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.

Keywords: Mobile financial services, Mobile money, Financial innovation, Digitalization, Informal sector, Developing countries

JEL Classification: C26, E26, O33, G29, L96