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IJSE
45,7 Financial inclusion and
socioeconomic development:
gaps and solution
1122 Shailesh Rastogi
Symbiosis Institute of Business Management, Symbiosis International University,
Received 12 August 2017
Revised 29 March 2018 Pune, India, and
Accepted 3 May 2018
Ragabiruntha E.
Thiagarajar School of Management, Madurai, India

Abstract
Purpose – The purpose of this paper is to identify factors relevant for financial inclusion (FI) and establish a
model that shows how these factors lead to economic development (ED) through FI.
Design/methodology/approach – Primary data were collected through structured questionnaire. Out of
350, 311 respondents accurately filled the questionnaire. The data were collected from rural areas of
Tamil Nadu. Exploratory factor analysis has been applied to evaluate drivers/factors relevant for FI.
Confirmatory factor analysis has been applied to establish reliability and validity of the identified factors.
A structural model has been proposed and empirically tested for ED through FI.
Findings – The main findings of the current paper are as follows: online banking (OB), understanding banking
services (UBS) and financial literacy (FL) are the drivers of FI; FI can lead to ED, as the proposed model of ED,
through FI, is supported in the paper (χ2/degree of freedom and CMIN/degree of freedom are less than 3; GFI and
AGFI are more than 0.90 and 0.85, respectively). Behavior of the people, with respect to mode of financial
transactions, has changed due to demonetization. (The χ2 test for mode of financial transaction is significant).
Research limitations/implications – The geographical reach of the sample should cover the whole India.
The sample should also have equal representation from rural and urban areas.
Practical implications – The identified factors for FI (OB, UBS and FL) should be more focused to bring
about better results for FI in India. These factors can lead to a more effective execution of FI initiatives.
In addition to this, policy makers can be confident of relying upon FI as a tool for ED.
Originality/value – The identified three drivers for FI have not been explored earlier. In addition to this, ED
(through FI) in the form of structural model has also not been tested earlier. Government of India can realign
their policies toward FI by using findings of this paper. In addition to increasing the access of formal financial
system to masses, more thrust can be given to OB and FL for better results of FI in India.
Keywords Online banking, Economic development, Financial inclusion, Financial literacy, Demonetization
Paper type Research paper

1. Introduction
1.1 Defining financial inclusion (FI)
FI has been defined by different entities in different ways. In generalized manner, FI can be
explained as the access and availability of the formal financial system to all the sections of
the society. This definition includes people of lower income groups and less privileged
sections of the society (Haldar et al., 2016). FI has been divided into two parts. The first part
is for individuals and the second is for firms. Using this twin-pronged concept, FI has also
been defined as proportions of the individuals and firms who are banked (or unbanked for
financial exclusion (FE) measurement).

1.2 India and FI (history of FI in India)

International Journal of Social
Economics FI per se is not new to India. But, the efforts done for FI have been changed over the period
Vol. 45 No. 7, 2018
pp. 1122-1140
of time. The first milestone for FI was in 1904. During those days, they were not allowed to
© Emerald Publishing Limited
0306-8293
be a part of formal banking system. In 1904, cooperative societies were allowed to become
DOI 10.1108/IJSE-08-2017-0324 the part of the banking system. This heralded a new era of involving less privileged sections
of society to mainstream financial system through cooperative. This can be called as the FI and
beginning of FI in India. The banking in its present form started after the enactment of socioeconomic
Companies Act in 1850. Nonetheless, most of the development for FI took place only after development
the independence, in 1947.
The second milestone for FI was when, as a regulatory measure, social control was brought
into banking system as a policy initiative in 1967. This facilitated the conversion of status of
banks in India from private sector to public sector. Consequently, most of the banks were 1123
nationalized in 1969. This nationalization of banks, in 1969, was the third milestone for FI in
India (Shabbir, 2016). Nationalization of banks allowed the government to use banking for
social welfare of people and introduce them to the formal financial system. But the biggest
hurdle in this regard was to have access to the last person of the society. Reaching to the people
who are socially and economically deprived and living in remote areas was the real challenge.
This situation was handled by starting banks, directly, in the rural areas. A full-fledged branch
of a bank in a rural area was neither physically nor economically a viable solution. Therefore, in
1976, a new concept of smaller banks took shape which was named Regional Rural Banks
(RRBs). This was the fourth milestone in the journey of FI in India.
Having established RRBs, policy makers felt that the regulatory requirement of a rural set-
up is different from that of an urban set-up. Both cannot be regulated properly by the same
regulatory body. The rural and underprivileged sections of the society, which includes
farmers, needed specialized attention which would be different from the urban perspective.
This requirement led to the establishment of a regulatory body that was meant exclusively for
catering to the rural and agricultural requirements. As a result, National Bank for Agricultural
and Rural Development (NABARD) was established in 1982. NABARD gained the status of
central bank for rural India where the main focus was agriculture and poor people. This can
be called as the fifth milestone for FI initiatives in India.
Later on in 2014, government, at the centre, in India changed (India is a federal system of
states and a centre). This new government took series of initiatives meant for FI. This was
the sixth milestone for FI in India. The initiatives are as follows:
• launching of Pradhan Mantri Jan Dhan Yojana (PMJDY) in 2014;
• launching of small and payment banks in 2014;
• launch of Mudra bank in 2015 (micro units development and refinance agency bank);
• passing of micro finance bill in the parliament in 2016; and
• demonetization during the end of year 2016 (November).

