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Financial Inclusion: A Critical Assessment of its Concepts and Measurement

Article in Asian Journal of Research in Business Economics and Management · January 2015
DOI: 10.5958/2249-7307.2015.00002.X

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 Asian Journal
Asian Research Consortium of Research in
Business Economics
and
Asian Journal of Research in Business Economics and Management
Vol. 5, No. 1, January 2015, pp. 12-18 Management
ISSN 2249-7307 www.aijsh.org

Financial Inclusion: A Critical Assessment of its Concepts

and Measurement

Dr. Ramananda Singh*; Mr. Sankharaj Roy**

*Professor,
Department of Business Administration,
Assam University,
Silchar, Assam, India.
**Research Scholar,
Department of Business Administration,
Assam University,
Silchar, Assam. India. DOI NUMBER-10.5958/2249-7307.2015.00002.X

Abstract
In April 1965, the Reserve Bank liberalized branch-licensing norms and also decided to focus on
rural areas. The eleventh five year plan (2007-12) emphasized inclusive growth that is when
financial inclusion started getting more prominent position in the policy framework. Wide range of
literatures suggests that inclusive financial system is imperative for economic growth and
sustainable development which can be achieved through financial inclusion. The definition of
financial inclusion is varied but most of the literature zeroed down to use of basic banking services
like deposits, loans/micro-finance, payment services, money transfer, insurance, financial literacy
etc. So it is essential to measure financial inclusion from supply and demand side to find out the
reason that act as an detriemental determinant in the pocess of achieving financial inclusion.

Keywords: Financial inclusion/exclusion, credit, financial services.

________________________________________________________________________________

Introduction

2. Literature Review

2.1. Defining and Understanding the Concept of Financial Inclusion/Exclusion

The thought of financial inclusion can be traced back to the beginning of the nineteenth century
when the cooperative movement took place in the year 1904 against the non institutional agencies

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 Singh & Roy (2015). Asian Journal of Research in Business Economics and Management,
Vol. 5, No. 1, pp. 12-18

in the form of money lenders who were charging exorbitant interest from poor peasants. The people
excluded from the formal source of banking were losing money and property to local money
lenders. To bring out an inclusive financial system, and bridge the gap between urban and rural area
in facilitating banking services, the concept of financial inclusion gained momentum. In a bid to
focus on rural areas the Reserve Bank of India liberalized branch licensing norms in 1965 * and
subsequently 14 major commercial banks of the country were nationalized in 1969 and lead bank
schemes was introduced. This helped to a certain extent in opening a number of branches all over
the country trying to minimize the geographical exclusion depriving people of basic banking
services.

In spite of such measures a large number of population still remain outside the ambit of formal
financial system and a problem of access and usage still exist among a large part of the population
which needs the attention of special nature. Studies have proved that lack of inclusion or rather
exclusion from the formal financial system cause a loss of 1% to the GDP (Chattopadhay, 2011).
Thus apart from social issue it is an economic issue as well. This consternation made RBI to focus
on this issue and deliver policy framework so that the rural and urban areas does not experience
difficulties in accessing the formal financial system and urged banks in its Mid Term monetary
policy review (2005-06) to make Financial Inclusion as one of the primary objectives.

The planning process in India right from its inception was working under the objective of growth
with equity for the common people. This slowly catapulted into the agenda of inclusive growth
with government and Reserve Bank of India taking number of initiatives to address this issue.

Financial inclusion is defined by the committee on financial inclusion under the chairmanship of
Dr. C. Rangarajan as “the process of ensuring access to financial services and timely and adequate
credit when needed by vulnerable groups such as the weaker sections and low income groups at an
affordable cost by mainstream financial institutions players”. The financial services does not mean
only banking products, but a host of other financial services like credit, insurance and other types of
equity products(See Fig-1) (The committee on financial sector reforms, Raghuram Rajan, 2009)†.

The segment of the society not able to access timely credit and other financial services in
appropriate form, from the formal sources are financially excluded creating a concern for the policy
maker. Thus the three important elements or dimensions of financial inclusion are having access to
banking services, access to affordable & timely credit and access to financial literacy programmes
that educates the people about a healthy financial life. Leeladhar has defined financial inclusion as
the delivery of banking services at affordable cost (Leeladhar, 2005).

