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

This paper investigates the impact of mobile financial services ‐ MFS (mobile money, and mobile credit and savings) on the informal sector using a sample of 101 emerging and developing countries over the period 2000‐15. Using both fixed effects estimator and propensity score matching methods, we show that the adoption of MFS significantly decreases the size of the informal sector. The magnitude of these effects is large, the reduction of the informal sector reaching 1 to 4 points, depending on the estimator. This effect is likely to increase as the services benefit wider segments of the population. 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. Our results were confirmed by robustness checks, using alternative measure of informal sector and MFS, sets of control variables, and estimation approaches. 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.