1.3 Why to consider FI for economic growth and development?

In 2013, World Bank Group president Jim Kin sets the goal for World Bank for FI. He also
fixes the goal of Universal Financial Access by 2020 (UFA, 2015). Consideration of FI by
World Bank is the testimony to the fact that FI is recognized as a tool for economic
development (ED) of the world (IFC, 2017; Beck and Demirguc-kunt, 2008; GFDR, 2014).
FI is one of the new strategies for the economic growth and development of nations.
Undoubtedly, there are many merits inherit in FI. It effectively tries to allocate the
productive resources and helps in reducing the cost. It ensures less dependence on informal
financial and credit system. Role of FI for ED and growth has been acknowledged by many
studies on the topic (King and Levine, 1993; Beck and Demirguc-kunt, 2008; Levine, 2005).

1.4 Identification of the problem

It has been estimated that 2.7 billion people are financially excluded in the world
(CGAP, 2009). In a study by the Rangarajan Commission (SIDBI, 2008) for India, it is claimed
IJSE that only 59 percent bankable population are banked and remaining bankable population,
45,7 i.e. 41 percent are unbanked (Ramesh and Sahai, 2007). Despite the efforts by Government of
India (GOI) for FI (discussed in Section 1.2), low impact (almost 50 percent rate of FE) is the
research problem in the present paper.

1.5 Objective of this paper

1124 Threadbare investigation of the literature on the outcome of FI in India puts forth following
issues for further consideration: determinants of FI should be re-explored; and relationship
between FI and ED should be verified through empirical testing. Thus, this paper focuses on
the following two objectives:
(1) to explore drivers for FI; and
(2) to develop a model for ED through FI.

1.6 Significance of the study

Both the issues of bringing about desired success to FI and linking ED to FI are perplexing.
The current research addresses both the issues and also provides executable solutions to
policy makers. FI has the potential to bring about social change and also helps people to
improve their standard of living. But FI has not been wholly successful in India and
therefore the social change, due to FI, has been quite low. The current research is aimed at
exploring the reasons for low success of FI and to provide a solution to this problem. FI has
been less successful in developing nations than developed nations ( Jukan and Softic, 2016;
Blanco, 2013). The current paper focuses on India which is a developing nation. Therefore,
the significance of the present study is very important.
The paper is divided into seven sections. The second section discusses review of
literature. Third section focuses on proposed model in the paper. Fourth section discusses
data and methodology. Empirical results are shared in the fifth section followed by
discussion on the results in the sixth section. The paper ends with a conclusion and policy
implication in seventh section.

2. Literature review
The literature on FI has been divided into three categories. First category discusses about
the studies focused for FI in India. Second category is on studies done for FI in places other
than India. The third category covers impact studies of FI and ED owing to FI.

2.1 FI in India
Bhave (2014) demonstrates that for FI to be successful in India, more concerted efforts are
required. Chauhan (2014) shows that in the state of Madhya Pradesh in India, FI is related to
the growth of the region but the pace of growth is slow. Ghosh (2012) explains that the impact
of FI varies state wise across India. Kundu (2015) demonstrates the output of FI initiatives in
India. He shows, for less than expected success of FI in India, demand-side-reasons far more
outweigh than supply-side. Kundu, while doing the study of FI in India, finds similar
examples of demand-side issues for lack of success as compared to other nations, e.g. Brazil,
Kenya, Indonesia and South Africa. Bhave (2014) also reports demand-side issues as the cause
for FE in India. But Das and Choubey (2015) evince, on the basis of study in the financially
deprived north-east state of Assam in India, that both demand as well as supply side are the
reasons for the lack of success of FI in the region.
There are many success stories as well for the effective implementation and outcome-based
results for FI initiatives. In their study for FI (in Tamil Nadu), Bruntha and Indirapriyadharshini
(2015) share cases of changed lives due to FI. But Joshi and Rajpurohit (2016) make an
audit of FI in India post PMJDY initiatives and evince that impact is effective but still it is a long FI and
way to achieve the desired success. The same observation of less than desired success of FI is socioeconomic
demonstrated by Hastak and Gaikwad (2015), Swamy (2011), Kawadia and Philips (2013), development
Tewari (2015) and Lalrinmawia and Gupta (2015) in their respective studies.
There are several studies which have proposed how one should go about executing FI
initiatives for more impact. Cnaan et al. (2012) provide three pronged platforms for framing
up of the future initiatives for FI. Pearce and Ortega (2012) propose six steps for the 1125
execution of FI in India. There are several studies which share the instances of how FI can
reduce the poverty in India (Nanayakkara, 2017; Khaki and Sangmi, 2017).

