Measurement of An Index of Financial Inclusion in Nigeria: A Principal Component Analysis Approach

Abstract: This study constructs a comprehensive Financial Inclusion Index (IFI) for Nigeria, utilising Principal Component Analysis (PCA) to capture the multi-dimensional nature of financial inclusion. To ascertain the efficient level of financial inclusion in Nigeria, this study employs Principal Component Analysis (PCA). The dimensions of financial access, financial usage, and financial quality are analysed using supply- and demand-side indicators. Post-estimation tests, including the Kaiser-Meyer-Olkin (KMO) test, are conducted to validate the adequacy of the data for PCA. The findings reveal a modest yet growing level of financial inclusion, with demand for financial services marginally surpassing supply. This study recommends broader measurement of the dimensions of the financial inclusion index; financial services should extend to rural areas with a well-functioning mobile banking to enhance financial inclusion that supports sustainable economic growth.