Informal Sector and Mobile Financial Services in Developing Countries: Does Financial Innovation Matter?

Abstract

This paper investigates the impact of mobile financial services -MFS (mobile money, and mobile credit and savings) on the informal sector. Using both parametric and non-parametric methods on panel data from 101 emerging and developing countries over the period 2000-15, we find that MFS negatively affect the size of the informal sector. According to estimates derived from propensity score matching, MFS adoption decreases the informal sector size in a range of 2.4 -4.3 percentage points of GDP. These formalization effects may stem from different possible transmission channels: improvement in credit access, increase in the productivity/profitability of informal firms attenuating subsistence constraints typical of entrepreneurship in the informal sector, as well as possible induced growth of firms already in the formal sector. The robustness of these results is supported by the use of an alternative estimation approach (instrumental variables). These findings lay the groundwork for the scarce literature on the macroeconomic impact of mobile financial services, a major dimension of the growing drive towards economic digitalization.

What we know and don't know about the socioeconomic impacts of mobile money in Sub‐Saharan Africa: A systematic literature review

“…Rotondi and Billari (2017) showed that household users of MM were less likely to have school age children who are not enrolled in school, and this effect was most evident in SSA. Moreover, MM is associated with a declining presence of the shadow economy, suggesting the contribution of MM to economy formalization (Jacolin et al, 2019)…”

Subjective well-being

“…Some informal firms already utilise digital applications and free social media tools to promote their products and services. Empirical evidence shows that adopting mobile financial services reduces the size of the informal sector in developing countries by 2.4 to 4.3 percentage points of gross domestic product (GDP) (Jacolin et al, 2019).…”

Institutional Environment and Financial Inclusion in Sub-Saharan Africa

“…Several studies have been carried out on the effects of governance on financial inclusion. However, while the effects of institutional factors on traditional financial services, i.e., banking or markets, have been widely discussed in the literature (Beck et al, 2003), their effects on financial inclusion involving mobile money are much less addressed (Jacolin et al, 2019). Similarly, because of the high rate of bankization in developed countries, the need for financial inclusion in emerging or developing countries is evident.…”