FINANCIAL INCLUSION INDEX: DEVELOPING A ROBUST FRAMEWORK TO MEASURE BANKING PENETRATION AND ANALYZING BEHAVIORAL IMPACT FINANCIAL INCLUSION INDEX AND BEHAVIORAL IMPACT

Abstract

Financial inclusion remains a critical development priority, yet comprehensive measurement frameworks integrating multiple dimensions of banking penetration and behavioral outcomes are limited. This study develops and validates a robust Financial Inclusion Index (FII) incorporating three core dimensions: Access (availability of financial infrastructure), Usage (actual utilization of financial services), and Quality (consumer protection, financial literacy, and service quality). Using panel data from 137 countries spanning 2010-2024, we employ a two-stage Principal Component Analysis (PCA) methodology to construct a multidimensional composite index integrating 20 indicators from both supply-side (IMF Financial Access Survey) and demand-side (World Bank Global Findex) sources. The FII demonstrates strong psychometric properties with robust internal consistency and cross-national validity. Empirical analysis reveals significant heterogeneity in financial inclusion across income groups and regions, with developed nations scoring 0.78±0.12 versus 0.42±0.18 for developing countries. Behavioral impact analysis through structural equation modeling demonstrates that financial inclusion significantly influences household financial behaviors including savings rates (β=0.42, p<.001), formal credit usage (β=0.38, p<.001), and financial resilience (β=0.35, p<.01). Incremental validity analysis confirms FII accounts for 16% additional variance in financial well-being beyond income and education. Cross-country analysis identifies digital banking penetration (r=0.67, p<.001) and mobile money adoption (r=0.58, p<.001) as primary drivers in developing nations. Policy simulation modeling indicates targeted interventions addressing barriers to access could increase inclusion by 12-18 percentage points within 3-5 years. The validated FII framework provides policymakers, researchers, and practitioners with a comprehensive tool for monitoring progress, identifying gaps, and designing evidence-based financial inclusion strategies.