determinants of financial inclusion: evidence from ...

International Journal of Entrepreneurship and Development Studies (IJEDS) 4(2) 2016, 141-155

DETERMINANTS OF FINANCIAL INCLUSION: EVIDENCE FROM ACCOUNT OWNERSHIP AND USE OF BANKING SERVICES PRABHAKAR NANDRU1, ANAND BYRAM2 AND SATYANARAYANA RENTALA3 Abstract: The term ‘financial inclusion’ involves the access to and use of banking services (ownership of bank account, savings, insurance, credit, remittance, payments, etc. ) at affordable cost to a vast segment of disadvantaged and low-income groups of any society. In fact, banking services are in the character of public good. Hence it is necessary that accessibility and usage of banking services to the whole population without any inequity need to be the prime objective of the government and financial institutions. This facilitates to addresses the basic financial needs of the public in a country. The main purpose of this study is to examine the impact of ownership of bank account and use of banking services as determinants of financial inclusion. In this research, the ownership of bank account was considered as dependent variable. Income level, age, gender dimension, employment status and education level have been employed as independent variables. The results of this research are based on field investigation and the data have been collected using structured questionnaire from respondents in Union Territory of Pondicherry region in India. The results indicate that income level and education have a significant impact on financial inclusion as measured by the ownership of bank account.

Keywords: Account ownership; Banking services; Determinants; Financial inclusion; India 1. Introduction Financial inclusion basically encompasses the wide range, quality and availability of banking services (having a bank account, savings, credit, remittance and insurance services etc.) at an affordable cost to the vast sections of disadvantaged and low income groups in the society (Leeladhar, 2005; Rangarajan, 2008). Financial inclusion involves the access to and use of formal financial services and has become a subject of growing interest for researchers, policy makers, financial institutions and governments in developing countries (Allen et al, 2012; Beck & Torre, 2006; Camara & Tuesta, 2014). Globally, efforts are being made for enhancing access to wide range of financial services. The World Bank had already declared an objective of achieving universal financial access by 2020. This highlights that financial inclusion has been accepted as a fundamental premise for the process of economic growth in various countries. In India, the central government has recently launched ‘Pradhan Mantri Jan Dhan1 Doctoral Scholar, Department of Management, Pondicherry University, Karaikal - 609 605; Email: [email protected]; Mobile: +91 90925 27553 2 Assistant Professor, Department of Management, Pondicherry University, Karaikal - 609 605; Email: [email protected] 3 Program Manager – South Zone, Piramal School of Education Leadership and Kaivalya Education Foundation, A-56 Panchsheel Enclave, New Delhi – 110017; Email: [email protected]

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Yojana (PMDJY)’, a national level financial inclusion programme with an objective that every household should have a bank account in a formal financial institution. In India, the focus of the financial inclusion programmes at present are restricted to ensuring certain measures to provide minimum access to a savings bank account with no-frills. But having only ownership of bank account is not considered as an exact indicator of financial inclusion. There are other factors also that should be considered to accomplish financial inclusion. There could be other multiple levels of financial inclusion indicators that are considered to ensure higher levels of financial inclusion. Use of various banking services like deposits, credit, payments, remittance and insurance services are the multiple levels in formal financial inclusion system. In the context of financial inclusion, there is a quite opposite form of financial inclusion which is called as financial exclusion. The nature of certain causes which make financial exclusion imperative has been examined by earlier research studies. A few researchers (Kempson & Whyley, 1998, Bhanot et al, 2012) examined the extreme conditions where people face barriers to accessibility and usage of banking services. Self-exclusion/Voluntary exclusion: people face barriers that encourage selfexclusion Price of financial products exclusion: based on unaffordable cost or premium, which means high cost of insurance policies and high cost of credit. Condition exclusion: households are deterred by the conditions attached to financial products-which are offered with restricted usefulness. These include being offered insurance policies which contain certain exclusions and bank accounts where certain amount of minimum balance has to be maintained. Marketing of financial products exclusion: households with no financial products have had no sales approaches Psychological barrier: lack of financial services, the feeling that financial services are not for households with very low incomes was similarly very widespread. Additionally, lack of awareness, low income, poverty and illiteracy are the factors that lead to low demand for banking services and consequently surface as the main reasons to financial exclusion (Chattopadhyay, 2011; Crisil Inclusix, 2014). However, a great extent of financial exclusion consists of a complicated set of adjacent obstacles. Hence the policy makers and financial institutions have to offer successful financial inclusion initiatives that must be addressed to reduce cut those barriers to universalisation of financial services.