2.2 FI other than India

The variation in impact of FI on the economic growth varies across many nations due to
age, gender, income, developing-developed economies and size of the firms (Demirgüç-Kunt
and Klapper, 2012). Heenkenda (2014) shares the similar views, i.e. success of FI is linked
with the demographic characteristic of the individuals, which eventually leads to the
financial equality. Blanco (2013) uses data from 16 countries, from 1961 to 2010, and shows
the impact of FI on ED. Blanco demonstrates that the impact of FI on ED is much higher on
high-income nations than low-income nations.
Literature varies on the type of financial institutions suitable for FI in the world.
One school of thought says that smaller financial institutions, as alternative to the
conventional financial system, serve the FI better (Berger et al., 2001; Berger and Udell,
2006). On the other hand, another set of studies have supported large and conventional
financial institutions and their systems for the success of FI. It was explained that the multi
branch set-up is ineffective for the execution of FI policies, rather than the opposite set-up
that helps more and delivers better results (Keeton, 1995).
After referring to nine organizations for economic cooperation and development
counties, Ward and Zurbruegg (2000) explain that insurance positively helps in the
economic growth of the nations. Camara and Tuesta (2015) from Peru exhibit that FI is more
effective in enterprises than individuals. Zulfiqar et al. (2016) demonstrate the low impact of
FI in Pakistan due to the lack of funds with the individuals and too much requirement of
documentations for availing the financial and banking services.
FE is a matter of concern. Similar views have been raised by several authors in their
respective impact studies for FI. Credit constraints and slow growth of the nation have been
reported as the main cause of FE from 80 nations by Ayyagari et al. (2008).
World Bank’s database, Global Findex, highlights that banks and banking systems are
at the forefront for delivering FI in the world (Cheston et al., 2016; Haldar et al., 2016;
Nair, 2015; Hastak and Gaikwad, 2015). Corporate social responsibility and FI have also
been linked with ED in India, Bangladesh and Nepal (Haldar et al., 2016; Upadhyay-Dhungel
and Dhungel, 2013; Sharma and Mani, 2013).
Mehrotra and Yetman (2015) exhibit the flip side of the FI story and elaborate that the
overindulgence in FI may increase the risk and can be detrimental instead of giving benefit
to the nation.

2.3 Impact studies and ED owing to FI

At all the levels, the literature is full of studies substantiating the point that FI not only
helps in the reduction of the poverty but also extends support for the ED, growth and
prosperity (GFDR, 2014; Bhave, 2014; Blanco, 2013; Sehrawat and Giri, 2016; Toindepi, 2016;
Bongomin et al., 2016). There are many evidences to corroborate the fact that the lack of FI
may result into an increase of poverty and people may get trapped into vicious cycle of
poverty (Aghion and Bolton, 1997; Banerjee and Newman, 1993; Galor and Zeira, 1993).
IJSE Demirgüç-Kunt et al. (2013) find association among the structure of the financial system,
45,7 ED and FI initiatives. Providing access to savings account increases the propensity of
customer/unbankable people to start using the formal financial system. (Dupas and Robinson,
2013; Ashraf et al., 2010). Other authors also corroborate that FI helps in economic growth, and
the lack of FI leads to adverse impact on financial and economic growth (Arya et al., 2015;
Sharma, 2015; Cnaan et al., 2012; Sehrawat and Giri, 2015; Nair, 2015; Laha, 2015; Omilola and
1126 Akanbi, 2014; Chirwa and Odhiambo, 2016).
Except a few authors like Karlan and Zinman (2011) and Roodman and Jonathan (2011),
it has been accepted by many other studies, with some variations, that FI helps in ED,
poverty reduction and ensuring economic equality (King and Levine, 1993; Rajan and
Zingales, 1998; Li et al., 2000; Clarke et al., 2006; Beck et al., 2007). Karlan and Zinman (2011),
in a study in Philippines on 1,601 individual who have been part of micro-credit initiatives
there, have found that FI initiatives do not lead to much economic growth and development.
Same results of failures of bringing ED through FI (using microcredit) have been reported
by Roodman and Jonathan (2011).

