2.1 Financial Inclusion Concepts
The development of financial inclusion theory gives hope in improving the synergy between practice and policy. This refers to Ozili (2020) which explains the importance of financial inclusion theory to achieve a high-level synthesis between financial inclusion objectives and financial inclusion outcomes, as well as a guideline on which to base financial inclusion practices. Financial inclusion is generally understood as the openness of financial access for everyone, whether poor, rich, small, medium, or large businesses. Along the way, the definition of financial inclusion has developed from several experts, including, Ababio et al (2019) explains that financial inclusion usually describes access to use and formal financial services by low-income, poor households, small farmers, small businesses, and companies that have hitherto been underbanked or unbanked. Nguyen and Ha (2021) define financial inclusion as the process of ensuring access to financial products and services needed by vulnerable groups (weak and low-income groups) at affordable costs in a fair and transparent manner by mainstream (formal) institutions. In line with Soyemi et.al (2020), it also emphasizes financial inclusion on access to financial services provided by formal financial institutions at affordable costs for everyone (rich, poor, and low-income people) in the economy. Not only for the sake of accessing financial services for business purposes through credit or increasing income through investment, but financial inclusion also allows adults to invest in education Demirgüç et al (2017). Some of the definitions of financial inclusion above generally do not explain what factors the reference is in measuring the level of financial inclusion. The supply aspect (Beck et al., 2007), it explains the definition of financial inclusion explained by a multidimensional view, which consists of the dimensions of "access" and "use" of financial services. This multidimensional definition is growing, especially the view that is often used as a reference Sarma (2008), explaining the definition of financial inclusion as a process that ensures easy access, availability, and use of the formal financial system for all members of the economy. This definition emphasizes that there are three dimensions of financial inclusion, namely, penetration, availability, and usage. In his article, Sarma also mentions that the bank is the most basic service as an instrument of financial inclusion, so the definition of financial inclusion also reflects banking inclusion. These three dimensions of financial inclusion are also followed by Siddik and Kabiraj (2018) who assesses the importance of several dimensions of financial inclusion in a practical approach, which next can be assessed based on a composite index. However, different views are also developing about whether financial services should be provided at a price that is “sustainable” to the provider (Cela et al., 2018) or “affordable” to the customer. This means that the current definition of financial inclusion refers to a multidimensional view by prioritizing easy access to financial services for all residents, especially members of the poor, disadvantaged and inaccessible to financial services.
2.2. Measuring Financial Inclusion Index
The size of the financial inclusion index is determined by three components, namely, how to determine the dimensions, how to determine the indicators of each dimension, and how to determine the weight of each dimension. There is a room that continues to grow in measuring the financial inclusion index, so it is not surprising that the various views of each researcher vary in explaining the appropriate dimensions, indicators, and weights to measure the financial inclusion index because they consider the problem of access of the poor and other groups to financial services to be solved with the right measure. Before determining the formulation of the measurement of the financial inclusion index, this study will first explain the views of previous researchers and the differences with this study regarding the determination of dimensions, indicators, and determination of weights per dimension.
2.2.1. Determining the Dimensions of Financial Inclusion
The calculation of the financial inclusion index is determined by the value and number of dimensions used. Based on previous research in Table 1 shows that there are variations in determining the dimensions of financial inclusion. Sarma (2008) begins by defining three dimensions that determine the size of the financial inclusion index, namely penetration, access, and usage. Furthermore, Arora (2010) uses a different supply approach which is named the outreach, cost, and ease dimensions. Gupte et al (2012) develops the dimensions used by Arora by adding usage as a representative of the demand aspect, so that there are four dimensions in measuring financial inclusion. Meanwhile, five researchers used three dimensions referred to in Sarma (2008), while six researchers used two dimensions representing supply and demand aspects to measure financial inclusion. But unfortunately, the supply aspect of the last six researchers, uses different naming dimensions, including access, availability, and penetration. Generally, some of these researchers use the access dimension in explaining financial inclusion from the supply side.