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2. Review of literature Efobi et al (2014) explored the factors influencing the access to and use of banking services in Nigeria. The results reveal that the individual attributes, income and ICT inclination are significant factors influencing the use of bank services in Nigeria. Fungacova and Weill (2015) studied the understating of financial inclusion in China. It was observed that greater use of formal accounts and formal savings significantly impacted the level of financial inclusion in China. Other influencing factors like higher income, better education, gender and age are the variables that have been connected with considerable use of formal ownership of bank accounts and formal credit in China. Allen et al (2012) examined whether greater account ownership and use of accounts are associated with affordable cost and greater proximity to financial intermediaries. Lower-fee accounts, exempting depositors from documentation requirements, allowing correspondence banking and using bank accounts to receive government financial benefits are the special effective initiatives that were found to promote financial inclusion among those likely to be excluded. Demirguc-Kunt and Klapper (2013) measured financial inclusion through variation in use of financial services across and within countries. It was observed that having an account at financial institutions serves as an entry point into the formal financial sector. It was concluded that bank accounts, savings and credit highlight the distinction in various countries’ level of financial inclusion. It was also observed that account ownership was influenced by the individual income level and shows variation in the use of formal and informal saving and credit mechanisms between the poor and the rich within different countries. Kumar (2013) examined the status of financial inclusion and provided the evidence of its determinants in the Indian context. It had recognised that branch penetration is an important dimension which impacts financial inclusion. Proportion of factories and employee base factors are important key determinants of penetration in financial inclusion index. It was also found that the significance of a region’s socio-economic and environmental association plays a major role in shaping banking practices of masses in India. It was also identified that expanding branch network has a considerable impact on financial inclusion. Kohli (2013) investigated the factors which significantly impact the enhancing of financial inclusion in India. The author identified that there is a relationship between financial inclusion and levels of human development in India. Socio-economic factors, income levels among individuals were found to have a significant influence on the level of financial inclusion in India. On the other side, technology and education about the banking services were also found to be important factors that influence the growth of financial inclusion in India

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Bhanot et al (2012) studied the phenomenon of financial inclusion in two-states (Assam and Meghalaya) in north-east India. The authors have attempted to explore the various factors which are critical for determining financial inclusion in remote areas of India. The study concluded that financial inclusion in these remote areas of India was very low. Income levels, awareness regarding financial products through various sources, information about Self Help Groups (SHGs), and education levels of the respondents were concluded to be influential in determining financial inclusion. It was also found that nearness to financial institutions like banks and post offices increases financial inclusion. Other factors like area terrain and government support were not found to be influencing financial inclusion but government support in plain areas was found to have a positive influence on financial inclusion. Gupte et al (2012) identified key factors which measure the financial inclusion index in Indian context. The authors used four critical dimensions for calculating financial inclusion index. Outreach dimension (geographic branch penetration, geographic ATM penetration, number of accounts, deposits & loans per 1000 adults), the usage dimensions (volume of deposits and loans), ease of transaction dimension and cost of transaction dimension (annual fees charged to bank customer for ATM card usage or the cost of international transfer of money) were investigated as determinants for computation of financial inclusion in India. It was found that geographic branch outreach penetration and ATM penetration played an important role in enhancing financial inclusion in the Indian context. In Indian context, most of the studies (Arora, 2010; Gupte et al, 2012; Nandru et al, 2016; Sharma, 2008) focused on secondary data which is available on RBI data source to study the determinants and extent of financial inclusion. A study by Sharma (2008) evaluated the “index of financial inclusion” and considered three basic dimensions of index for an inclusive financial system - bank penetration (indicated by number of people having bank accounts), availability of banking services (indicated by number of bank employees per customer) and usage of banking system (indicated by volume of credit and deposit proportion). In the study by Gupte et al. , (2012) on “Computation of financial inclusion index for India”, four different dimensions which include outreach dimension (measured by branch penetration, ATM penetration and number of accounts), usage dimension (indicated by volume of deposits and loans as a percentage of GDP), ease of transaction dimension (measured by the number of locations to open deposit or avail loans and affordability of deposit or loan accounts) and cost of transaction dimension (indicated by the annual fees charged to customers for ATM usage or cost of money transfers and remittances) have been considered. Further, another study by Arora (2010) on “measuring financial access” has considered three variables: physical access or outreach dimension (measured by branch penetration and ATM penetration), ease of transaction dimension (measured by locations to open bank account and the number of documents required to open