3. Theoretical framework: the proposed model

3.1 Exploring the reasons for FE in emerging economies
As discussed in Section 1.2, GOI made many efforts for the success of FI, even before her
independence, in 1947. But the lack of desired results is the problem (Section 1.4). RBI made
well-articulated guidelines for the banks to increase their efforts for rural penetration of
the banking services. GOI and RBI extended their full support especially after the
nationalization of banks in 1969. Increase in the number of bank branches and Automatic
Teller machines (ATMs), in rural areas, are the testimony to the fact that access of banking
services in rural area has been increased (Nandru et al., 2015). It means that there was
considerable amount of efforts but despite this, the desired results for FI could not be
achieved. Exploring the reasons for less than expected success of FI in India and to provide
a solution for that are the main motivation of this research.
There may be two possibilities for less than expected success of FI in India. First, GOI
did not find right set of drivers which can truly drive FI and provide desired results. Second,
execution of the drivers was poor. McKee et al. (2011) add another perception to the second
possibility. They argue that the focus for achieving FI should be on FI only and the focus
should not be shifted to their drivers. For instance, if the identified driver is access to
financial system, merely increase of financial access is no guarantee of increase in FI.
As a solution to the problem of identification of drivers, exploratory factor analysis (EFA)
has been applied (EFA has been discussed in Sections 4 and 5). EFA gives three possible
drivers[1] for FI: online and mobile banking (OB), understanding banking services (UBS) and
financial literacy (FL). Using confirmatory factor analysis (CFA), these drivers have been
tested for their significance to bring about FI. (Details of CFA is discussed in Sections 4 and 5).
Niebel (2018) does not find much difference between emerging and developed economies
with respect to ED through ICT (information and communication technology). Nonetheless,
literature supports that the identified drivers have relevance for FI. Niebel (2018) show direct
association between development in ICT and economic prosperity across all the nations. Shaikh
et al. (2017) demonstrate direct association between digital banking culture and FI for
developing economy. Zins and Weill (2016) advocate for mobile banking to boost FI. They
explored determinants of FI in developing and emerging economies in Africa. Ouma et al. (2017)
also corroborate findings of Zins and Weill in Africa. Ozili (2018) examines relevance for digital
finance for FI in developing and emerging economies and find evidence for support. Literature is
replete with examples of the association of OB with FI (Andrianaivo and Kpodar, 2012; Siddik
et al., 2014; Gogia and Agrawal, 2016; Saxena and Anand, 2017):
H1. Online and mobile banking (OB) drives FI.
Banks and their accesses, considerably, facilitate FI. Access of banking services leads to FI and
understanding of the banking and its services. In developing nations, including India, banks socioeconomic
are the pillars of FI (Iqbal and Sami, 2017). Access and awareness about the banks and its development
services significantly impact the FI. Goel and Sharma (2017) exhibit UBS as one of the most
important dimensions for the construction of index for FI. Alam and Akhter (2015)
demonstrate linkage between banks and its services with FI, in India. Bhanot et al. (2012)
highlight the sanctity of banks, its access and understanding of its services for FI. They 1127
study north-east states of India which are not only geographically far-off from the main part
but also have rough terrain. These difficulties make banking a difficult proposition there.
Brown et al. (2015) find evidences that banks and their services have direct association with FI.
They found this while exploring banks and microfinance institutions in South-East Europe.
In addition to commercial banks, role of small banks (e.g. RRBs), microfinance banks and
cooperative banks is equally significant for the success of FI in the context of developing
nations (Stephen and Tom, 2015):
H2. UBS drives FI.
Providing access to formal financial system is essential for FI, but FL can increase the
depth of FI multi-fold. Opening an account is obviously the first step for FI but sufficient
activities in the account can only be ensured through increasing awareness and FL
(Agarwal, 2016). Grohmann and Menkhoff (2017) demonstrate linkage of FL with FI which
is eventually required for economic and financial well-being of people. They advocate that
FL for FI is relevant across all the countries. Furthermore, they show that FL for FI is
more appropriate for developing and emerging economies than developed economies.
Camara and Tuesta (2015) exhibit FL as one of the significant factors for FI. FL is
obviously the next step to consolidate FI after ensuring access to the formal financial
system. Camara and Tuesta explore regional differences in the success of FI which can be
attributed to different levels of FL in different regions. Fraczek et al. (2017) clearly
demonstrates the integration of FL with FI for the larger benefit of people. Fraczek et al.
apply experimental research design and found a strong association between FL and FI.
Lalrinmawia and Gupta (2015) show that among farmers, for a feasible intervention of FI,
FL is essential:
H3. FL drives FI.

3.2 The proposed model

Having explored the drivers for FI, we address the second possibility of poor execution
of drivers for less than expected success of FI (as discussed in Section 3.1). The perspective
of McKee et al. (2011) for focus on FI and not on its drivers is relevant in the context of
improper execution of drivers.
Fungacova and Weill (2015) advocate that sustainable development bereft of FI is
doubtful, especially in the long run. Literature is replete with examples of how FI is leading
to economic and financial development of the people (Section 2.3). Kim et al. (2018)
demonstrate examples of Islamic countries to corroborate the fact that FI leads to ED among
developing nations. Sarma and Pais (2011) advocate the same thing:
H4. ED is supported by FI.
The whole discussion of OB, UBS and FL driving FI and consequently FI supporting ED
culminate into the following model (Figure 1). The proposed model features that ED
directly gets supported by FI. In addition to having direct support from FI, ED may also
get indirect support from the constituents of FI. The drivers of FI (OB, UBS and FL) play
twin roles: the first role is to be the driver of FI and the second role is to be extending
IJSE
45,7 OB

H1

UBS H2 FI H4 ED
1128

Figure 1. H3
Conceptual
path model
(structural model) FL

indirect support to ED. Literature is abundant with examples of both the roles of the
drivers of FI, as discussed in Section 3.1.
The proposed model is the unique feature of this paper. Clubbing both, drivers of FI and
FI supporting FD, in the same model is the distinctive feature of the model.

