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Financial inclusion: a new A multi-

dimensional
multi-dimensional index and index and
determinants
determinants – evidence
from the Union for the
Mediterranean countries Received 24 December 2021
Revised 23 June 2022
Accepted 29 September 2022
Soumaya Ben Khelifa, Dorra Hmaied and Olfa Ben Ouda
LEFA, IHEC Carthage, Tunis, Tunisia
Rym Ayadi
Bayes Business School, City University of London, London, UK, and
Rania Makni
LEFA, IHEC Carthage, Tunis, Tunisia

Abstract
Purpose – This paper proposes a new multi-dimensional financial inclusion index.
Design/methodology/approach – The authors employ two-stage principal component analysis (PCA) and
aggregating indicators of availability, access and use. The paper first assesses the cross-country variations in the
index and analyses trends over time for a sample of countries members of the Union for the Mediterranean (UfM)
from 2010–2018. Second, it investigates factors that could explain the level of financial inclusion across countries.
Findings – The financial inclusion index shows a downward trend for the full sample over the period under
investigation; however when splitting the sample by income group, it appears that high- and middle–income
countries did not register the same trend. When examining the determinants of financial inclusion for the UfM
countries, the authors find that macroeconomic, social and governance factors, as well as banking conditions, matter.
Policy-makers in low- and middle-income economies should consider the importance of digital financial inclusion,
which is substituting the role to traditional banking system, to close the gap and accelerate its development.
Originality/value – First, the authors provide a new measure of financial inclusion using a three-dimensional
index: availability, access and use, for which weights are assigned using PCA. It uses data available for the UfM
sample by combining data from different databases in order to include most indicators considered in the
literature, as the majority of studies only use single measures (number of bank branches, ownership of a bank
account, ratio of credits or deposits to gross domestic product [GDP], etc.). Second, by focussing on UfM
countries, the study covers a region that includes both large developed and small developing economies that
are connected via financial and trade ties, whilst previous studies generally give global evidence from an
international sample with little or no economic ties. Third, splitting the sample by country income groups, the
paper presents a more comprehensive representation of the cross-country variation in financial inclusion levels
between high- and middle-income economies for this region.
Keywords Multidimensional financial inclusion index, Determinants, Principal component analysis
Paper type Research paper