*
Financial inclusion: It all started in the 1960s-(Economic Times Article), Accessed from the following web address
http://economictimes.indiatimes.com/articleshow/37150463.cms?utm_source=contentofinterest&utm_medium=text&utm_c
ampaign=cppst on 25th June 2014

†
Report retrieved from http://www.msmementor.in/Publications.asp on 16.03.2014

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 Singh & Roy (2015). Asian Journal of Research in Business Economics and Management,
Vol. 5, No. 1, pp. 12-18

Fig-1: Household access to Financial Services

Retirement savings
Contingency
Buffer Savings
Planning
Insurable Contingencies

Business Livelihood

Emergency Loans
Wealth
Access of Creation Housing Loan
Financial
Services Consumption Loan

Savings & Investments based on

household‟s level of financial literacy and
Credit risk perception.

Source: A Hundred Small Steps - Report of the Committee on Financial Sector Reforms (Chairman: Dr. RaghuramRajan)

Economic exclusion considered as one of the form of social exclusion means lack of access to
labour markets, credit availability and other forms of capital assets. Financial exclusion is an
extended form of economic exclusion depriving people of credit, income and utilization of this
credit and income to build capital assets further limiting their living opportunities in the mainstream
economy. Being excluded from the opportunity to be employed or to receive credit may lead to
economic impoverishment that may, in turn, lead to other deprivations (such as undernourishment
or homelessness) (Amartya Sen, 2000).

Giving access to well operating financial system and drawing the attention of the world community
is a challenge that was made somewhat easy by the U.N. report (2006) entitled “Building inclusive
financial sector for development” ‡ which was able to capture the concern of the international
community on this issue and financial inclusion was able to gain priority as a policy matter in many
countries (ATISG, 2010)§. The U.N report defines a financial system to be an inclusive one which
is able to provide credit to all individuals and enterprises who are „bankable‟; savings, payment &
remittance services for all; insurance to insurable people.

‡
The book can be accessed online at:
http://www.uncdf.org/english/microfinance/pubs/bluebook/pub/index.php?get_page=contents (accessed on 10 th January
2014)
§
The report can be viewed at:
http://www.gpfi.org/sites/default/files/documents/G20%20Principles%20for%20Innovative%20Financial%20Inclusion%20-
%20AFI%20brochure.pdf (accessed on 20th Sept 2013)

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 Singh & Roy (2015). Asian Journal of Research in Business Economics and Management,
Vol. 5, No. 1, pp. 12-18

Inclusive growth is a prerequisite for sustainable development in an economy. Inclusive growth

means easy, safe and affordable access to credit and other financial services by the poor, vulnerable
groups, and lagging sectors which is acknowledged to be the drivers of economic growth and
reducing disparities in income thus reducing poverty. The relationship between financial
development and growth is accepted in various studies but there is lack of consensus on the
direction of causality (Fitzgerald, 2006).

2.2. Need for Financial Inclusion:

Financial inclusion is providing financial services to the commercial and retail customers who are
excluded from the system at a cost which is affordable and easily available to them. Financial
services are delivered primarily by banks along with other financial institutions like post office,
insurance companies, brokers, investment funds etc collectively known as the financial sector. This
financial sector development brings down information and transaction cost playing an important
role in mobilizing savings, disbursing credit, facilitating payments, risk management etc to enhance
economic growth leading to reduction in poverty. At the same time some concerns has also been
raised that the rich and politically strong people would be more beneficial form improvement in the
financial system (Haber, 2004). While this phenomenon exists in early stages of financial
development as the economic growth aggravate from a slow growing economy to a fast one more
people participate and comes under the formal financial system and enjoy a wide range of benefits
that helps to achieve steady distribution of income across peoples (Greenwood & Jovanovic, 1990).

2.3. Measuring Financial Inclusion

The measurement of financial inclusion in particularly the use of financial services & credit facility
through a bank account form the demand side. The measurement of this require surveying the
people on the use of the financial service along with their various socio economic factors like
occupation, income, literacy, landholding patterns, rural indebtness and the perception of the people
about banking services will enable the policy makers to have an insight on the impact of these socio
economic factors of the households on the usage of formal financial services. Another important
dimension for measuring the effectiveness of financial inclusion initiatives will be collecting data
on amount of credit disbursed, deposites kept in banks, remittances made, insurances coverage etc
that is prerequisite to be financially included as merely opening of bank account without taking the
advantages of basic banking services undermines the impact of financial inclusion measures.