4. Data and research methodology

4.1 Sample data and study variables
National Council for Applied Economic Research did a study entitled Indian Human
Development Survey (IHDS) for Indian households in 2012 (IHDS, 2012)[2]. In the study,
Indian society has been divided into five categories on the basis of annual income.
Respondents in the current study should follow two conditions: respondents should either
belong to III or lower categories with reference to IHDS categorization (i.e. respondents
should have annual income less than Rs88,000); and respondents should have saving
accounts with a bank under PMJDY scheme.
A structured questionnaire has been administered to collect the data. The sample of 350
such households has been taken from southern parts of India. After removing the
incomplete questionnaires, 311 respondents have been used for the further analysis. Other
than socio-demographic data, 30 statements related with FI (extracted through the review of
literature; Table I) have been used in the study. The questionnaire was administered after
undergoing pilot testing and subsequent corrections.
In the current study, convenient sampling method has been used for sampling because
respondents who meet the conditions of income and bank account have to be identified
(as discussed above).
Cochran’s formula (Cochran, 2007), with 5 percent α and 3 percent margin of error, is
applied to determine the sample size. Pilot testing gives standard deviation of items at 1.41.
With a five-point Likert scale, desired sample size is 339 (Barlett et al., 2001). In addition to
sample size approach, subject-to-variable ratio approach of 10 gives the desired sample size at

Factor/Construct References

Online and Mobile Banking (OB)
Understanding of banking services (UBS)
Economic development (ED)
Table I. Financial literacy (FL)
Construct and Financial inclusion (FI)
literature review Banking services delivery (BSD)
Gogia and Agrawal (2016) and Anand and Saxena (2012)
Bhanot et al. (2012)
Sharma (2015) and Dupas and Robinson (2013)
Camara and Tuesta (2015)
Sharma (2015) and Dupas and Robinson (2013)
Nandru et al. (2015)
300 with 30-statement-questionnaire (Arrindell and Van der Ende, 1985). Both the approaches FI and
justify sample size of 350 applied in this paper (Barrett and Kline, 1981; MacCallum et al., 1999). socioeconomic
development
4.2 Sample profile
The profiles of the respondents have been reported in Table II. On the basis of gender, all
the respondents have almost similar profiles. Occupation is dominated by daily-wage
workers who are followed by service-class and self-employed people. The participation of 1129
farmers is meagre (only 3 percent respondents comprised of farmers). In total, 70 percent
respondents belong to the age bracket of 26–50 years followed by 22 percent respondents
who belong to the age bracket of 51–75 years. In all, 72 percent respondents had some or the
other accounts (including accounts with post offices) before opening up accounts under
PMJDY scheme (in India people can open their savings account with post offices also).
As we go through the sample profit, we come across one important finding. Due to
demonetization, behavior of many people has changed with respect to the method used for
financial transaction. Demonetization was executed in India in November 2016. Under
demonetization drive, people were motivated to use digital methods for financial transactions.
χ2 test for preferred mode of financial transaction, before and after demonetization, is
significant (Table II). This change in behavior for financial transactions may be due to any of
the two reasons: people have genuinely changed their behavior for financial transactions; and
it is only due to the aftereffects of demonetization. The correct reason can be validated only by
executing another study and therefore it is out of scope of the current paper.

4.3 Construct measurement and structured equation modeling

Exploring drivers for FI is one of the main objectives of the current paper. There may be many
latent dimensions related to FI that can be the true drivers for FI. This paper attempts to
explore those true drivers for FI. EFA serves this purpose well. But after identifying the latent
variables, we need to confirm their reliability and validity. Only after the verification of
reliability and validity of the constructs, they can be used for further analysis. Validity and

Details Categories % of respondents

Gender Male 49
Female 51
Occupation Farmers 3
Daily wage earners 50
Self-employed 20
Service 27
Age Less than 25 years 7
26–50 70
51–75 22
More than 75 years 1
People having bank account before PMJDY’s account Yes 72
No 28
Preferred mode of transaction (before demonetization) Bank 50
ATM 44
Mobile 1
Others 5
Preferred mode of transaction (after demonetization) Bank 40
ATM 29 Table II.
Mobile 1 Descriptive statistics
Others 30 of the respondents
IJSE reliability of the constructs have been checked by CFA. Above-mentioned discussion confirms
45,7 the relevance of use of both EFA and CFA in the current paper.
In EFA, to explore factors/latent variables, principal axis factor (PAF) method has been
used for factor extraction. Direct oblimin method has been used for factor rotation. Fabrigar
et al. (1999), Preacher and MacCallum (2003) and Russell (2002) elaborate upon the logic,
i.e. factors extracted in EFA using principal component analysis (PCA) will be independent
1130 and not correlated. This will not be appropriate for conducting CFA on such
independent factors. The same logic applies to orthogonal (varimax) method vs oblique
method (direct oblimin) of factor rotation. Therefore, using PAF (instead of PCA) for factor
extraction and direct oblimin (instead of varimax) for factor rotation are justified.
Further, the structural equation modeling (SEM) has been done on the constructs
( factors) derived out of EFA. This has been done in two steps. The first step is measurement
model using CFA for ensuring the reliability and validity of the constructs. The second step
is testing structural model on ED through FI using SEM (Figure 1).

