The dynamics of the financial inclusion index for developing countries: lessons learned

Abstract

Purpose The purpose of this paper is to calculate the financial inclusion index and analyze its dynamics in developing countries. Design/methodology/approach The authors use the two-stage principal component analysis (PCA) method and consider financial technology innovations to improve the accuracy of the financial inclusion index. Findings The authors found a downward trend in the financial inclusion index in most developing countries over the study period. The authors also found that a high financial inclusion index is linked to high scores in the Doing Business and high business climate regulation ranking. In addition, the authors observed that the rates of low financial inclusion in developing countries are due to low utilization of and unequal access to financial services. Practical implications The analysis suggests that policymakers in developing countries could invest in digital infrastructure to extend access to financial services in remote areas. They could also encourage financial innovation, particularly in financial technologies, by adopting flexible regulatory frameworks. Promoting the financial inclusion of marginalized groups through targeted initiatives tailored to their needs is another solution. They could also encourage the use of financial services by raising awareness and educating populations through training programs. Finally, to improve the business climate, governments could simplify administrative procedures and promote transparency and legal stability. Originality/value Unlike previous studies, the use of the two-stage PCA method and the consideration of financial technology (Fintech) innovations such as mobile money in the determinants of the financial inclusion index improve the accuracy of the index.