Introduction
Widely considered a key factor in socioeconomic development, inclusive and sustainable
economic growth, financial inclusion has become an important policy objective around the
globe [1]. In emerging and developed countries alike, governments have promoted various
financial inclusion initiatives (Demirg€
uç-Kunt and Klapper, 2012a, b; Iqbal and Sami, 2017). In
the academic literature, many studies explore how sustainable environmental economic
growth should be maintained (Cao et al., 2022; Ji et al., 2022; Sadiq et al., 2022; Ge et al., 2022). Journal of Economic and
Administrative Sciences
© Emerald Publishing Limited
1026-4116
JEL Classification — G21, O11 DOI 10.1108/JEAS-12-2021-0266
JEAS In this framework, financial inclusion has attracted growing interest from the academic
community as many researchers have focussed on its positive effects on individuals and the
economy as a whole. Though the literature on what reinforces financial inclusion still remains
limited, empirical studies on the determinants of financial inclusion document the role of
macroeconomic conditions, social and technological development, and institutional quality
(Honohan, 2008; Demirg€ uç-Kunt and Klapper, 2013; Allen et al., 2016).
There is neither a formal definition for financial inclusion in the literature nor a consensus
on how it could be measured. In this paper, we retain a broad definition that includes the
availability, the access and the use of financial services by individuals and micro, small and
medium-sized enterprises (MSMEs). On measuring financial inclusion, different approaches
have been proposed in the literature, including the use of a variety of dimensions. A recent
approach considers financial inclusion as a multidimensional concept and proposes the
construction of an index (. . .). A multi-dimensional index allows for the understanding of
changes over time and across countries. Different indexes are proposed in the literature that
consider different dimensions and indicators (Sarma, 2012; Camara and Tuesta, 2014; Mialou
and Massara, 2017; Park and Mercado, 2015, 2018).
This paper extends the existing literature on financial inclusion by focussing on northern
and southern Mediterranean countries that are members of the Union for the Mediterranean
(UfM) [2]. First, we construct a new financial inclusion index based on a definition covering
three dimensions (availability, access and use) of financial services and using data from the
International Monetary Fund’s Financial Access Survey (FAS) and Global Payment System
Survey (GPSS), for a sample of 35 country members of the UfM from 2010 to 2018. Then, we
assess the cross-country variations in the index and analyse trends over time. Finally, the
paper identifies the relevant factors explaining the cross-country differences in financial
inclusion levels for the sample of UfM countries and this using a set of macroeconomic and
country-specific factors (banking conditions, institutional quality and social factors).
This paper contributes to the literature in several ways. First, we provide a new measure
of financial inclusion using a three-dimensional index: availability, access and use, for which
weights are assigned using principal components analysis (PCA). Our measure employs data
available for the UfM sample by combining data from different sources in order to include
most indicators considered in the literature. We do so because the majority of studies only use
single measures (number of bank branches, ownership of a bank account, ratio of credits or
deposits to gross domestic product [GDP], etc.). Second, by focussing on UfM countries, the
current study covers a region that includes both large developed and small developing
economies that are connected via financial and trade ties. It is noteworthy that previous
studies generally give global evidence from an international sample with little or no economic
ties (. . .). Third, splitting the sample by country income groups, this paper presents a more
comprehensive representation of the cross-country variation in financial inclusion levels
between high-income and middle-income economies in this region.
Our empirical results suggest that high-income countries, such as Malta and Portugal, score
highly during the period of investigation. The bottom of the ranking includes middle-income
economies, like Albania, Tunisia, Morocco and Egypt. Furthermore, we find that amongst
country-level factors, per capita income, rule of law, financial freedom and age dependency ratio
significantly affect the level of financial inclusion for UfM countries. Specifically, higher per capita
income, rule of law, and financial freedom significantly increase financial inclusion; while higher
age dependency ratio significantly reduces financial inclusion. When splitting the sample by
income level, factors differently affect financial inclusion for high- and middle-income countries.
The remainder of the paper is structured as follows. Section 2 presents the literature
review. Section 3 presents the sample and data. Section 4 discusses the methodology adopted
to construct the financial inclusion index and to examine its determinants. Section 5 presents
the results and section 6 concludes.
Literature review A multi-
The literature on the determinants of financial inclusion has examined both the individual dimensional
(Zins and Weill, 2016) [3] and country-level characteristics, however the research remains
limited. Moreover, the measurement of financial inclusion varies across studies. While
index and
previous studies use single measures for financial inclusion (e.g. number of bank branches, determinants
ownership of a bank account, ratio of credits or deposits to GDP etc.), the indexing approach
has been proposed to capture the different dimensions of financial inclusion.
Beck et al. (2007) were the first to explore the determinants of the cross-country variation
in financial inclusion. Using single indicators, they find that factors such as the economic
development level, the quality of the institutional environment, the strength of the
informational environment of credit markets, and the development of the physical banking
infrastructure all have a positive impact on financial inclusion. Using single measures, other
studies have provided further evidence on the importance of macroeconomic conditions,
social development, technological advancements, and institutional quality for enhancing
financial inclusion (Ardic et al., 2011; Honohan, 2008; Rojas-Suarez, 2010; Demirg€ uç-Kunt and
Klapper, 2013; Allen et al., 2016).
Kabakova and Plaksenkov (2018) suggest that the development of financial inclusion does
not depend only on the development of financial markets, but also on the entire ecosystem,
including economic, political, social and technological spheres. They examine financial
inclusion, measured by account ownership for 43 developing and low-income economies,
considering four dimensions of the ecosystem: socio-demographic, technological, economical
and political, constructed as indexes from a set of indicators. Kabakova and Plaksenkov find
that the absence of social and economic factors, even in the presence of political and
technological development, affects financial exclusion. Moreover, they argue that it is
important to consider at least two out of four spheres in the ecosystem in order to develop
financial inclusion – social and economical, economical and political or social, digital and
political.
Park and Mercado (2018) consider indicators from the World Bank Global Findex
Surveys (2014) which are related to the availability and use of dimensions to measure
financial inclusion for 151 countries. They find that per capita income, rule of law,
dependency ratio, education and literacy are important factors that explain a country’s
financial inclusion level.
Sha’ban et al. (2019) study the determinants of financial inclusion across 95 countries from
2004 to 2015. They construct a financial inclusion index, using two different approaches
covering the dimensions of use, access and depth. Their results suggest that banking
conditions, technology and infrastructure, macroeconomic factors, institutional quality and
social variables explain the variation in financial inclusion levels across countries.
It is important to note that the improvement of bank performance may enhance financial
inclusion. Butt et al. (2022) suggest that reputational risk affect the connection between
financial risks and the performance of banks. Shahzadi et al. (2021) find that Islamic corporate
governance reinforces the link between market share and the Profit Distribution
Management practices. Ramos Meza et al. (2021) show that the loan guarantee, financial
performances and CSR have a negative and significant impact on the long-term zero-debts.
Altaf et al. (2021) suggest that corporate governance affects significantly the operational risk
management practices in commercial banks of Pakistan. Customers’ behaviour may also
affect significantly the financial inclusion (Shabbir, 2020; Shabbir and Zeb, 2020). Said et al.
(2021) show that 54% customers of conventional banking intend to convert their accounts
towards Islamic banks.
Others studies focuses on the relationship between corporate social responsibility and
financial performance (Ehsan et al., 2021; Shabbir and Wisdom, 2020; Shabbir et al., 2020).
This connection may have significant effect on the evolution of financial inclusion.
JEAS Sample and data
Sample
Our sample includes all the country members of the UfM. The UfM includes the 28 European
Member States and 15 Southern Mediterranean, African and Middle Eastern countries,
namely Albania, Algeria, Bosnia-Herzegovina, Egypt, Israel, Jordan, Lebanon, Mauritania,
Monaco, Montenegro, Morocco, Palestine, Syria, Tunisia and Turkey. Because data is
missing for some countries over the period of investigation, our final sample includes 35
economies that are classified into two income groups (high-income and middle-income) [4].

Data for the construction of the financial inclusion index

To construct the financial inclusion index, we collect data for the period 2010 to 2018 using
supply-side annual data from the IMF’s Financial Access Survey (FAS 2019) for the
availability and use dimensions; and data from the Global Payment System Survey (GPSS)
for the access dimension [5].
For the availability dimension, we consider demographic and geographic penetration of
the banking system using four indicators: the number of branches and the number of ATMs,
both per 100,000 adults and per 1,000 Km2. The access dimension is captured by two
indicators: the number of deposit transaction accounts and the number of debit cards in
circulation, both indicators are measured per 100,000 adults. To evaluate the extent of the use
of financial products by individuals, we employ the following indicators: Domestic credit
provided by financial sector (% of GDP), outstanding deposits with commercial banks (% of
GDP), and outstanding loans with commercial banks (% of GDP). Appendix 1 summarises
the indicators considered for the construction of the financial inclusion index and the data
sources.