5. Results and analysis

Data analysis has been done in three steps, as discussed in the previous section:
(1) exploring the relevant factors for FI using EFA;
(2) testing measurement model (using CFA) and establishing reliability and validity of
the factors (constructs) identified in EFA; and
(3) testing the structural model (Figure 1). The model has been made in such a way that
ED is being caused by FI and FI is being caused by OB, UBS and FL.
EFA has been reported in Appendix.

5.1 Measurement models using CFA

5.1.1 Regression weights and significance. The regression weights (standardized weights)
and corresponding t-values for the CFA of the measurement model (Figure 2) are reported
in Table III. All the regression weights are significant at 5 percent level of significance.
5.1.2 Goodness of fit statistics for measurement model (CFA). The goodness of fit
statistics for measurement model is reported in Table IV. All the measures reported in
Table IV, χ2/DF, CMIN/DF, GFI, AGFI and RMSEA, are within the specified range (Hu and
Bentler, 1999; Schumacker and Lomax, 1996). This confirms that measurement model is
appropriate and all the constructs can be used for further analysis. Besides this, the construct
reliability and validity have been reported in Table III (discussed in the next subsection).
5.1.3 Construct reliability and validity. The construct reliability and validity of all the six
identified factors (constructs) is estimated by measurement model using CFA. Both are reported
in Table III. All the constructs have construct reliability. The values of composite reliability (CR)
for all the constructs are more than 0.60 which is within the acceptable range. Convergent
validity for all the constructs is also within the acceptable range.
Average variance extracted (AVE) is more than 0.50 and is also more than average shared
squared variance and maximum shared squared variance. This implies discriminant validity for
all the six constructs (Fornell and Larcker, 1981; Anderson and Gerbing, 1988; Joreskog, 1971;
Hair et al., 2010).

5.2 Path model

5.2.1 Path analysis (goodness of fit statistics for path model). The goodness of fit statistics
for the path model (Figures 1 and 3) is reported in Table IV. All the reported statistics for
path model are under acceptable levels. The results for all the four hypotheses considered in
 e4 S39 FI and
0.84 socioeconomic
0.89
e3 S38
OB development
0.57
e2 S41
0.64

S40
e1
1131
S28 0.14
e9
0.82
0.81
e6 S29 UBS 0.38
0.61

e5 S46
0.23
0.59

e13 S20 0.23

0.74

0.74 0.23
e12 S21 ED
0.65

S22 0.22
e11

0.42

0.50

e17 S26
0.78
0.49
e16 S35 FL
0.46 0.65

S42 0.21
e15

0.24 0.60

e10
S31
0.67
e14 S32 0.67 0.40
FI
e19 S33 0.65

0.65
e18 S34
0.20

e8 S18 0.77
BSD Figure 2.
Measurement
e7 S19 0.89 model (CFA)

this study are discussed in Table V. The standardized values of the regression relationship
along with their significance are also discussed in Table V.
5.2.2 Hypothesis testing. The hypothesis that OB and FL (as exogenous variables) have a
causal regression relationship with FI (as endogenous variables) has been rejected. But the causal
IJSE Regression
45,7 Symbol (construct/statements) Variables weight t-value*

OB OB1: have you done any purchase online ever? 0.636 –

CR: 0.82 OB2: are you aware of cyber theft? 0.891 11.66
AVE: 0.56 OB3: are you aware of government initiatives such as 0.567 11.39
BHIM and OB4 UPI (Unified Payments Interface)?
1132 OB5: are you afraid of cyber threat? 0.836 11.53
UBS UBS1: desirable to take credit/loan from the bank 0.816 10.26
CR: 0.79 UBS2: prefer borrowing from bank rather than 0.809 9.45
AVE: 0.56 borrowing from money lenders
UBS3: do you think keeping more cash in hand gives 0.607 –
the sense of security?
ED ED1: PMJDY has helped to reduce dependence on 0.740 10.37
CR: 0.75 unorganized sector for financial needs
AVE: 0.51 ED2: PMJDY is beneficiary for people 0.647 –
ED3: PMJDY will improve people’s standard of living 0.744 9.26
FL FL1: are you uncomfortable with less cash? 0.458 –
CR: 0.61 FL2: major purpose of the internet connectivity is for 0.781 5.89
AVE: 0.56 financial transaction
FL3: people who have taken PMJDY are literate 0.492 5.46
FI FI1: PMJDY is helpful in preventing exploitation in 0.654 8.50
CR: 0.76 the hands of money lenders
AVE: 0.54 FI2: PMJDY is foot forward toward solving financial 0.648 –
needs of poor people
FI3: PMJDY is helpful in improving country’s 0.672 8.26
economic growth
FI4: PMJDY gives economic independence and 0.672 9.47
confidence to poor people.
BSD FI5: were all the benefits adequately and timely 0.770 11.26
CR: 0.82 provided to you?
Table III. AVE: 0.69 FI6: are banking officials cordial in providing 0.891 –
CFA summary of information?
measurement model Note: *Significant at 5 percent level

