Developing an Index of Financial Inclusion

This paper develops an index of financial inclusions (IFI) for Punjab, India, using a multidimensional approach. It can be used to compare levels of financial inclusion across economies at a particular point in time. It can also be used to monitor the progress of policy initiatives for financial inclusion over a period of time. Such an index is useful to the research community to investigate empirical questions on relationship between development and financial inclusion.

The IFI incorporates information on various dimensions of an inclusive financial system and is easy to compute. It incorporates criteria that satisfy requirements for a good measure of financial inclusion. They include:

• Incorporating information on as many aspects of financial inclusion as possible;
• Being easy and simple to compute;
• Being comparable across countries.

The proposed IFI takes values between 0 and 1, 0 indicating lowest financial inclusion and 1 indicating complete financial inclusion. The IFI takes into account three basic dimensions of an inclusive financial system, namely, banking penetration, availability of banking services and usage of the banking system.