Data for the determinants of financial inclusion

To examine the determinants of financial inclusion, we use data from several sources for the
period 2010–2018. The data on macroeconomic and social factors are obtained from the
World Bank Development Indicators (WDI) and the IMF. Banking conditions’ data is drawn
from the Global Financial Development Database (GFDD) and Heritage Foundation. Data on
governance quality are drawn from the World Governance Indicators and the Centre for
Systemic Peace.
Appendix 2 summarises the variables and data sources.

Methodology
Construction of the financial inclusion index
The lack of a harmonised measure to define financial inclusion challenges the understanding
of the phenomenon. When measuring financial inclusion, accounting for its multi-
dimensionality in an index is important for several reasons. First, a measure that
aggregates several indicators into a single index allows summarising the complex nature
of financial inclusion and permits the study of its evolution. Second, a multi-dimensional
index is a better means for extracting the relevant information and assessing the relationship
between financial inclusion and other macroeconomic variables. Third, information by
dimension helps better understand financial inclusion and can be used as a tool to set up and
evaluate policies.
In this paper, we construct a multi-dimensional financial inclusion index considering three
dimensions: availability, access and use. Unlike Sarma (2008, 2015, 2012) [6] who uses a non-
parametric method to construct the index by assigning equal weights to all indicators and
dimensions, we apply a parametric approach (PCA) that limits the problem of assigning A multi-
exogenous or equal weights to components (Camara and Tuesta, 2014) [7]. dimensional
First, each indicator is calculated by dimension as:
index and
Xi  mi determinants
Xi;d ¼ (1)
Mi  mi

where X I is the actual value of indicator i, mi and Mi are respectively the lower and the upper
limits on the value of indicator i and X i; d is the standardised value of indicator i of
dimension d.
PCA is employed in order to aggregate each indicator to a dimension index. Following
Camara and Tuesta (2014), we denote λj (j 5 1; . . .; p) as the j-th eigenvalue, subscript j refers
to the number of principal components that also coincides with the number of indicators. We
suppose that λ1>λ2> . . . >λp and denote Pk (k 5 1, . . ., p) as the k-th principal component. We
compute the estimator of each dimension index Yid using the weighted averages:
P
p
d
λdj P ki
j;k¼1
Yid ¼ (2)
P
p
λdj
j;k¼1

where Pk 5 X.λj; λj is the variance of the kth principal component (weight) and X represents
the indicators matrix.
The weights assigned to each component are decreasing, so that the highest proportion of
the variation in each dimension is given by the first principal component and so on. Once, we
construct the sub-indexes, we apply a second stage of PCA to compute the aggregate
financial inclusion index. Thus, we obtain the following estimator for the financial
inclusion index:
Pp
λj P uki
j¼1
FII i ¼ p (3)
P
λj
j¼1

where FIIi is the aggregate financial inclusion index for country i. Pk 5 X.λj; λj is the variance
of the kth principal component (weight) and X represents the dimensions matrix.

Financial inclusion index ¼ w1 3 Availability index þ w2 3 Access index

(4)
þ w3 3 Use index

where w is the weight assigned to a dimensional index in the PCA.

Determinants of financial inclusion

To investigate the relevant factors explaining the cross-country differences in financial
inclusion levels, we use a comprehensive set of variables, macroeconomic and social factors
as well as factors related to banking conditions and governance quality.
The governance quality is assessed through two variables. First, we consider Polity, an
index which reflects the extent of democracy in the country. A high level of democracy
favours financial inclusion through established institutions and better policies (Claessens and
JEAS Perotti, 2007; Deininger and Squire, 1998). Second, we use Rule of law as we argue that good
governance and high institutional quality should increase financial inclusion, since it
improves enforcement of financial contracts (Honohan, 2008; Rojas-Suarez, 2010; Park and
Mercado, 2015).
We add two factors that reflect a country’s banking system conditions. To capture the
extent of an economy’s financial freedom, we use, Financial freedom, an indicator of banking
efficiency, independence from government control and interference in the financial sector. We
expect a low government control to encourage financial inclusion through ease of access to
financial services (Beck et al., 2007; Rojas-Suarez, 2010). We also consider, Bank concentration,
calculated as the share of assets of the three largest commercial banks, as a share of total
commercial banking assets. The literature predicts a negative relationship between bank
concentration and financial inclusion. A high level of concentration in the banking sector can be
associated with low financial inclusion, as banks are less incited (low competition) to assess the
quality of potential borrowers in the provision of credits (Demirg€ uç-Kunt and Klapper, 2013).
We use GDP per capita as a measure of country income (in logarithm form). We argue this
variable should be positively associated with the level of financial inclusion, as high-income
countries have more inclusive financial systems (Ardic et al., 2011; Owen and Pereira, 2018;
Sha’ban et al., 2019). The second variable to assess the macroeconomic environment is
Inflation. Inflation may negatively affect both the demand for and supply of financial services
because of economy uncertainty (Rojas-Suarez, 2010; Allen et al., 2016).
Our proxy for the social factor is age dependency ratio, which is the percentage of
dependants to working-age population. Higher age dependency ratio should reduce financial
inclusion as a larger segment of the population do not have access to financial services,
because they do not earn income (too young or above the retirement age).
The following specification is estimated through the GLS method in a panel data
regression [8].
FIIi;t ¼ α þ β1 Polityi;t−1 þ β2 Rule of lawi;t−1 þ β3 Financial freedomi;t−1
þ β4 Bank concentrationi;t−1 þ β5 GDP per capitai;t−1 þ β6 Inflationi;t−1
þ β7 Age dependency þ μi;t (5)

FII it is the country’s financial inclusion index.

