Index of Financial Inclusion Conceptual Issues Mandira Sarma Centre for International Trade and Development Jawaharlal Nehru University, Delhi 67 msarma.ms@gmail.com (Prepared for CAFRAL workshop, Pune, 08 June 01)
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.
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.
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: 009-10 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 6.33 1.63 33.3 Asian Peer group countries China 1.33 3.8 111.8 Indonesia 3.73 4.84 3 Malaysia 8.6 16.44 16.6 Thailand 7.37 17.05 90.5
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)
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
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.
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.
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 ).
IFI formula (n-dimensional IFI) ) (.. ) ( ) ( 1 1 1 n w n d d w d w IFI + + + = )... ( 1 n w w w + + +
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)
IFI values for different countries and different years Sl No. Country 004 005 006 007 008 009 010 1 Afghanistan 0.07 0.041 0.049 Algeria 0.5 0.47 0.60 0.74 0.84 0.303 0.313 3 Angola 0.03 0.05 0.041 0.053 0.068 0.081 0.069 4 Argentina 0.180 0.19 0.04 0. 0.4 0.33 0.46 5 Armenia 0.088 0.130 0.138 0.174 0.184 0.11 0.34 6 Austria 0.837 0.838 0.837 0.84 0.849 0.856 7 Azerbaijan 0.053 0.067 0.088 0.103 0.10 8 Bangladesh 0.9 0.31 0.330 0.34 0.340 0.357 0.386 9 Belgium 0.67 0.670 0.69 0.76 0.743 10 Belize 0.51 0.544 0.581 0.609 0.595 11 Bosnia & Herzego 0.304 0.353 0.370 0.386 1 Botswana 0.30 0.55 0.67 0.59 0.7 0.74 0.56 13 Brazil 0.300 0.81 0.91 0.308 0.35 0.335 0.348 14 Bulgaria 0.538 0.59 0.656 0.70 0.713 0.704 15 Cambodia 0.09 0.043 0.05 0.064 0.074 16 Cameroon 0.03 0.05 0.06 0.08 0.030 0.039 17 Chad 0.006 0.007 0.008 0.010 0.014 18 Chile 0.460 0.469 0.519 0.557 0.606 0.6 0.640 19 Colombia 0.311 0.334 0.359 0.365 0.384 0.398 0.385 0 Comoros 0058 0.058 0.055055 0.0505 0.050050 0.051051 0.059059 0.068068 1 Congo, Republic o 0.009 0.010 0.011 0.013 0.015 0.00 Cyprus 0.844 0.911 0.958 0.963 3 Czech Republic 0.411 0.407 0.44 0.440 0.459 4 Djibouti 0.103 0.104 0.110 0.119 0.167 5 Equatorial Guinea 0.079 0.088 6 Estonia 0.616 0.699 0.674 7 Ethiopia 0.0606 0.0606 0.064064 8 Finland 0.644 0.66 0.666 0.77 0.740 0.747 0.775 9 France 0.658 0.677 0.689 0.700 0.710 0.73 0.71 30 Gabon 0.05 0.033 0.033 0.047 0.047 0.054 31 Georgia 0.46 0.49 0.69 3 Germany 0.635 0.641 0.668 0.669 0.675 0.695 0.697 33 Greece 0.763 0.775 0.804 0.86 0.83 0.840 34 Hungary 0.340 0.357 0.380 0.401 0.450 0.461 0.476 35 India 0.305 0.30 0.307 0.314 0.340 0.368 0.383 36 Iraq 0.09 0.040 37 Ireland 0.737 0.875 0.89 0.889 0.87 38 Israel 0.70 0.710
