Mobile financial services and performance of business in the informal economy

Abstract

The rapid growth of mobile financial services in emerging economies presents a vital opportunity to assess their impact on informal business performance, yet current empirical evidence remains mixed. Utilizing mixed methods, including quantitative analysis of the World Bank's 2023 Informal Enterprise Survey and qualitative interviews in Zambia and Kenya, this study investigates this relationship. Our analysis, which considers endogeneity, confirms a strong positive effect of mobile money adoption on the profitability of informal businesses. However, this benefit largely depends on the ability of businesses to overcome additional operational challenges. Importantly, we find that mobile money usually supports, rather than replaces, formal financial services, with adoption closely linked to existing practices such as bank account ownership. Despite its potential, the adoption rate remains relatively low due to transaction fees, security concerns, fraud, and infrastructure issues. This gap between high impact for adopters and low overall penetration is a key insight. It challenges overly optimistic views of technology and emphasizes that the transformative power of mobile money is influenced by structural factors. By resolving conflicting evidence and highlighting this conditional reality, this study provides a detailed evidence base for financial inclusion efforts, stressing that tackling systemic obstacles is crucial for achieving broader development goals.