in the 21st Century

Measurement of Financial Inclusion: Beyond the Binary Measure 221
standardisation and aggregation (including value weighting). We examine
each in turn. Standardisation imposes uniform units on disparate indicators.
For example, the FSM forces a variety of different indicators that do not lend
themselves naturally to ordinal ranking into a scale from one to eight. This
process can hide information and can serve to dumb down the contribution
of individual disaggregated indicators to financial inclusion discourse. Unless
stakeholders commit to tracking such a composite indicator to benchmark
performance, its lack of usefullness in research spheres renders it not
particularly valuable.
Aggregation of standardised indicators into a composite indicator opens up
the question of value weighting. When value weighting different indicators,
there are two options: weighting the indicators based on a subjective ratio of
importance; or remaining agnostic and simply leaving the indicators unweighted
and calculating a simple average of the scores. Value weighting is a highly
subjective exercise and it can be difficult for researchers to reach a consensus
on the relative importance of the component indicators. Nevertheless, there
are a number of examples in the social sciences of composite indicators
using predetermined value weighting, such as the CGD’s CDI index. The
environment score in the CDI, for example, is made up of standardised
indicators for climate change (60%), biodiversity and global ecosystems (30%)
and fisheries (10%). The CDI overall country score weights the standardised
scores for aid, trade, environment, security, technology, migration and
investment as equal, transferring the weighting to the choice of sectors for
inclusion. It is noteworthy that the FSM summary measure did not become
a useful measurement term pursued by policymakers.
An alternative approach is to present the set of component indicators and stop
short of aggregating them into a summary measure. This approach allows
observers to understand the multi-dimentionality of financial inclusion and
to encourage informed debate on what it means to be financially included. In
this chapter, the portfolio approach is recommended.
A separate but important issue relates to the assumptions made with the
choice of indicator. Indicators have normative connotations. Every indicator
is based on the assumption that ‘things are getting better’ if performance in the
indicator improves year on year. For example, the number of lending products
a person may have is not something to be maximised, while at the same time
one or two products (if used properly) is preferable to no borrowing.