Beyond Principal Component Analysis: Developing a Multidimensional Financial Inclusion Index for BRICS: 25302
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https://doi.org/10.35716/IJED-25302
Author: Bhawna Rajput, Anupama Rajput* and Shilpa Chaudhary
Author Address: *Professor, Department of Commerce, Janki Devi Memorial College, University of Delhi, New Delhi-110060 (India)
Abstract
This
study constructs annual estimates of a comprehensive index of Financial
Inclusion (IFI) for the five BRICS countries over the period 2005-2022. Supply-
and demand-related indicators for all formal financial institutions are
combined using a two-stage Principal Component Analysis (PCA) technique,
utilising information from all principal components. In the first stage, three
sub-indices representing the dimensions of access, barriers, and usage were
computed; in the second stage, they were aggregated to derive the IFI for each
country-year observation. The statistical adequacy of PCA was evaluated using
the Kaiser-Meyer-Olkin (KMO) test and the Bartlett's Sphericity Test (BTS). The
PCA-based IFI was validated by evaluating its correlation with the IFI computed
using the normalised inverse Euclidean distance technique. The rankings of
BRICS countries varied across the three sub-indices. Russia led in
the access dimension; India had the lowest distance barriers, and China led in the usage dimension. In the
overall composite index, China emerged as the top performer, followed by
Russia, India, and Brazil, while South Africa ranked lowest.
Keywords
Dimensionality
reduction techniques, emerging economies (BRICS), inclusive finance, index
construction methodology, measurement of financial inclusion.
JEL
Codes
C38, E44, G20, O16, O57.