Table IV. Model χ2/Dof Value CMIN/DF GFI AGFI RMSEA

Goodness of fit
statistics for CFA (measurement model) 2.237 2.237 0.910 0.874 0.063
measurement model Structural model 2.52 2.524 0.910 0.873 0.070
and structural model Acceptable range Less than 3 Less than 3 More than 0.90 More than 0.85 Less than 0.10

relationship between USB (as exogenous) and FI (as endogenous) is significant. Furthermore, the
causal relationship between FI (as exogenous variable) and ED (as endogenous variable) has also
been significant. The results of hypotheses testing are mixed in the present paper.

6. Discussion
Various studies have been conducted on the topic of FI. Individually, the relationships
between FL, UBS and OB with FI have been empirically tested. But collectively, in a
structural model where FI is being caused by USB, OB and FL and ED is being caused by FI,
their relationships have not been much observed by the authors in the literature.
Bhanot et al. (2012), Camara and Tuesta (2015), Nandru et al. (2015), Gogia and Agrawal
(2016), Sharma (2015), Kumar (2015), Dupas and Robinson (2013), Heenkenda (2014) and
 e11 e12 e13 e14 FI and
e4 S40 socioeconomic
0.57
0.64
S31 S32 S33 S34 development
e3 S41
OB 0.56
0.89 0.70 0.60
e2 S38 0.66
0.84

e1 S39 0.12
1133
0.14
0.67 S20 e15
0.27 0.33
e7 S46 0.63 0.61 0.57 0.80 S21 e16
0.40 FI ED
0.79 0.68
e6 S29 USB
0.82 S22 e17
0.17
e5 S28 e18 e19
0.23

e10 S42
0.50
0.47
e9 S35 FL Figure 3.
0.75 Path model (structural
e8
model)
S26

Hypothesis Casual path Regression weight Status of hypothesis

H1 OB → FI 0.121 Rejected
H2 UBS → FI 0.397* Accepted
H3 FL → FI 0.173 Rejected
H4 FI → FD 0.573* Accepted Table V.
Note: *p-value is less than 0.05 Hypothesis testing

Lalrinmawia and Gupta (2015) explore various relationships among UBS, FL, OB, FI and
ED. But in none of these studies, a structural model has been tested where FI is being caused
by some factors and further ED is also being caused by FI. Presenting the structural model
combining UBS, FL, OB, FI and ED is the contribution of the present paper.
Sharma (2015) finds that FI is closely associated with strength and depth of the financial
system. But the present study does not support any such association. Laeven and Fabian
(2012) and Fungacova and Weill (2015) also contradict with Sharma in this regard.
Laha (2015) proposes a strong association between FI and Human development. Loha
uses index numbers to measure both FI and Human Development and finds significant
correlation between the two (but only after 2012). Loha proposes a model to communicate
this argument but does not empirically test the model. The current paper tests the
relationship. But instead of human development index, we take ED and test the model of
association between FI and ED.
In the present paper, FI is regressed by UBS, FL and OB. But the standardized regression
weights of FL and OB (as exogenous variables), with respect to FI (as endogenous
variables), are not statistically significant. In spite of this, the structural model fitness of FI
being caused by UBS, FL and OB and further ED being caused by FI (Figures 1 and 3)
is a good fit (Table V ). Moreover, this is also a fact that all the constructs are good fit in
the measurement model. Validity and reliability of all the identified constructs are also at the
IJSE reasonable and acceptable levels (Figure 2; Tables III and IV ). In addition to this,
45,7 the individual relationships between OB and FL with FI have been supported and are
significant in the literature (Gogia and Agrawal, 2016; Camara and Tuesta, 2015).
Taking reference from the aforesaid discussion, this contradiction of non-significant
relationship between OB and FL with FI can be explained due to sampling (considering the
support of literature and structural model fitness). In all the likelihood, with another sample,
1134 this contradiction may be cleared and a significant relationship between FL and OB with FI
could be there.

