Composite Measure of Financial Inclusion in Nigeria: A Principal Component Analysis Approach

Abstract

Owing to gaps in the literature regarding the dearth of a robust and an all-inclusive measurement of Financial Inclusion (FI), this study constructed an all-inclusive index for measuring FI in Nigeria.  Adopting the use of the PCA as an indexing mechanism, the study condenses 22 selected aggregate indicators into a single comprehensive static that can serve as a measurement of financial inclusion. The selected indicators comprises not only indicators germane to the banking sector, which has become traditional in other studies but advances its investigation to include the contribution of previously neglected indicators that captures other sub-sectors (like Insurance and Mortgage) and financial markets (like Stock market) that constitutes the financial system. In a two-stage PCA analysis, the results indicate that the non-bank sectors contribute more to the supply of financial services in Nigeria than the banking sector. The results also suggest that the demand for financial services in urban centres outmatches that of the more populated rural areas. Generally, the results indicate a slow and sluggish rise in Financial Inclusion for the duration of the study. The study recommends that policies and programmes designed to increasing availability of points of service in rural settings should be pursued in order to fast track the actualization of financial inclusion goals.