Financial inclusion, financial technology, and economic development: a composite index approach

Financial inclusion is recognized by policy makers as one of the main tools of promoting household income and economic development. Recently, increasing attention has been focused on proposing reliable indicators to quantify financial inclusion by country. In this research, we adopt a composite index approach for that purpose. The main distinguishing feature of our empirical exercise is its data-driven spirit; in particular, we make very few assumptions about the nature of the composite index. Moreover, we define financial inclusion from three main dimensions making use of both demand and supply side data and recognize that financial technology and digital finance are playing an increasing role in boosting financial inclusion. Next, we analyze financial inclusion changes over time by distinguishing between catching-up and environment change effects. The latter allows us to verify whether policy makers have succeeded in creating an environment that has fostered financial inclusion and quantify the scope for policy interventions. Finally, we take the heterogeneity between countries into consideration by partitioning countries into income per capita categories. Our empirical exercise reveals important patterns useful in understanding financial inclusion differences and designing future policy implementations.