Table 1
Dimensions of Financial Inclusion According to Experts
Researchers | Supply | Demand | |
---|
Access | Outreach | Penetration | Availability | Cost | Ease | Usage |
---|
Sarma (2008) | no | no | yes | yes | no | no | yes |
Arora (2010) | no | yes | no | no | yes | yes | no |
Beck,Kunt and Peria (2007) | yes | no | no | no | no | no | yes |
Gupte et al (2012) | no | yes | no | no | yes | yes | yes |
Yorulmaz (2013) | no | no | yes | yes | no | no | yes |
Camara,N& Tuesta,D (2014) | yes | no | no | no | no | no | yes |
Amidžić et.al (2014) | no | yes | no | no | no | no | yes |
Unnikrishnan R&Jagannathan L (2015) | no | no | yes | yes | no | no | yes |
Sethy (2015): | no | no | yes | yes | no | no | yes |
Ambarkhane et al (2016) | no | no | no | yes | no | no | yes |
Raza, M.S, et.al (2019) | yes | no | yes | no | no | no | yes |
Takeshi I (2019) | yes | no | no | no | no | no | no |
Datta et.al (2019) | yes | no | no | yes | no | no | yes |
Cela, V.P, et al (2020) | yes | yes | no | no | yes | yes | yes |
Ababio, et al (2020) | no | no | yes | no | no | no | no |
Ouechtati (2020) | no | no | yes | no | no | no | yes |
Omar,Md.A & Inaba,K(2020) | no | no | yes | yes | no | no | yes |
Ratnawati K (2020) | yes | no | yes | no | no | no | yes |
Thathsarani, et al (2021) | yes | no | no | no | no | no | yes |
Arora (2021) | no | no | yes | yes | no | no | yes |
Source: Constructed by Author |
It is not surprising that the Access dimension is used the most by previous researchers compared to other dimensions from the supply side. These results provide an understanding that the essence of financial inclusion is to overcome the problem of financial barriers through easy access to financial services. However, the difference in the dimensions of financial inclusion provides an opportunity for re-verification regarding how many and the right types of dimensions are used as standards in measuring the financial inclusion index. This verification is important because the difference in the use of the dimensions shows different views in looking at the issue of financial inclusion. Referring to Sarma (2008) which explains the different definitions between penetration and availability, Sarma explained that financial inclusion is represented by banking inclusion, so that bank penetration in question is a financial system that can reach the widest possible users characterized by the size of the "banked" population or the number of people who have bank accounts. Meanwhile, the availability of banking services is the availability of financial system services as indicated by the number of bank outlets (per 1000 population) or the number of ATMs per 1000 people, or the number of bank employees per customer. This shows a different focus in assessing the supply aspect in the financial system. The definition of "access" has differences with the two previous variables, Claessens in Arora (2010) explains what is meant by "access" to finance is the availability of a reasonable supply of financial services at a reasonable cost, where the quality and cost are reasonable relative to objective standards. In this case, costs reflect all cash and non-pecuniary costs. Access is described by Sophastienphong and Kulathunga in Arora (2010) in the case in Asia by considering six indicators of banking access, namely bank demographics and ATM penetration (branch/ATM per 100,000 population), deposit and loan accounts per 1000 people, branches/ATM per 1000 km rectangle. Arora adopts the thinking of the two researchers by defining access or physical reach in terms of how many people it covers – geographically and demographically. This is further explained through the variables of branch penetration and ATM penetration with units of distance measurement (1000 sq. km) for geography, and population size (100,000 people) for demographics. To accommodate the different types and number of dimensions used by the researchers, Gupte et.al (2012) tried to combine the thoughts of Arora (2010) and Sarma (2008) to form four dimensions, namely outreach, usage, the ease of transactions and, the cost of transactions.
2.2.2. Determining the indicators of the dimensions of financial inclusion
Based on the previous review of the dimensions of financial inclusion, it appears that there are four dimensions often used by researchers, namely, penetration, availability, access, and usage. However, these four dimensions need to be further tested methodologically to determine the right number and dimensions to measure the financial inclusion index. Next, the identification of what indicators are appropriate to be used in explaining each dimension is another important factor. Table 2 presents several indicators that are often used by previous researchers according to the dimensions of financial inclusion.