Access is the ability of an individual to get and use financial services that are affordable, usable and
meet their financial needs. A well-functioning financial market is one in which the majority of the
adult population have access to financial services (Genesis Analytics, 2004). One of the main
challenges in measurement of financial access is the distinction between access to financial services
and actual use of services. This is because of the presence of voluntary exclusion in the system.
(Kumar, 2004) In her study on the delivery of financial services showed that 33% of the people
who did not have an account have voluntarily decided not to open a bank account and 70% of those
who do not have applied for a loan from banks claimed that they did not need the money.

Measuring the proportion of voluntary exclusion who has excluded themselves willingly is
difficult, so, measuring use of financial services is a more straightforward proposition

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 Singh & Roy (2015). Asian Journal of Research in Business Economics and Management,
Vol. 5, No. 1, pp. 12-18

(Stone, 2005). There is a thin line of distinction between access and usage that makes it too fine
point to pursue by asking psychographic questions that flesh out the concept of „access‟ distinct
from „usage‟, so the focus should be on measurement of the latter and a more traditional
econometric analysis of the determinants of usage is favored (Honohan & King, Cause and effect of
financial access: cross-country evidence from the Finscope surveys, 2009)

The measurement of financial inclusion is an multidimenional approach and is linked to its

perception by different researchers. The financial sector is undergoing a transition encompassing a
blanket of financial services. So a comprehensive tool must be developed that is flexible enough to
apprehend various definitions of financial inclusion. As it is mentioned in the earlier part of the
study that financial inclusion is a form of social exclusion so the meaurement of financial inclusion
takes the dimension from three angles i.e. financial participation, financial capability & financial
well being (Charlie Gluckman, 2009).

Financial participation is the use of financial products and services while inability to participate is
measured in term of individuals capability to participate in the mainstream financial sector and is
labelled as financial capability (Atkinson, 2011). The use of financial services effectively improves
the quality of financia life being measured in terms of improvement in lifestyle and feeling
confident while dealing with day to day monetary requirement and is labelled as financial well
being (Porter & Garman, 1993).

3. Conclusion
The critical assessment of the concept of financial inclusion envisages the importance of having a
inclusive financial system for the social and economic development of a country. Most of the
definitional aspects of financial exclusions hovers around lack of access whether voluntarily or
involuntarily by certain sections of the consumers to appropriate low cost, safe and fair finacial
products that might act as catalyst to their economic growth by providing financial stability to the
section of population who are excluded from the formal financial system. Exclusion could occur for
many reasons like because of inconvinient and un-affordable product, ignorance of the customer,
lack of financial literacy, high transaction cost and low outreach of banks etc. To bring about
financial inclusion these hurdles have to be removed by effective policy initiative after a through
comprehensive measurement of financial inclusion from both supply and demand side.

References
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Political Weekly 35(19), 1637-1648.

Analytics, G. (2004, October 6). Measuring Access to Financial Services in Swaziland. Genesis
Analytics (Pty) Ltd .

ATISG. (2010). G-20 Principles for innovative Financial Inclusion. Torronto Summit: Access
through Innovative Sub-Groups of the G20 Financial Inclusion expert group.

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Atkinson, A. (2011). Measuring financial capability using a short survey instrument: Instruction
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Beck, T, A. Demirguc‐Kunt and R. Levine (2004) “ Finance, inequality and poverty” World Bank
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Beck, T, A. Demirguc-Kunt and R. Levine (2007) “Reaching out: Access to and use banking
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Chakraborty, K. C. (2012, November). Financial inclusion – issues in measurement and analysis.

Keynote address at the Bank for International Settlements-Central Bank of Malaysia
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Toynbee Hall.

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Fitzgerald, V. (2006). Financial Development and Economic Growth. World Economic and Social
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Greenwood, J., & Jovanovic, B. (1990). Financial Development, Growth, and the Distribution of
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Haber, S. H. (2004). Mexico‟s Experiments with Bank Privatization and Liberalization 1991-2004.
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Honohan, P., & Michael, K. (2009). Cause and effect of financial access: cross-country evidence
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