Digital Financial Services and the Growth of Small and Medium Enterprises: Survey Evidence

Abstract

Small and medium enterprises (SMEs) are important producers and have limited access to finance and high SME transaction costs. Digital financial services (DFS), like mobile payments, online banking, digital credit and digital accounting tools can help to resolve both constraints. The objective of this study is to analyse the impact of DFS on the growth of SMEs based on survey data from 450 owner-managers of SMEs and understand the respective channels and beneficiaries of the impact. The total effect of DFS usage on growth is strong (β = .57) with 56% of the total effect being indirect via better access to finance (indirect effect .17) and greater operational efficiency (.15). The direct effect is still significant (.25). The stronger the owner's digital literacy, the greater the DFS effect, and this is approximately twice as great at high as at low digital literacy. The gains are greatest for micro and young firms, and are obtained under use of an objective sales-growth measure, instrumental variables and propensity-score matching. The results indicate that the role of digital finance in SME growth is optimal when combined with access to finance and user skills.

Keywords: Digital Financial Services, SMEs, Firm Growth, Access to Finance, Financial Inclusion, Digital Literacy, Operational Efficiency, Digital Finance.