Sl No. Country 004 005 006 007 008 009 010 39 Italy 0.397 0.396 0.401 0.44 0.51 0.57 0.58 40 Japan 0.885 0.884 0.883 0.88 0.88 0.88 41 Jordan 0.367 0.383 0.384 0.391 4 Kazakhstan 0.4 059 0.59 0.84 033 0.33 0.319 0313 0.313 0.307 43 Kenya 0.083 0.087 0.100 0.11 0.14 0.167 44 Korea, Republic of 0.840 0.847 0.861 0.863 0.885 0.895 45 Kosovo 0.144 0.166 0.06 0.51 0.83 0.9 46 Kyrgyz Republic 0.073 0.079 47 Latvia 0.40 0.433 0.474 0.58 0.537 0.546 0.567 48 Lb Lebanon 0386 0.386 0.39 0399 0.399 0.416 0431 0.431 0.448 49 Lesotho 0.080 0.096 0.16 0.090 0.090 0.095 0.113 50 Lithuania 0.634 0.658 0.660 0.679 0.673 51 Luxembourg 0.994 5 Madagascar 0.041 0.046 0.047 0.049 0.056 0.058 0.064 53 Malaysia 0.601 0.638 0.647 0.65 0.658 0.658 0.741 54 Maldives 0.66 0306 0.306 0.336 0383 0.383 0.410 044 0.44 0.418 55 Malta 0.819 0.81 0.808 0.818 0.86 0.88 0.830 56 Mexico 0.364 0.407 57 Moldova 0.84 0.309 0.340 0.387 0.40 0.414 0.430 58 Namibia 0.336 0.360 59 Netherlands 0.67 0.674 0.673 0.68 0.679 0.670 0.663 60 Norway 0619 0.619 0.656 070 0.70 0.708 0671 0.671 0.670 61 Oman 0.370 6 Pakistan 0.101 0.107 0.105 0.103 63 Peru 0.186 0.166 0.00 0.19 0.60 0.83 0.330 64 Philippines 0.15 0.0 0.16 0.6 0.9 0.56 65 Poland 0.338 0.373 0.433 0.444 0.464 66 Portugal 0.837 0860 0.860 0.87 0881 0.881 0.90 0919 0.919 0.918 67 Qatar 0.76 0.9 0.301 0.311 0.31 0.36 0.349 68 Romania 0.58 0.47 69 Russian Federation 0.499 0.595 0.65 0.647 0.663 0.685 70 Rwanda 0.119 0.14 71 Saudi Arabia 0.18 0.00 0.31 0.5 0.79 0.316 7 Seychelles 0.185 0.41 0.35 0.4 0.73 0.588 0.610 73 Sierra Leone 0.044 0.05 0.077 74 Singapore 0.656 0.647 0.650 0.65 0.657 0.664 0.684 75 Slovak Republic 0.497 0.545 0.653 0.667 0.670 76 Slovenia 0.577 0.591 0.607 0.618 0.607
Sl No. Country 004 005 006 007 008 009 010 77 South Africa 0.195 0.43 0.89 0.311 0.335 0.369 0.388 78 Spain 0.817 0.854 0.887 0.909 0.90 0.931 0.99 79 Swaziland 0.163 0.174 0.178 0.180 0.199 0.11 0.14 80 Switzerland 0.368 0.369 0.369 0.369 81 Syrian Arab Republic 0.098098 0.100 0.111 8 Tanzania 0.050 0.056 0.06 0.068 0.076 0.07 83 Thailand 0.618 0.630 0.639 0.658 84 Togo 0.103 85 Tonga 0.44 0.49 0.96 0.38 0.34 0.314 86 Turkey 0.411 0.41 0.46 0.40 0.48 87 Uganda 0.051 0.050 0.065 0.068 0.083 0.086 0.099 88 Ukraine 0.5 0.545 0.579 0.609 0.610 0.597 89 United Kingdom 0.938 0.96 0.98 0.975 0.949 0.931 0.96 90 United States 0.311 0.31 91 Uruguay 0.13 0.36 9 Uzbekistan 0.7 0.68 0.305 0.30 0.38 0.335 0.357 93 West Bank and Gaza 0.189 94 Yemen, Republic of 0.046046 0.054054
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