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bank account) and cost of transaction dimension (measured by bank charges to customers for accessing banking services). Nandru et al. , (2015) investigated the factors that influence the usage of banking services in enhancing financial inclusion in Pondicherry region in India. The results of the study indicated that easiness in accessing bank products and purpose of opening bank account have significant influence on usage frequency of banking services. Nandru et al., (2015a) identified the demographic factors that have a significant impact on financial inclusion in Union Territory of Pondicherry in India. The authors concluded that frequency of usage, ease of using banking products and physical accessibility of bank branch show significant impact on level of financial inclusion in Pondicherry. In this study, an attempt was made to explore the determinants of financial inclusion as measured by the account ownership in Pondicherry region in India. Using a survey technique, the data was analysed using binary logistic regression model. This research aimed to fill the gap by using primary data collected from Pondicherry region to examine the status of financial inclusion. The strength of the study lies in fitting a binary logistic regression model to primary data collected from 110 respondents from Pondicherry region. 3. Objective of the research The study attempts to explore the determinants of financial inclusion measured by the account ownership in Pondicherry region. Figure 1 depicts the conceptual model to achieve the objective. 4. Conceptual Framework Figure 1

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5. Measuring financial inclusion 5.1 Sample data and variables used This paper uses primary data from Union Territory of Pondicherry, India. 110 respondents were approached for assessing the financial inclusion in the region. After clearing the data for missing entries, the final sample size was 98. The data have been collected by adopting convenience sampling technique. The study uses account ownership, savings behaviour and frequency of money withdrawals by review of various studies which have been mention in Table 1 as follows Table 1: Variables used in determinants of financial inclusion by earlier researchers S.NO

Author(s)

1.

Efobi et al, (2014)

2.

Das (2009)

3.

Allen et al, (2012)

4.

Bendig et al, (2009)

5.

Fungacova and Weill (2015)

6.

Kendall et al, (2010)

7.

Demirguc-Kunt and Klapper (2013)

8.

Nino-Zarazua and Copestake (2008)

9.

Kuri and Laha (2011)

Variables Used 1.Use of bank services 2.Use of the account to save and 3.Frequency of bank withdrawals 1.Access to bank accounts 2.Access to savings Schemes 3.Access to credit 4.Taking loan 1. Ownership of an account 2.Use of the account to save 3. Frequent use of the account (defined as three or more withdrawals per month) Savings Loans Insurance Formal account Formal savings and Formal credit 1.Numbers and volume of deposits accounts 2.Loans 3.Banking infrastructure ( e,g. branches and ATMs) and financial services usage 4.Per capita income Account ownership Saving behavior Borrowings 4.Use of credit cards Having a bank account Savings Credit services 1. Number of bank accounts 2. Number of branches 3. Number of ATMs 4. Amount of bank credit 5. Amount of bank deposit and Socio-economic factors


10.

Gitaharie et al, (2014)

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Households characteristics Social economic factors Access to technology and information

Source: Authors’ compilation from various literature reviews Based on above sound literature reviews the researchers used dependent and independent variables to explore the determinants of financial inclusion in Pondicherry region.

5. 2. Dependent variables In this study, three main determinants of financial inclusion in the line with earlier studies (Demirguc-Kunt and Klapper (2013); Efobi et al, (2014); Nino-Zarazua and Copestake, (2008); Gitaharie et al, (2014) and Allen et al, (2012) were focused to elicit responses from the sample using a structured questionnaire. The three determinants include ownership of bank account, (measured by 1=if the individual have bank account and 2=no bank account), the savings behaviour (measured by 1 which represents yes if the individual has saved in past 12 months and 2=no if there were no savings in the past 12 months) and frequency of money withdrawals (measured if the individual has money withdrawal out of bank account in a typical month which represents 1 = Zero times, 2= 1- 2 times, 3= 3-5 times and 4= 6 times or more). 5.3. Independent variables The following are independent variables that were considered to be the determinants of the financial inclusion indicators. The variables are individual’s demographic characteristics, information and communication technology (ICT) and distance to bank branch. Gender of the individuals was measured as 1=male and 2=female. Age of the individuals was measured by 1=18-25 years, 2=26-35 years, 3=36-45 years, 4=46-55 years and 5= above 55 years. Educational level was measured by 1= Below 10th standard, 2= 10+2/Diploma, 3= Bachelors degree, 4= Masters Degree and 5= others. The income level was measured by 1= Less than Rs. 10, 000, 2= Rs. 10, 00130, 000, 3= Rs. 30, 001-50, 000, 4=Rs. 50, 001- 1, 00, 000 and 5= Above Rs. 1, 00, 000. Information and Communication technology (ICT) was measured using response to the question: do you have a debit card (1=yes, 2=no). Finally, the distance to bank branch was measured as distance in kilometers from respondents’ residence (1= Less than 3 km, 2= 3 km – Less than 6km, 3= 6km- Less than 10 km and 4= 10 km & above). 6. Determinants of financial inclusion Ownership of bank account was employed as one of the main indicators of financial inclusion to examine how it was associated with the individual demographic characteristics and socio-economic characteristics that influence financial inclusion