Table 2
List of Indicators used to explain the Dimensions of Financial Inclusion
Indicators | Penetration | Availability | Access | Usage |
---|
Number of Account at Commercial bank | | | 1 | |
ATMs per 100.000 adults | 1 | 3 | 4 | |
Commercial bank branches per 100.000 adults | | 2 | 3 | |
ATMs per 1000 Km2 | 1 | 1 | 2 | |
Commercial bank branches per 1000 Km2 | | 1 | 1 | |
Number of bank branches per 1000 km2 | | | 1 | |
Number of bank branches per 100.000 people | 1 | 1 | 3 | |
Percentage of account holders at financial institutions (age 15+) | | | 1 | |
Percentage of debit card holders (age 15+) | | | 1 | |
Number of Bank Account per 1000 adults | 4 | | | |
Number of Deposit account with commercial bank per 1000 adults | 2 | | | 1 |
Internet penetration, Mobile penetration & telephone | 1 | | | |
Number of ATM per 1000 people | | 2 | | |
Number of bank employees per customer | | 1 | | |
Number of bank branches per 1000 people | | 3 | | |
Credit percentage of GDP | | | | 3 |
Deposit percentage of GDP | | | | 4 |
Number of loans per 1000 people | | | | 1 |
Loan accounts per capita | | | | 1 |
Commercial bank borrowers per 1000 adults | | | | 1 |
Total | 10 | 14 | 17 | 11 |
Source: Constructed by Author |
Of the 15 (fifteen) indicators often used to explain the dimensions of the supply aspect, the access dimension is most often interpreted by 17 indicators. ATMs per 100,000 adults are the most widely used indicator to describe the dimension of access, then Commercial bank branches per 100,000 adults and the number of bank branches per 100,000 people. The indicators less widely adopted are the number of bank branches and ATMs in units of distance per 1000 km2. Most of the previous studies refer to Arora (2010) in explaining the dimensions of access or outreach determined by geographical and demographic considerations. The second dimension, availability is explained by eight types of indicators with a total of 14 studies. Commonly used indicators include ATMs, commercial bank branches, and the number of bank branches in demographic units (100,000 adults). The first two indicators are also used to explain the access dimension, but the difference is that the demographic size is preferred to the availability dimension rather than the geographic size. The penetration dimension also uses ATMs in demographic units (per 100,000 adults) and geographical units (1000 km2) which are the same as access and availability dimensions. This fact shows that there are differences in the interpretation of indicators in explaining the dimensions of financial inclusion among researchers. This is different from the usage dimension, where most of the researchers have similarities in using the percentage of credit and debit per GDP as an indicator of the usage dimension. ATM, Bank branches variable require re-verification because several researchers claim them to enter in different dimensions. ATMs classify into three different dimensions, including the dimensions of penetration, availability, and access. Meanwhile, bank branches categorize as an availability dimension for one researcher and the other as an access dimension.
2.2.3. Human Development and Financial Inclusion
The success of the development is no longer just a measure of physical or material success. Development has a deep meaning related to values, culture, and ideology that determine the quality of human life. Amartya Sen in the book Todaro and Smith (2012) uses a capability approach which is the basis for assessing the success of the development. Amartya Sen assessed that development should pay more attention to efforts to improve the quality of life and the freedom that humans live. He further explained that subjective well-being is a state of the human psyche – a function – which can be achieved side by side with the functioning of health and dignity. Long before the era of Amartya Sen, Morris (1978) had described a measure of development success based on a physical quality of life index which aims to complete the GNP measure, namely literacy rate (Education), infant mortality rate, and life expectancy at one year of age (Health). Furthermore, UNDP developed a new human development index (HDI) in 2010. HDI is an index that measures the achievement of a country's socio-economic development, which combines achievements in the field of education (average of actual educational attainment of the entire population, educational attainment expected of children). children today), Health (life expectancy after birth), and gross national income (GNI) per capita (Todaro and Smith, 2012) using the calculation of the geometric mean.