μi,t is the error term

Results
Summary statistics
Table 1 reports the descriptive statistics for the indicators used to construct the financial
inclusion index, as well as the variables used in the regression analysis. As for indicators of
financial inclusion, the mean number of branches and ATMs across the sample of UfM
countries is around 28 and 75 per 100,000 adults, respectively. Bank deposits and loans
represent 64.35 and 67.69% of GDP, respectively, whereas domestic credit provided by
financial sector is around 118%.
The mean of the financial inclusion index is 0.35 with a minimum of 0.071 for Egypt and a
maximum of 0.678 for Luxembourg.

Financial inclusion index time trend

Table 2 reports the normalised weights assigned to dimensions’ indicators (first stage PCA),
as well as the weight of each dimension in the global index (second stage PCA). The index and
Variable Obs Mean Std. Dev Min Max
A multi-
dimensional
Panel A: Financial inclusion indicators index and
ATMs (per 100,000 adults) 273 75.09 39.04 10.94 194.63
ATMs (per 1,000 Km2) 273 96.40 111.98 4.79 675 determinants
Commercial bank branches (per 100,000 adults) 273 27.99 15.82 1.43 91.9
Commercial bank branches (per 1,000 Km2) 273 37.09 60.96 0.22 459.38
Domestic credit provided by financial sector (% of GDP) 273 118.27 59.29 32.84 317.41
Outstanding loans with commercial banks (% of GDP) 273 67.69 35.00 19.55 197.45
Outstanding deposits with commercial banks (% of GDP) 273 64.35 28.22 13.58 162.36
Number of debit cards in circulation par 1000,000 adults 273 8924.4 4051.3 5060.1 16499.1
Number of deposit accounts par 1000,000 adults 273 15722.8 9607.4 7821.7 98001.3
Financial inclusion index 273 0.351 0.129 0.071 0.678
Panel B: Determinants
Polity 272 8.02 4.05 6 10
Rule of Law 280 4.31 0.26 3.38 4.61
Financial Freedom 280 4.17 0.22 3.40 4.50
Bank concentration 280 0.66 0.16 0.32 0.98
GDP per Capita 280 9.90 0.91 7.80 11.69
Inflation 280 0.02 0.03 0.02 0.30
Age dependency ratio 272 0.51 0.06 0.38 0.70
Note(s): The table reports descriptive statistics. Panel A reports summary statistics for indicators used to
construct the financial inclusion index and for variables used in the regression analysis for the full sample of 35 Table 1.
countries for the period 2010–18 Descriptive statistics

Normalised
Indices Indicators weights

Availability  Commercial bank branches (per 100,000 adults) 0.404

 ATMs (per 100,000 adults) 0.250
 Commercial bank branches (per 1,000 Km2) 0.200
2
 ATMs (per 1,000 Km ) 0.147
Access  Number of deposit transaction accounts 0.282
 Number of debit cards in circulation 0.718
Use  Domestic credit provided by financial sector (% of GDP) 0.438
 Outstanding loans with commercial banks (% of GDP) 0.316
 Outstanding deposits with commercial banks (% of GDP) 0.245
Financial Inclusion Index  Availability 0.206
 Access 0.539 Table 2.
 Use 0.255 Composition of the
Note(s): The table reports the weights, calculated through a two-stage principal component analysis, of financial
dimension indicators and the three dimensions to construct the financial inclusion index inclusion index

each sub-index take values between 0 and 1, where 1 suggests a very high level of financial
inclusion and 0 is associated with the lowest level. For the Availability dimension, it appears
that the indicator “Branches of commercial banks per 100,000 adults” is the most important,
as it has the largest weight (around 40%), followed by “(ATMs) per 100,000 adults” (around
25%). The indicators of ATM and bank branches per 100,000 adults have higher weights
than the same indicators per Km2. This is consistent with Camara and Tuesta (2014) who
argue that the ratios associated with population contain more information than those
associated with location. For Access, the indicator “Number of debit cards” is highly weighted
(72%) compared to “Number of deposit accounts” (28%). Finally, for the use dimension, the
two indicators “Domestic credit to GDP” and “Outstanding loans with commercial banks”
JEAS appear to be more important than “Outstanding deposits” for the entire period, presenting the
weights of 44% and 31% respectively. It seems that the credit indicators contain more
information than the deposits.
The results show that UfM countries are at very different levels of availability, access and
use. In terms of income groups, high income countries have higher levels of availability,
access and use indexes than countries in middle income groups. We note that Turkey is the
only upper-middle income country ranked in the top five over time for the access index. Israel
is the only high-income country presenting a very low access index.
Looking at the composition of the financial inclusion index, we find that access is
the most important dimension, with a weight of 54%, followed by use (25%) and
availability (21%).
Figure 1 shows the time trend of the financial inclusion index for the period 2010–2018. A
downward trend is observed as more pronounced since 2015. This declining trend is noted
especially for high income countries, whilst middle to low-countries experienced a steadily
increasing index, with a slight drop in 2014 and a quasi stability until 2018. The figure shows
a high level of financial inclusion for high income countries, compared to the middle-income
group. However, the increase in financial inclusion over time is more pronounced in middle
income countries. The downward trend for high income countries may be explained by
several factors, mainly the saturation of demand for conventional financial products,
structural changes after the 2012 sovereign debt financial crisis, the decrease of GDP growth
driven by demographic ageing, the increasing use of digital banking and the rapid evolution
of digital financial products [9, 10].
Figure 2 shows a decline in the three dimensions of financial inclusion for the full sample.
The decrease is more pronounced for the availability [11] and use dimensions, however, for
the access dimension, we note a slight increase until 2014 and a quasi stability thereafter.
When looking at the evolution of the dimensions over the period, by splitting the sample by
income group, it appears that the high and middle income groups did not register the same
trend. For middle income countries, the graph shows a significant increase in the use index, a
decrease of the access index from 2014 followed by stability until 2018 and a more stable