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in Pondicherry region. Binary logistic regression model was employed to explore the determinants of financial inclusion by estimating the following equation. Prior research on financial inclusion considered bank account as one of the main indicators of the financial inclusion. Hence it was considered as dependent variable and other variables related to individual’s socio-demographic characteristics provided in the survey (age, gender, income level, education and employment status) were considered as independent variables. The results of the study indicate that income level and education show significant impact as determinants of financial inclusion in Pondicherry region. 6.1. Demographic profile Table 2 gives a summary of the demographic details of the 98 respondents included in the research. Among all the respondents, 55 per cent (n=54) are male and 45 per cent are female (n-44). It can be noted that more than 50 per cent of the respondents are married. The results also point out that the respondents are relatively young, with 38. 78 percent of the respondents between 26 and 35 years of age. Majority of the respondents have college education level: 28. 57 percent are 10+2 and diploma holders, 33. 67 percent have a Bachelor’s degree and 21. 43 percent have Master’s degree of education. A total 13. 27 percent of the respondents have only high school qualification. Table 2: Profile of respondents Variable

Frequency

Percentage

Male

54

55.10

Female

44

44.90

Total

98

100

18-25 years

31

31.63

26-35 years

38

38.78

36-45 years

18

18.37

46-55 years

8

8.16

Gender

Age


149

above 55 years

3

3.06

Total

98

100.0

Less than 10,000

37

37.76

10,001-30,000

39

39.80

30,001-50,000

15

15.30

50,001-1,00,000

7

7.14

Total

98

100.0

Married

51

52.04

Unmarried

47

47.96

Total

98

100.0

Below SSLC

13

13.27

10+2/Diploma

28

28.57

Bachelors degree

33

33.67

Masters degree

21

21.43

Others

3

3.06

Total

98

100.0

42

42.86

Income level

Marital Status

Level of Education

Employment Status Student

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Self-employed

24

24.49

Employed

20

20.41

Unemployed

12

12.24

Total

98

100.0

Source: Survey results 6.2. Accessibility and Usage of banking services Table 3 gives an account of the accessibility of banking services as measured by the ownership of bank account. It was found that 80 per cent (n=78) respondents have a formal account. The results also reveal that the most of the respondents possess a bank account in public sector banks (64 per cent). Table 3: Accessibility of banking services

Variable Frequency Bank Account Yes 78 No 20 Total 98 Account in Which Bank Private sector bank 24 Public sector bank 50 Co-operative bank 3 Total 78 Type of Bank Account No-frills A/C 7 Savings A/C 67 Current A/C 3 Fixed Deposit A/C 1 Total 78

Percentage (%) 79.59 20.41 100.0 32.05 64.10 3.85 100.0 8.97 85.90 3.85 1.28 100.0

Source: Survey results 6. 3. Usage of banking services Table 4 presents the status of the usage of banking services. It needs to be noted that mere ownership of bank account is not a determining factor to determine the level of financial inclusion. It needs to be understood that usage of bank account is the most