7. Conclusion and policy implication

Four relevant factors (constructs) for FI have been identified using EFA (OB, UBS, FL and
BSD). Out of these four identified factors for FI, OB, FL and UBS have been found to have a
direct association with FI. Therefore, these three factors (UBS, FL and OB) have been identified
as the drivers for FI in India. A structural model has been empirically tested using these
identified three drivers of FI as exogenous variables and FI as endogenous variable.
Furthermore, in the same structural model, FI (as exogenous variable) is modeled to have a
causal relationship with ED (as endogenous variable). The structural model is a good fit model.
One of the main policy implications of current paper is that the GOI can start spending a
significant amount of money to create FL. This can considerably increase FI. Moreover, FL
can multiply the success of FI in the areas where access of formal financial system has already
been reached. The second implication is to identify gaps in digital reach for financial
transactions (online and mobile banking). The gaps may be in the form of infrastructural
limitation or lack of knowledge for using digital mode for financial transaction. Former may
be achieved in the long run but the latter can easily be improved in the short run through FL
program initiatives. The third implication is that FI cannot achieve its full potential unless the
other two drivers (OB and FL) are also taken care of along with the increasing UBS. Merely
facilitating access to formal financial system (UBS) will not yield desired results for FI.
The fourth implication is that GOI should have patience to build the infrastructure for
FI which will consequently help in economic and financial development of the people.
The lack of significant association of FL and OB with FI in the structural model is a
limitation of the paper which can be rectified by using another sample, as discussed in the
Discussion section. Estimating the FL at different geographical locations of the country and
finding its association with FI can be the future scope of the research in this filed. This work
may help GOI to identify requirement of FL initiatives in different geographical locations.
In addition, this will help in optimally utilizing the scarce resources for the better success of FI.

Notes
1. Factors/drivers have been explored using EFA. The result of EFA has been discussed in Appendix.
2. IHDS (2012) has done the following classification of the society in India on the basis of annual income
into five parts. The bottom most comprises of households with an annual income between Rs1,000 and
Rs33,000. The next category comprises of households with an annual income of Rs33,001−Rs55,000.
The third category of households is with an annual income of Rs55,001−Rs88,800.
The fourth category covers households with an annual income of Rs88,801−Rs1,50,000. The top
category is comprised of households with annual incomes more than Rs1.5 lakhs.

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IJSE Appendix
45,7
Exploratory factor analysis
As a result of EFA, six factors have been identified. EFA has been applied using principal axis factor
(PAF) for factor extraction and direct oblimin method for factor rotation. This chosen pair of factor
extraction and rotation methods is conducive for further analysis of CFA in this present paper.
Because, the pair of PAC and direct oblimin method generate uncorrelated factors which can further be
1140 used for CFA easily. Use of CFA on correlated factors is not a right approach.
The identified factors are OB, UBS, ED, FL, FI and BSD. All the identified factors have their Eigen
values more than 1. Factor identification on the basis of Eigen value of 1 or more is suggested in the
literature (Field, 2013; Malhotra, 2008). Table AI has reported the factor loading for all the statements
of all the six identified factors. All the factor loadings are more than 0.45 as accepted by the literature
(Field, 2013; Malhotra, 2008). Similarly, the Cronbach’s α is estimated for all the identified factors that
have been reported in Table AI. Their values should be more than 0.6 which is in the acceptable range
(Field, 2013; Malhotra, 2008).

Factor Cronbach’s KMO

Factor Statements Code loading α statistics

Online and Have you done any purchase online ever? S40 0.835 0.826 0.749
mobile banking Are you aware of cyber theft? S38 0.732
Are you aware of government initiatives such as BHIM and UPI S41 0.677
(Unified Payments Interface)?
Are you afraid of cyber threat? S39 0.640
Are you comfortable with mobile banking? S24 0.570
Understanding Desirable to take credit/loan from the bank S28 0.781 0.760 0.730
of banking Prefer borrowing from bank rather than borrowing from S29 0.685
services money lenders
Do you think keeping more cash in hand gives the sense S46 0.683
of security?
Your preference for savings through banks S36 0.490
Economic PMJDY has helped to reduce dependence on unorganized sector S21 −0.744 0.789 0.769
development for financial needs
PMJDY is beneficiary for people S22 −0.724
PMJDY will improve people’s standard of living S20 −0.555
PMJDY is/will be helpful in improving the extent of S23 −0.712
financial literacy
Financial Are you uncomfortable with less cash? S42 0.615 0.684 0.677
literacy Major purpose of the internet connectivity is for financial S26 0.545
transaction
People who have taken PMJDY are literate S35 0.523
You are aware of the benefits offered by S44 0.757
Modi accounts or Pradhan Manthri Jan Dhan Yojana account
Financial PMJDY is helpful in preventing exploitation in the hands of S33 0.694 0.721 0.679
inclusion money lenders
PMJDY is foot forward toward solving financial needs S34 0.663
of poor people
PMJDY is helpful in improving country’s economic growth S31 0.503
PMJDY gives economic independence and confidence S32 0.685
to poor people
Table AI. Banking Were all the benefits adequately and timely provided to you? S18 0.677 0.814 0.500
Result of EFA services delivery Are banking officials cordial in providing information? S19 0.780

Corresponding author
Shailesh Rastogi can be contacted at: krishnasgdas@gmail.com

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