contributes to the methodology of building a composite index of financial inclusion with optimal weights of dimensions and traditional-digital financial inclusive indexes.