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important dominant factor in measuring the financial inclusion. The results indicate that among the 78 respondents who have a formal bank account, nearly 83 per cent of respondents (n=65) have savings in banks in the past one 1 year. But very few respondents are availing credit from the bank which is very low (only 37. 18 per cent). It was also observed that majority of the owners of bank account possess ATM/Debit card, indicating that ICT plays significant role in usage of banking services. The purpose of visit to bank branch for depositing money in the banks and number of money withdrawals were also observed to be high. In a typical month, 49 respondents mentioned that they withdraw money between 3-5 times in a month from their bank accounts. Table 4: Usage of banking services Variable Frequency Percentage (%) Savings Behaviour (In last 12 months) Yes 65 83.33 No 13 16.67 Total 78 100 Availing of Bank Credit (In last 12 Months) Yes 29 37.18 No 49 62.82 Total 78 100.0 Ownership of ATM/Debit card Yes 60 76.92 No 18 23.08 Total 78 100.0 Purpose of Visit Bank Branch Deposits 37 47.44 Withdrawals 28 35.90 Loans 5 6.41 Repayment 8 10.25 Total 78 100.0 Frequency of Withdrawals (In a Month) 1-2 times 13 16.67 3-5 times 49 62.82 6-8 times 11 14.10 More than 8 times 5 6.41 Total 78 100.0 Source: Survey Results 6.4 Results of Binary logistic regression

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Binary logistic regression model was used by using SPSS 20. 0 version. A total of 98 respondents were included in the analysis for this study. Ownership of bank account has been considered as dependent variable (represented as 1=yes, 2= no). Table 5 represents the three different statistical tests (likelihood ratio, score, Wald) which have been used to test whether all independent variables show a significant impact on the dependent variable. These statistical tests follow chi-square distribution (Hosmer & Lemeshow, 1989). The p-value for likelihood ratio test is less than 0. 001, which shows that model is significant. Table 2 in the earlier section indicates that income level and education of respondents show significant impact on ownership of bank account. The results of this study strengthen the results of earlier studies (Bhanot et al, 2012; Nandru et al, 2015a). The remaining variables were not found to have a significant impact on financial inclusion as measured by ownership of bank account. Table 5: Results of Binary logistic regression model Variables Age Gender Income_level Education Employment status

B .347 -.462 -1.282 -1.084 .607

S.E .419 .569 .517 .330 .318

Wald .684 .662 6.147 10.795 3.655

Df 1 1 1 1 1

Significance .408 .416 .013** .001*** .056

Note: *** Denotes significance at 1 percent level, ** denotes significance at 5 percent level. Source: Authors’ compilation based on primary data by using SPSS 6.5 Model adequacy In order to assess the adequacy of the fitted model, goodness of fit statistic is calculated. The measure of model accuracy of binary data classification (1= yes, 2= zero) is assessed using the Hosmer and Lemeshow (1989) goodness of fit model where the acceptance of model is indicated by the p-value (the p-value should be >5 percent) for acceptance. The value of chi-square of the goodness fit statistic for this model is 5. 784, and the corresponding p-value is 0. 565 which is greater than 5 percent level and is found satisfactory to ascertain the model fit. Hosmer and Lemeshow Test Step

Chi-square

df

Sig.

1

5.784

7

.565

Source: based on primary data by using SPSS


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Therefore, it is clear that the variables which have been considered in this study as independent variables fit the conceptual model. Figure 2: Tested Model

*** Denotes significance at 1 percent level, ** denotes significance at 5 percent level. Significant line Not significant line Figure 2 represents the tested model and the significant determinants of financial inclusion (Income level and education). 7. Conclusion In this study the factors influencing financial inclusion as measured by the account ownership of bank account in the Pondicherry region were investigated. In India, the focus of the financial inclusion at present is restricted to ensuring certain measures for undertaking to provide minimum access to a savings bank account with no-frills. But having only ownership of bank account is not considered as an exact indicator of financial inclusion since other factors also need to be considered to accomplish financial inclusion. Accordingly, there could be other multiple levels of financial inclusion indicators which are likely to enhance financial inclusion. Use of various banking services like deposits, credit, payments, remittance and insurance services are the multiple levels in financial inclusion. Hence in this study other dimensions of financial inclusion like savings behaviour and frequency of withdrawals were also considered. It was found that 78 of the respondents have a formal bank account. The study also reveals that majority of the respondents have exhibited a propensity to save money in their savings bank accounts in the past 1 year. Ironically, very few respondents were found to availing credit from the bank which indicates that there are barriers to enhance access to credit which is an important factor to increase financial inclusion. The results also highlight that ICT plays a significant role in usage of banking services. Among all the independent variables considered in this research, income level and

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education status of respondents are the key factors which influence financial inclusion as measured by the ownership of bank account. References [1]

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