Every developing country, in general, strives to achieve a high level of human development. This achievement is important to catch up with developed countries. Given the characteristics of low- and middle-income countries that are identical with high poverty levels, one of the efforts to accelerate development is through financial inclusion. Soyemi et al (2020) empirically proves the impact of financial inclusion on increasing development in Nigeria in the long term, in Pakistan (Raza et al., 2019) and other countries in the South Asian region (Thathsarani and Samaraweera, 2021). Likewise, it is also proven for all countries of low-, middle- and high-income groups (Datta et al., 2019; Unnikrishnan and Jagannathan, 2015). Some researchers explain that it is not financial inclusion that causes a country's economic development to increase, on the contrary, it is necessary to carry out human development first to increase financial inclusion (Ababio et al., 2019). The results of this study are reinforced by Arora and Kumar (2021), which states that the government needs to accelerate financial inclusion policies in India because it is empirically proven that financial inclusion and human development have a two-way causality relationship based on the Granger non-causality test. This means that financial inclusion plays a key role in human development. A two-way relationship can be interpreted as both having the same important variable position for the economy of a country (Arora, 2018), so the development of both must be equally high. For example, in the Kerala state of India, where human development scores higher than physical (financial) capital has not been able to have a positive impact on economic growth.
Other studies assess the importance of financial inclusion and human development for the economy (Chin and Chou, 2001). Where human capital is a key factor in creating financial innovations that result in financial development, it will then lead to the creation of further human resources. So, there is a two-way reciprocal relationship between financial innovation, financial development, and human development. These results were strengthened (Grier, 2002) who studied 18 Latin American countries for the period 1965–1980. Evans (2015) also proved the importance of developing financial and human capital on economic growth in 82 countries in the 21-year period 1972–1993. The results of the study Evans (2015) state that financial access is determined one of them by public education. The importance of financial inclusion for development is also explained Arora (2014) which states that access to finance should be an important indicator of development. This means that their position is like that of per capita gross domestic product, life expectancy, and adult literacy rate, which are indicators of the human development index. He further explained that human development without access to financial services is meaningless because people cannot apply their skills.
2.2.4. Research Contribution
Based on previous research, it can be grouped into three views in measuring the financial inclusion index. First, the research group that sets the dimensions and indicators follows the reference Sarma (2008) which uses three dimensions (penetration, availability, and usage), including Yorulmaz (2013), Unnikrishnan and Jagannathan (2015), Sethy (2015), Omar and Inaba (2020) and Arora (2010). Second, the research group uses the types of dimensions based on factor analysis using the PCA (Principal Component Analysis) method, including Datta et al (2019), Thathsarani and Samaraweera (2021), Amidžić et al (2014)d mara and Tuesta (2014). Third, using the PCA method, most measure the inclusion index with a composite index. However, the summary in Table 1 shows that the number of dimensions and the dimension categories of the variables tested differences between the results of previous studies. The PCA method derives from existing theory, so the number and type of dimensions are predetermined. This weakness is what this study tries to fix by using the factor analysis (FA) method. Dimensions were determined by re-examining all the variables used by previous researchers at different timescales.
Furthermore, it expects that the dimensions formed are consistent every year. Fourth, the research group uses the CFA (Confirmatory Factor Analysis) approach, which treats dimensions as latent variables and determines indicators based on a literature review. Furthermore, the first and third research groups used unbalanced weights because they depended on their contribution to the formed factors/dimensions. The second view is statistically verifiable in the number of dimensions, types of dimensions, and the right weight for each dimension. Determination of the correct dimensions, indicators, and weights essential affects the measurement results of the financial inclusion index.
In addition, most studies focus on how to measure the financial inclusion index only. In general, financial inclusion aims to eradicate poverty, so most studies discuss the impact of financial inclusion in reducing poverty in developing countries Lal (2017), Park and Jr.Rogelio (2015), Papadavid et al (2017), Erlando et al (2020), and Emara (2020). Only a few researchers have linked its impact on human development (Soyemi et al., 2020; Raza et al., 2019; Thathsarani and Samaraweera, 2021; Datta et al., 2019; Unnikrishnan and Jagannathan, 2015). Furthermore, there are differences in research results related to the function of human development variables, most of which state as the dependent variable, one of the research results states human development as the independent variable (Ababio et al., 2019). In this study, we will re-examine whether financial inclusion functions as an independent or dependent variable with the object of research being low- and middle-income countries.