Accurately assessing financial inclusion levels is fundamental for guiding inclusion efforts, but doing so on a large scale remains an issue, in spite of a growing supply of data and resources. A new composite index from the International Monetary Fund aims to change this. The new tool incorporates multiple inclusion dimensions and advanced methodologies, creating the ability to generate easily comparable inclusion calculations at the country, region, income, or even operational level.

ATM, Bangkok, Thailand

The new index addresses criticisms of previous financial inclusion indices, particularly the inability to accurately incorporate multiple financial inclusion dimensions into one tool. The index was built using data from IMF’s Financial Access Survey and from the World Bank’s World Development Indicators dataset. Released late last month, along with the tool, the IMF published the results of running the index using the country information included in IMF’s dataset for 2009 to 2012.

The index is based on a definition of financial inclusion that incorporates the dimensions of outreach, usage, and quality of financial services. To capture outreach, the index employs the variables of number of ATMs and financial institutions per landmass or adult population. According to the World Bank Global Findex, out of the 2.5 billion people who are excluded from formal financial services, 20 percent cite physical distance from the point of service as the main reason for not having an account. For usage, the index incorporates the variables of percentage of adults with at least one type of regulated deposit account, and percentage of adults with at least one type of regulated loan account. Although the IMF recognizes services quality as cornerstone to inclusion, they indicate there is not yet ample data to enable its incorporation in the index. However, expanding the index in future iterations to include quality is indicated as a possibility.

Among the results uncovered by running the index, the new tool found that the assessed countries’ inclusion rankings remained generally stable relative to one another between 2009 and 2012. However, one trend illustrated by the composite financial inclusion index, as well as by the outreach and usage sub-indexes, was a polarization based on income levels. For example, in 2009 seven out of the ten top-ranked inclusion countries were high and upper-middle income, and by 2012 this increased to eight countries. For outreach specifically, high and upper-middle income countries accounted for half of the top ten in 2009, and by 2012 they accounted for eight of the top ten. On the opposite end, this polarizing dynamic based on income was illustrated for the lowest ranking countries, too, for all three areas of outreach, usage, and overall inclusion.

Examining performance by region, the top ten ranking countries for all three indices demonstrate great geographic diversity. Though there is a preponderance of densely-populated and smaller-sized countries in the top ten for outreach (for example, Mauritius and the Maldives ranked one and two every year their data was available), the high-ranking countries for the other two areas exhibit more varied size and population distributions. Brunei and Thailand, regularly ranking in the top three for usage, demonstrate such diversity. This regional variation among the top rankings was not shown in the lower rankings. The African and Middle East & Central Asia regions accounted for almost the entire bottom ten for usage every year. For overall inclusion, the African region occupied six out of the bottom ten spots in 2011, and eight out of the bottom ten in 2012. In this final year studied, the bottom three countries were the Republic of Congo, followed by the Central African Republic, and, least inclusive, Chad.

For more on the new resource, click here.

Image credit: Allie_Caulfield

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Last week, Raghuram Rajan was officially inaugurated as the 23^rd Governor of the Reserve Bank of India. Rajan’s appointment has been greeted by a near obscene amount of excitement and adulation here in India, even by the standards of an often excessive Indian press. The front page of The Economic Times on Thursday (image at right) has Rajan sliding across the page, James Bond-style, rupee-barreled gun in hand. I am very much looking forward to seeing Janet Yellen or Larry Summers do the same.

Rajan’s academic credentials and work experience are indeed impressive – his previous position was chief economic adviser to the Prime Minister, and before that he was chief economist for the International Monetary Fund – but his main claim to fame is correctly predicting in 2005 that risky credit markets in the U.S. could lead to a global financial crisis. That position brought him much derision at the time, including from the likes of Larry Summers, but have of course since proven to be prescient.