Financial
inclusion Index
0.5

0.4

0.3

0.2

0.1

0
2010 2011 2012 2013 2014 2015 2016 2017 2018

Figure 1. Full sample High income Middle income

Financial inclusion
index trend over time
by income group
Note(s): The graph plots the trend of financial inclusion index overall and by income region
over the period 2010-18
 Full sample High income countries Middle income countries
0.5 0.6 0.3

0.5
0.4
0.4 0.2
0.3
0.3
0.2
0.2 0.1
0.1 0.1

0 0 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018

Availability index Use index Availability index Use index Availability index Use index

Access index FI index Access index FI index Access index FI index

Note(s): The graph plots the trend of financial inclusion by dimension (availability, access and use) over the period 2010-18, considering
two income groups: High and middle income countries
dimensional
index and
determinants

Figure 2.
A multi-

index trend over time

by dimension and
income group
Financial inclusion
JEAS trend for the availability indicators. For high income countries, the decline in the financial
inclusion index is explained by the downward trend of the indicators, which are mostly
related to the banking sector. The trend of financial inclusion indicators for the period
2010–2018 is presented in Appendix 4. Panels A, B and C present the evolution of availability,
use and access indicators, respectively. We note a clear difference in the level and trend of the
different indicators of financial inclusion between the two groups of countries. The European
Banking Federation draws attention to the contraction of the banking sector of the EU28
countries since the financial crisis and especially in 2015 compared to 2014 (reduction in
number of bank branches etc.) [12]. This trend has been accentuated by the increasing use of
digital banking, as more than half of EU individuals, 54%, used Internet banking in 2018, up
from 25% in 2007.
Looking at the financial inclusion trend for each country, we note that the downward trend
is not registered for all high income countries, but essentially for Greece (since 2014), France
(2013) and Spain. For the majority of high income countries, the financial inclusion index is
quasi stable or slightly increasing (Sweden, Portugal and Poland). Middle income
countries experiencing a considerable increase in financial inclusion are Turkey, Tunisia
and Morocco.
Appendix 3 reports the ranking of the 35 UfM countries according to the 2018 financial
inclusion index. The ranking shows that high income countries are in the top ten during all
the period. In particular, Portugal and Malta perform the best, ranked in the top five for the
whole period. This finding confirms the empirical literature, arguing that developed countries
have more inclusive financial systems. It is important to note that, amongst middle income
countries, Turkey and Bulgaria are well ranked compared to high income countries. Looking
at the lowest six ranked countries, we note that, except Israel, all are middle income countries
including Albania, Tunisia, Morocco, Jordan and Egypt. Egypt has the lowest index for all the
period amongst UfM countries.

Determinants of financial inclusion

Table 3 reports the estimates for equation (5), using panel data to examine the dependence
between financial inclusion and country-level factors for the entire sample for the period
2010–2018. Different specifications are employed to test the robustness of the results. In
specification (1), we test governance quality, including Polity and Rule of Law. In
specification (2), we include banking conditions associated with Financial Freedom and Bank
concentration. In specification (3), we incorporate macroeconomic factors measured by GDP
per capita and inflation; In specification (4), we add the socioeconomic factor related to Age
dependency ratio (see Table 4).
The results related to model 1 show a positive and significant relationship only for Rule of
Law, suggesting that stronger rule of law, including stringent regulation and enforcement of
financial contracts, enhances customers’ confidence in financial institutions, which
contributes to promoting financial inclusion. This result confirms the findings of Park and
Mercado (2015).
When we add banking conditions in model 2, Rule of law loses its significance. Amongst
banking conditions’ variables, Financial Freedom has a positive and significant effect on
financial inclusion. Hence, efficient and independent banks are likely to offer more convenient
and inclusive financial services (Rojas-Suarez, 2010; Sha’ban et al., 2019). However, no effect
of bank concentration on financial inclusion has been noted. Financial freedom seems to be a
main determinant of financial inclusion, as it keeps its significance even when introducing
other variables.
Turning to the macroeconomic factors (model 3), GDP per capita is found to be positively
associated with financial inclusion, indicating that high income countries have more inclusive
 Model (1) Model (2) Model (3) Model (4)
A multi-
dimensional
Polity t-1 0.00202 0.00085 0.00044 0.00032 index and
(1.4) (0.64) (0.35) (0.26)
Rule of law t-1 0.13063*** 0.05546 determinants
(3.49) (1.49)
Financial Freedom t-1 0.16705*** 0.15596*** 0.16833***
(6.08) (5.59) (5.91)
Bank concentration t-1 0.04311 0.03552 0.02999
(1.5) (1.25) (1.05)
GDP per capita t-1 0.03230** 0.02553*
(2.14) (1.66)
Inflation t-1 0.12258 0.06624
(1.54) 0.82
Age dependency ratio t-1 0.22936***
(2.77)
Constant 0.19308 0.54663*** 0.59232*** 0.46434***
(1.22) (3.37) (3.84) (2.84)
Observations 248 248 248 241
Adjusted R-Squared 0.2663 0.1873 0.2892 0.2801
Note(s): The table reports the regression findings on the relationship between financial inclusion and country-
level factors. The dependent variable is financial inclusion index. The independent variables (lagged by one Table 3.
year) are governance quality, banking conditions, macroeconomic and socioeconomic factors. The sample Determinants of the
includes 35 UfM countries from 2010 to 2018. The t-statistics are reported in parentheses. *, **, *** represent financial inclusion
significance at 10, 5 and 1 percent levels, respectively index (Full sample)

