Index of Financial Inclusion Conceptual Issues

Transcription

1 Index of Financial Inclusion Conceptual Issues Mandira Sarma Centre for International Trade and Development Jawaharlal Nehru University, Delhi 67 (Prepared for CAFRAL workshop, Pune, 08 June 01)

2 Definitional issues An index is a numerical summary of a particular phenomenon. In economics, indexes are widely used for measuring socio- economic situations - poverty index, cost of living index, price indexes, human development index, index of financial inclusion and so on. When we are attempting to design an index of financial inclusion, a lot depends on how we define financial inclusion. Many tend to define financial inclusion as analogous to having access to the formal financial system. Then a measure of financial inclusion is quite easy to define it is given by the proportion of adults/hhs having a bank account.

3 This measure can be obtained only through primary surveys. Otherwise, a more readily available statistic, i.e., the no. of bank accounts per 1000 adults is used as a proxy for this. Honohan (008) has also tried to utilize the positive correlation between no. of bank accounts and proportion of banked adults/hh to econometrically estimate this measure. Proportion of banked adults, however, measures only the incidence of financial inclusion - and ignores other important dimensions of an inclusive financial system, eg., how widely the banking services are utilised, how wide spread the banking services are and how affordable the banking services etc. If we acknowledge financial inclusion to be a multidimensional phenomenon, then a more comprehensive measure needs to be designed.

4 Policy makers seem to acknowledge this, hence they try to report several lindicators while reporting on financial i linclusion. i Table IV.34 of RBI's Report on Trend and Progress of Banking in India: relating to Financial Inclusion Countries /groups Financial Access Financial Market Size and Depth No. of branches per 1,00000 persons No. of ATMs per 1,00000 persons Private Credit to GDP ratio (per cent) India Asian Peer group countries China Indonesia Malaysia Thailand

5 As individual indicators provide incomplete (though useful) information, a meaningful way of measuring FI would ldbe to construct an index using these (and many more) indicators. The index of financial inclusion (IFI) should be such that it represents the true situation as far as possible it is simple and easy to compute so that it is amenable for comparison it should have meaningful bounds (say 0 and 1) it should have monotonicity (higher values indicating higher level of financial inclusion)

6 Index of Financial Inclusion (Sarma 008, Sarma 010, Sarma 01) The index of financial inclusion (IFI) is a measure of inclusiveness of the financial sector of a country/region. It is constructed as a multidimensional index that captures information on various aspects of financial inclusion such as banking penetration, availability of banking services and usage of the banking system. The IFI incorporates information on these dimensions in one single number lying between een 0 and 1, where 0 denotes complete financial exclusion and 1 indicates complete financial inclusion

7 Index of Financial Inclusion (IFI) Methodology IFI is computed by using a multidimensional approach, similar to that used by UNDP for computing HDI, HPI and GDI etc. In order to compute IFI, first, a dimension i index is calculated for each dimension of financial inclusion. The dimension indexes can be viewed as a point in the n-dimensional Cartesian space. The IFI is measured by the distance of this point from an ideal point in the n-dimensional space.

8 IFI - methodology A dimension index for each of these dimensions has been first computed by the following formula where A i = Actual value of dimension i m i = minimum value of dimension i M i = Maximum value of dimension i w i = weight attached to dimension i; 0 w i 1 m i and M i are determined by empirical observation If w i is the weight of the i th dimension, then 0 d i w i. Higher the value of di, higher the achievement in dimension i.

9 IFI - methodology If n dimensions of financial inclusion are considered, then, a country will be represented by a point D k = (d 1, d, d 3,.d n ) on the n-dimensional Cartesian space. In the n-dimensional space, the point O = (0, 0, 0, 0) 0) represents the point indicating the worst situation while the point W = (w 1, w,..w n ) represents the highest achievement in all dimensions. The index of financial inclusion, IFI k for the k th country is given by the normalized inverse Euclidean distance of the point D k from the ideal point W =(w 1,w,..w n ).

10 IFI formula (n-dimensional IFI) ) (.. ) ( ) ( n w n d d w d w IFI = )... ( 1 n w w w + + +

11 Graphical explanation of 3-dimensional IFI Availability (A) (0, w, 0).. D (p, a, u). W (w 1, w, w 3 ) Usage (U) a u (0, 0, 0) p.(0, 0, w 3 ).(w 1, 0, 0) Penetration (P)

12 IFI values for different countries and different years Sl No. Country Afghanistan Algeria Angola Argentina Armenia Austria Azerbaijan Bangladesh Belgium Belize Bosnia & Herzego Botswana Brazil Bulgaria Cambodia Cameroon Chad Chile Colombia Comoros Congo, Republic o Cyprus Czech Republic Djibouti Equatorial Guinea Estonia Ethiopia Finland France Gabon Georgia Germany Greece Hungary India Iraq Ireland Israel

13 Sl No. Country Italy Japan Jordan Kazakhstan Kenya Korea, Republic of Kosovo Kyrgyz Republic Latvia Lb Lebanon Lesotho Lithuania Luxembourg Madagascar Malaysia Maldives Malta Mexico Moldova Namibia Netherlands Norway Oman Pakistan Peru Philippines Poland Portugal Qatar Romania Russian Federation Rwanda Saudi Arabia Seychelles Sierra Leone Singapore Slovak Republic Slovenia

14 Sl No. Country South Africa Spain Swaziland Switzerland Syrian Arab Republic Tanzania Thailand Togo Tonga Turkey Uganda Ukraine United Kingdom United States Uruguay Uzbekistan West Bank and Gaza Yemen, Republic of

15 Thank you