But regardless of the strength of his professional and academic background, Mr. Rajan faces a herculean task as the new RBI Governor of a nation facing some serious economic crosswinds. India’s economy is growing at its most tepid pace in four years, its stock market has tumbled in recent months, and inflation continues to rise unabated. Perhaps most strikingly, the rupee has devalued versus the dollar by nearly 20 percent over the last four months. In the meantime, a national election is coming in the spring, which has effectively made consensus and compromise in the always partisan Indian government nonexistent. It will take all of Rajan’s skill to right the ship.

For those of us in the financial inclusion industry here in India, expectations are doubly high. India’s broader travails as an economic laggard affect us deeply, and Rajan’s initial statements and actions as Governor imply, at least, that he is willing to make big changes to help solve short-term monetary ills. If the initial reaction is any indication, Rajan’s presence and changes could actually help – the rupee rose 2.1 percent against the dollar and the Sensex index jumped 2.5 percent on Thursday. Getting India back on track is crucial for the financial inclusion space – low economic growth and persistent inflation hurt low-income populations in many different ways, including leading to fewer construction and manufacturing jobs and higher food prices.

But outside of getting through this crisis, we in the financial inclusion industry also have a vested interest in much more progressive and inclusive RBI policy that will extend beyond simply righting the ship in the short term. It was therefore encouraging and exciting to see, in his first speech as acting RBI Governor, Rajan lay out persuasive arguments and ideas for better ways to ensure financial inclusion in India over the long term. He discussed making it easier for banks to open new branches, the importance of issuing more and different banking licenses, and he has asked Nachiket Mor to “head a committee that will assess every aspect of our approach to financial inclusion to suggest the way forward.” Rajan’s statement, under a section of the speech titled “Inclusive Development,” was music to our ears: “We need faster, broad based, inclusive growth leading to a rapid fall in poverty.” A recent IFMR blog on this topic, speaks eloquently about the continued difficulty of formal financial access for most Indian households, and Rajan’s ideas for solutions.

Rajan also spoke specifically about a number of technology-related initiatives that could significantly alter the financial inclusion landscape in India. He talked about exploring new mobile-based payments which would allow users to transfer funds using encrypted SMS across different telecom service providers and different kinds of handsets. He discussed the need for more “white label” ATMs run by non-bank entities across India, which could vastly improve the access to financial services for households in rural areas. And importantly, Rajan discussed changing the rules so that pre-paid cards and electronic wallets can be used to actually withdraw cash when tied to Aadhaar, the Unique Identification Number (UID) which the government will eventually issue to every Indian. This change could significantly ease the ability of non-banked customers to finally send payments and remittances across the country.

These are big and worthy ideas and they are very exciting for us at Accion Venture Lab, a seed-stage investment initiative that provides capital and support to innovative financial inclusion start-ups, particularly those using technology to enable new business models across payments, credit, savings, insurance, and more. As we continue to work with more and more entrepreneurs in India who are hoping to help solve big financial inclusion challenges, it is encouraging that the senior-most banking regulator in the country is also thinking actively about how technology can play an important role in getting financial services to the under-banked. Time will tell if Rajan’s appointment will truly herald big changes in RBI policy, but we are certainly excited to find out.

Vikas Raj is a senior investment officer at Accion, leading Venture Lab’s work in Asia. Prior to joining Accion, Vikas worked in investment banking at Evercore Partners, where he advised on multiple corporate transactions with aggregate value of over $45 billion. Previously, Vikas worked in microfinance, primarily in India, at Ujjivan and Catalyst Microfinance Investors (CMI). At Ujjivan, Vikas co-led the establishment of the firm’s first lending branches in Delhi and helped lead the firm’s Series B financing round. At CMI, Vikas was responsible for establishing and investing in the Fund’s greenfield MFIs, including their largest investment, in an Indian institution. Vikas also co-led Columbia Business School’s student-run Microfinance Investment Fund. He started his career at Deloitte Consulting, where he was in the Corporate Strategy group.

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