financial systems Sha’ban et al. (2019) and Park and Mercado (2018). However, there is no
significant effect of inflation on financial inclusion. GDP per capita is found to be a main
determinant, as it is significant for models 3 and 4.
Regarding socioeconomic factors, we find that higher age dependency ratio significantly
reduces financial inclusion, suggesting that countries with a high proportion of people that do
not have any income, due to being too old or too young, are expected to have a low level of
financial inclusion (Park and Mercado, 2015). This shows that there is large potential to
enhance financial inclusion in these population segments.
Furthermore, we investigate whether the relationship between financial inclusion and the
country-level characteristics varies according to the country’s income level. Hence, we split
the sample into high-income countries and middle-income countries. The results are
displayed in table (4). Focussing on governance quality, the coefficient on Rule of law
remains positive and statistically significant for high-income countries. However, it is
negatively associated with financial inclusion for the middle income group. The relationship
between financial freedom and financial inclusion remains positive and significant for the
two income groups. However, GDP per capita only retains its significance for middle-income
countries. Furthermore, we find that Inflation positively and significantly influences
financial inclusion only in middle income countries. This result is counter-intuitive, as
empirical studies find a negative relation. However, we think that for low and middle income
countries, despite the instability of macroeconomic environment (high level of inflation),
efforts are being made to increase financial inclusion. Finally, the relationship between Age
dependency ratio and financial inclusion is negative and significant only for high income
countries.
It is important to note that whilst models (3) and (4) well explain the relationship for middle
income group, the Adjusted R-Squared is around 67%.
 JEAS

Table 4.

income level
index by country
financial inclusion
Determinants of the
High income countries Middle income countries
Model (1) Model (2) Model (3) Model (4) Model (1) Model (2) Model (3) Model (4)

Polityt-1 0.03631 0.03652 0.03769* 0.03003 0.00100 0.00008 0.00076 0.00077

(1.64) (1.61) (1.69) (1.29) (0.9) (0.09) (0.78) (0.78)
Rule of lawt-1 0.26631*** 0.16971*** 0.09209** 0.05348
(4.59) (2.59) (2.22) (1.54)
Financial Freedomt-1 0.10941*** 0.14586*** 0.16004*** 0.28162*** 0.22430*** 0.22103***
(3.25) (4.59) (4.9) (4.71) (4.49) (4.38)
Bank concentrationt-1 0.04320 0.02623 0.02797 0.10703** 0.16714*** 0.16179**
(1.34) (0.8) (0.85) (2.1) (2.98) (2.44)
GDP per capitat-1 0.00451 0.00656 0.0699** 0.07210**
(0.21) (0.3) (2.43) (2.49)
Inflationt-1 0.11411 0.05831 0.23014*** 0.23540***
(0.85) (0.4) (2.63) (2.63)
Age dependency ratiot-1 0.26148** 0.03446
(2.52) (0.22)
Constant 1.12869 1.13717 0.61245** 0.48493 0.59139*** 0.61406** 1.18108*** 1.17207***
(3.44) (3.49) (2.04) (1.55) (3.65) (2.11) (4.09) (3.88)
Observations 190 190 190 183 58 58 58 58
Adjusted R-Squared 0.1798 0.1134 0.0715 0.045 0.1566 0.2149 0.6714 0.6787
Note(s): The table reports the regression findings on the relationship between financial inclusion and country-level factors for each income group: high income countries
and middle income countries. The dependent variable is financial inclusion index. The independent variables (lagged by one year) are governance quality, banking
conditions, macroeconomic and socioeconomic factors. The sample includes 35 UfM countries from 2010 to 2018. The t-statistics are reported in parentheses. *, **, ***
represent significance at 10, 5 and 1 percent levels, respectively
Conclusion A multi-
This paper proposes a multi-dimensional index that considers three dimensions: availability, dimensional
access and use to measure financial inclusion for 35 countries members of the UfM. First, we
identify the weights assigned to each dimension and construct the overall index, using a two-
index and
stage PCA. Our results suggest that access is the most important dimension as it presents a determinants
significant weight. UfM countries present different levels of availability, access and use. In
terms of income groups, high-income countries have high levels of financial inclusion and
middle-income countries are still lagging behind. However, it is interesting to note that the
trend of the financial inclusion index varies between the two groups. While middle-income
countries experienced a steadily increasing index for the period 2010–2018, a downward
trend is observed for the high-income group, which was more pronounced since 2015. This
may be explained by several factors, mainly the saturation of demand for conventional
financial products, the structural changes in the banking sector after the 2012 financial crisis
and, essentially, the increased availability, access and use of digital banking.
Second, our paper investigates the determinants of financial inclusion level for the UfM
countries. Our findings suggest that, amongst the country characteristics, per capita income,
rule of law, and demographic structure significantly influence the level of financial inclusion.
Specifically, higher per capita income, rule of law, and financial freedom significantly increase
financial inclusion; whilst higher age dependency ratio significantly reduces financial inclusion.
When splitting the sample by income level, the results vary between the two groups, suggesting
that factors affecting financial inclusion depend on the level of financial inclusion in a country.
The findings have several implications. First, they highlight the importance of country
income-level oriented policies and strategy for financial inclusion. Studies considering global
samples could not identify specific factors affecting the different groups of countries. Second,
they emphasise the importance of having access to a wide variety of financial products at
reasonable costs to boost financial inclusion. Third, the rapid evolution of financial inclusion
in developed countries suggests consideration of indicators that reflect technological aspects
and the use of digital financial products in order to better assess the level of financial inclusion
(Ayadi and Shaban, 2020). Finally, policy-makers in low- and middle-income economies should
consider the importance of digital financial inclusion, which is substituting the role to
traditional banking system, to close the gap and accelerate its development. This suggests the
need to readjust the traditional definition of financial inclusion to include digital availability,
access and use of financial services as means of defining and measuring financial inclusion.
Our study has some limitations. The financial inclusion index should be constructed based
on digital finance. Indeed, this area is under development, especially in the UfM countries. In
our case, data on digital finance is missing for the majority of UfM countries over the period of
investigation. Furthermore, indicators related to technology environment should be
considered to investigate the relevant factors explaining the cross-country differences in
financial inclusion levels.

