Misha Sharma
Dvara Research
Snegdha Gupta
Dvara Research Working Paper Series, Jul 2021, 589
JEL Codes:
JEL code(s) not specified.
● A Demand-Side Approach to Measuring Financial Inclusion: Going Beyond Bank Account Ownership
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Access to finance is a critical mechanism in generating income equality and economic growth. Despite the role of inclusive finance, the extent to which households access and use formal financial services is not fully understood, largely due to gaps in existing measures of financial inclusion. The objective of this paper is to contribute to the literature on the measurement of financial inclusion. We do this by creating a composite demand-side financial inclusion index. We validate this approach by measuring the differences in dimensions of financial inclusion, such as access to and usage of financial products by regions, both rural versus urban as well as state-wise differences. We argue that the composite index is a superior method over other existing approaches to measure financial inclusion and find that an index based solely on bank account ownership tends to overestimate levels of financial inclusion. Our analysis also finds that financial inclusion, in terms of access, usage, as well as the overall financial inclusion index scores, are higher for urban regions compared to rural regions, indicating that levels of financial inclusion are unevenly spread in rural and urban regions of India and that using a geographic lens is indeed a useful way to identify areas of priority for strategic policymaking in financial inclusion.

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