In the literature, both definition of financialinclusion and index formation to define financial inclusion have beenextensively discussed. Studies of causes of financial inclusion either focusedon particular regions or covered all countries. First, index formation will bediscussed then literature looking at financial inclusion’s impact on growth,stability and income equality will be presented. 83.5 Definition ofFinancial Inclusion and Index Formation Existing literature on financial inclusion hasdifferent definitions of the concept. Numerous studies define the concept interms of financial exclusion instead which is linked to a broader context ofsocial inclusion.
Sinclair(2001) indicated that the notion of financial exclusion was theincapability to access essential financial services while Leyshon and Thrift (1995)defined it as the processes which serve to preclude some social groups and/orindividuals from accessing the formal financial system. Similarly, Carbo et al. (2005)defined financial exclusion as the incapacity of some groups in accessing thefinancial system. On the other hand, Government of India’s definition offinancial inclusion lies on the basis of creating a system thatguarantees/ensures access by exposed groups (including low income ones) tofinancial services with (i) acceptable credit conditions and (ii) with an affordablecost, in a timely manner. Rajan(2014) signifies that financial inclusion encompasses the deepening offinancial services for those people with limited access as well as extension offinancial services to those who do not have any access.
In contrast, Amidži?, Massara, and Mialou (2014) andSarma (2008) directly define financial inclusion. The former describe financialinclusion as an economic state where persons and firms have access to basicfinancial services. Although it appears that there is a consensus on how financial inclusion is defined, there certainly is no standard way ofmeasuring it. Hence, existing studies offer differing measuring techniques of financial inclusion.
For instance,Honohan (2007 and 2008)constructed a financial accessindicator which captures the adultpopulation in an economywith access to formal financialintermediaries. The composite financial access indicator isformulated by utilizing household survey data for economieswith existing data on financial access. For those without household survey onfinancial access, the indicatoris constructed by utilizinginformation about bank account numbersand GDP per capita. The data is constructed as a cross-sectionseries using the most recent data asthe reference year varying across economies. However, Honohan’s (2007 and2008) calculations deliver a snapshot of financial inclusion and is notappropriate for comprehendingchanges over time and acrosseconomies.