About EMNES
The Euro-Mediterranean Network for Economic Studies (EMNES) is a network of research
institutions and think tanks working on socio-economics policy in the Euro-Mediterranean.
EMNES is coordinated by the Euro-Mediterranean Economists Association (EMEA).
The research conducted by EMNES Researchers, Associates and Fellows aims to design
sound and innovative socio-economic models that are inclusive, sustainable and employment
creative, to devise new models for regional integration and to provide policy
recommendations towards this goal.
EMNES research agenda is organised around the following mutually reinforcing and
interconnected themes led by EMNES researchers, associates and fellows:
JEAS (1) Governance, institutions and institutional reforms;
(2) Macroeconomic policies and employment creation;
(3) Private sector, micro, small and medium –sized enterprises development,
entrepreneurship and social business;
(4) Digital economy;
(5) Healthcare policy;
(6) Human capital development, education, innovation, skill mismatch and migration;
(7) Labour markets, employment and employability;
(8) Finance, financial inclusion and the real economy;
(9) Sustainable development;
(10) Regional integration;
(11) Euro-Mediterranean economic partnership;
(12) Scenarios analysis and foresight.
EMNES performs research activities, disseminated through series of internal and external
publications (studies, working papers, policy papers, policy-graphics and books) and the
organisation of annual conferences, and policy workshop meetings and online
webinars to bring together leading researchers, policy makers and representatives of the
civil society to discuss and debate optimal policies for the future of the region.
EMNES research and outputs are underpinned on the four fundamental principles:
Independence, Scientific Excellence, Policy Relevance and Deep Knowledge of
Euro-Mediterranean Affairs.
EMNES acknowledges the financial assistance of the European Union within the context
of the EU project “Support to economic research, studies and dialogue of the Euro-
Mediterranean Partnership” under contract number ENPI/2014/354–488 (2014–2019).
Disclaimer: The contents of EMNES’ documents are the sole responsibility of the
authors and can under no circumstances be regarded as reflecting the position of their
institutions.

Notes
1. Several studies, such as Honohan (2008) and Demirguc-Kunt and Klapper (2012a, b) amongst others,
reported a strong link between financial access to banking services and economic development and
growth.
2. The UfM includes the 28 European Member States and 15 Southern Mediterranean, African and
Middle Eastern countries (Albania, Algeria, Bosnia-Herzegovina, Egypt, Israel, Jordan, Lebanon,
Mauritania, Monaco, Montenegro, Morocco, Palestine, Syria, Tunisia and Turkey).
3. Zins and Weill (2016) investigate the determinants of financial inclusion in Africa. They find that
individual characteristics (such as being a man, richer, more educated and older to a certain extent)
favour financial inclusion with a higher influence of education and income.
4. The middle-income group includes upper-middle and lower-middle income countries.
5. GPSS data is not updated when the study is conducted; the access data is limited to 2015 and
maintained unchanged until 2018.
6. The non-parametric approach assumes that all dimensions have the same impact on financial
inclusion. There is evidence that indexes are sensitive to subjective weight assignment.
 7. Camara and Tuesta (2014) apply a two-stage principal components methodology to estimate the degree A multi-
of financial inclusion as an indexing strategy. Since the sub-indexes contain highly inter-correlated
indicators, they estimate the sub-indexes first, rather than estimating the overall index directly by dimensional
picking all the indicators at the same time. In the second stage, they estimate the dimension weights index and
and the overall financial inclusion index by using the dimensions as explanatory variables. determinants
8. The explanatory variables are lagged by one year to allow for potential endogeneity issues. The
independent variables – Rule of Law, Financial Freedom and GDP per Capita – are measured as the
natural logarithm.
9. Digital and mobile banking are not considered in the financial inclusion index calculation because
data is not available.
10. Findex Database: Measuring Financial Inclusion and the Fintech Revolution 2017.
11. Cihak and Sahay (2016) suggest that limiting the growth rate in the numbers of bank branches at an
optimal level maintains stability in the macroeconomic environment.
12. European Banking Federation “Banking in Europe; the 2019 Facts & Figures”

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Corresponding author
Soumaya Ben Khelifa can be contacted at: soumaiya_b@yahoo.fr
JEAS Appendix 1

