A FINANCIAL INCLUSION INDEX FOR INDONESIA

Abstract

Numerous studies have constructed financial inclusion indexes for Indonesia, using amultidimensional approach. However, there is a problem with the methodology, whichassumes that all the dimensions play the same role in defining financial inclusion,since they are based on equal weighting criteria. This paper aims to obviate concernswith the methodology by developing a more empirically based index, namely, aweighted multidimensional index of financial inclusion based on two-stage principalcomponent analysis. In other words, we endogenize the weights. We find that usage isthe most important dimension in defining financial inclusion in Indonesia, followedby availability and access.