Dimension Indicators Source

Availability Automated teller machines (ATMs) (per 100,000 adults) FAS

Commercial bank branches (per 100,000 adults)
2
ATMs (per 1,000 Km )
Commercial bank branches (per 1,000 Km2)
Access Number of deposit transaction accounts GPSS
Number of debit cards in circulation
Use  Domestic credit provided by financial sector (% of GDP) FAS
 Outstanding deposits with commercial banks (% of GDP)
Table A1.
Financial inclusion  Outstanding loans with commercial banks (% of GDP)
index composition Note(s): The table summarises the indicators used to construct the financial inclusion index and data sources

Appendix 2

Variables Description Source

Financial A multi-dimensional financial inclusion Authors calculation

inclusion index index for each country. Values are ranging
from 0 to 1
Polity Polity 2 score measures democratic practice Governance Centre for Systemic
on a scale from 10 to þ10 with higher quality Peace
values indicating greater
institutionalisation of democratic
procedures
Rule of law Captures perceptions of the extent to which Governance World Governance
agents have confidence in, and abide by, the quality Indicators
rules of society, in particular the quality of
contract enforcement, property rights, the
police and the courts, as well as the
likelihood of crime and violence
Financial An indicator of banking efficiency, as well as Banking The Heritage
Freedom a measure of independence from conditions Foundation
government control and interference in the
financial sector. It ranges between 0 and 100
Bank Assets of three largest commercial banks as Banking GFDD
concentration a share of total commercial banking assets conditions
GDP Per Capita The log value of real GDP per capita (PPP in Macro- World Bank, World
constant US$) economic Development Indicators
(WDI)
Inflation The year-on-year change in consumer price Macro- IMF, International
index economic Financial Statistics and
data files
Table A2. Age dependency The percentage of dependants to working- Social factors World Bank, WDI
Data definition and ratio age population
sources Note(s): The table summarises the variables used in the regression analysis and data sources
Appendix 3 A multi-
dimensional
Rank Country Financial inclusion index 2018
index and
determinants
1 Luxembourg 0.678*
2 Malta 0.611*
3 Portugal 0.604
4 Belgium 0.546*
5 Netherlands 0.535
6 Croatia, Rep. of 0.510
7 Denmark 0.465
8 Turkey 0.444
9 Germany 0.424*
10 United Kingdom 0.418*
11 Finland 0.410
12 Cyprus 0.395
13 Sweden 0.388
14 Slovenia 0.378
15 Estonia 0.364
16 Austria 0.362
17 Italy 0.359
18 Bulgaria 0.346
19 Spain 0.331
20 Ireland 0.330
21 Lithuania 0.328
22 Greece 0.307
23 Czech Rep 0.302
24 France 0.298
25 Slovak Rep 0.294
26 Poland 0.291
27 Latvia 0.268
28 Hungary 0.241
29 Romania 0.201
30 Morocco 0.195
31 Jordan 0.174
32 Israel 0.169
33 Tunisia 0.168
34 Albania 0.123
35 Egypt 0.102 Table A3.
Note(s): The table reports the ranking of the 35 UfM countries of the sample, based on the 2018 score of the Country ranking by
financial inclusion index. Countries are ranked from the most financially inclusive to the least. * values reported financial
represent average scores for the period 2010–2018 due to missing data needed to calculate the scores for 2018 inclusion index
 JEAS

Figure A1.
Availability indicators
Appendix 4

Full sample High income countries Middle income countries

120.00 60.00
120.00
80.00 40.00
80.00

40.00 40.00 20.00

0.00
0.00 2010 2011 2012 2013 2014 2015 2016 2017 2018 0.00
2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018
Automated Teller Machines (ATMs) per 1,000 km2
Trend over time of financial inclusion indicators

Automated Teller Machines (ATMs) per 1,000 km2 Automated Teller Machines (ATMs) per 1,000 km2
Automated Teller Machines (ATMs) per 100,000 adults
Automated Teller Machines (ATMs) per 100,000 adults Automated Teller Machines (ATMs) per 100,000 adults
Branches of commercial banks per 1,000 km2 Branches of commercial banks per 1,000 km2 Branches of commercial banks per 1,000 km2
Branches of commercial banks per 100,000 adults Branches of commercial banks per 100,000 adults Branches of commercial banks per 100,000 adults

Note(s): The graph plots the trend of financial inclusion indicators for the period 2010-18 by dimension availability, use and access in
Figure A1, A2 and A3, respectively
 Full sample High income countries Middle income countries
160.00 160.00 100.00

80.00
120.00 120.00

60.00
80.00 80.00
40.00
40.00 40.00
20.00

0.00 0.00 0.00

2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018

Outstanding deposits with commercial banks (% of GDP) Outstanding deposits with commercial banks (% of GDP) Outstanding deposits with commercial banks (% of GDP)
Outstanding loans with commercial banks (% of GDP) Outstanding loans with commercial banks (% of GDP) Outstanding loans with commercial banks (% of GDP)
DomesƟc credit provided by financial sector (% of GDP) DomesƟc credit provided by financial sector (% of GDP) DomesƟc credit provided by financial sector (% of GDP)
dimensional
index and
determinants

Figure A2.
A multi-

Use indicators
 JEAS

Figure A3.
Access indicators
Full sample High income countries Middle income countries
200000 240000 200000

160000 200000 160000

160000
120000 120000
120000
80000 80000
80000
40000 40000
40000
0 0 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018

Number of debit cards in circulaƟon per 100,000 adults Number of debit cards in circulaƟon per 100,000 adults Number of debit cards in circulaƟon per 100,000 adults

Number of deposit transacƟon accounts per 100,000 adults Number of deposit transacƟon accounts per 100,000 adults Number of deposit transacƟon accounts per 100,000 adults