Digital finance and MSMEs—The initial story of how and when digital finance works for MSMEs

Niamh Barry

FiDA Partnership is publishing a mini series on various insights derived from an analysis of the third edition of the Evidence Gap Map (EGM). This is the fifth blog.

Previous blogs: 

Between 2010 and 2050 Africa’s working population will almost double. There is a risk that this population growth will not be mirrored in the growth of economic opportunities. However, there is potential for  micro, small, and medium-sized enterprises (MSMEs) to fill this gap between the growing workforce and opportunities for work. Indeed, formal and informal MSMEs already make up over 90 percent of all firms worldwide and account on average for 60 to 70 percent of total employment and 50 percent of GDP

Access to financial services could stabilize and grow MSMEs

Yet, MSMEs face a range of challenges, one of which is access to financial services that meet their specific needs. Traditional financial providers have had limited interaction with this segment for many reasons, including the high cost of serving this segment, MSMEs’ limited documented financial and transaction history, and lower financial literacy among MSMEs.

MSMEs need working capital to smooth the ups and downs of their cash flows and to maintain adequate inventory. But it is not only credit that MSMEs require; MSMEs need effective channels through which to receive payments, to save and plan for business needs, and to create business transaction records. Digitization provides a way for finance providers to reach scale and serve new MSMEs while remaining affordable due to savings on staff and infrastructure.

There are many digital finance initiatives available for MSMEs to advance 

Digital financial services can be a game changer for MSMEs. The range of digital finance products for MSMEs is expanding and includes innovations in creating credit profiles for MSMEs through invoice services (Lidiya) and inventory tracking (Sokowatch). There are also new credit products designed specifically for MSMEs, such as invoice finance (First circle) and other products that use digital rails to more economically and efficiently provide credit to MSMEs (Lulalend and AYE). Still other firms, such as Lipa Na M-Pesa and Kopo Kopo, now offer merchant payments services with the opportunity to access credit based on transaction history. 

Notably, it is not only offline MSMEs that stand to benefit from digitization; increasingly platforms are offering financial services to online MSMEs. For instance, in Africa, Jumia and, in India, Paytm use online transactions histories, among other data points, to offer loans to their sellers.

But we don’t isolate the MSME from the individual when we test for the impact 

Given the uptick of digital financial services that service both online and offline MSMEs, a reasonable question to ask is “After access, what do we know about the impact of digital financial services on MSMEs?”

However, it is relatively rare for studies within the digital finance impact literature to investigate specific population segments. The most common distinction is urban versus rural, sometimes male versus female, but most often studies simply refer to “individuals” or “households”. The distinction between an MSME and an individual is often not a clear one, and, given how small many of these firms are, the distinction between individual accounts and MSME accounts is also unclear. Moreover, it is easier to speak with individuals rather than get into the details of the small business. Thus, it is not surprising that just five studies—published in the last two years—tested various digital finance interventions specifically with offline MSMEs, and three of these looked exclusively at female micro-entrepreneurs.

Spotlight on the impact of digital finance for MSMEs

Below we share the highlights of four of these studies. It is important to note that, unfortunately, the studies rarely supply details on the nature of the businesses included. The products tested were savings (2), credit (1) and, payments linked to credit (1). 

Digital savings to advance women-led businesses are better with business training 

  • The TechnoServe Women in Business program partnered with M-Pawa (an interest-bearing mobile money savings account that also provides microloans conditional on savings performance) and Arifu (a mobile learning platform) to trial two interventions meant to improve business outcomes for female micro-entrepreneurs in Tanzania. The M-Pawa intervention provided M-Pawa training and weekly savings reminders through Arifu. The business intervention included the M-Pawa training in addition to business skills training. The results showed that women in the M-Pawa group saved three times more than the control group, while those in the business intervention group, which offered M-Pawa and business training, saved almost five times more than the control. The intervention increased the probability of receiving a loan by 14 percent. Regarding business outcomes, there was evidence that the intervention led to business expansion when combined with business training. Here, women were 4.6 percent more likely to operate a secondary business and generate a small increase (4,000TZS/$1.74) in monthly profits.
  • Echoing this study, researchers tested the midline impact of two interventions, both separately and together, in alleviating constraints that impede savings and business growth among female micro-entrepreneurs in Indonesia. The mobile savings intervention expanded access to mobile savings accounts, while the business training intervention aimed to improve business skills and financial literacy. Overall, the business training in combination with the mobile savings intervention led women to increase both total and mobile savings. Both interventions independently increased household assets. The two interventions in combination increased women’s self-confidence and control, but there were no discernible effects of either intervention, alone or combined, on women’s business outcomes at the midline point. 

A common thread between these two studies was the examination of the effect of providing a savings product with and without business training. They found that providing business training alongside a digital savings product improved micro-entrepreneurs’ savings and business outcomes more than the savings product alone. 

Improving MFI loans outcomes for women’s businesses through a simple channel change 

  • In an RCT with the BRAC Uganda, researchers tested the disbursement of Micro Finance Institute (MFI) loans via a mobile money channel for women business owners. The digitization of the disbursement channel generated numerous positive effects for women business owners:
    • Business assets/inventory: An 11 percent (about $35) increase in the value of business assets and inventory was observed in the mobile disbursement group. 
    • Business sales: 15 percent higher for the mobile disbursement group both weekly and monthly.
    • Business profits: Eight months post-loan a 15 percent increase in business profits was observed. 10 percent higher than the control group. In the control groups, profits declined by 6 percent despite the loan. 
    • Increases in consumption: Significant increases in overall consumption for the mobile disbursement treatment were observed. This increase in consumption is of a similar value to the increase in business profits.
    • Impact mechanisms: women who experienced the most pressure at baseline to share money with family experienced the largest treatment impacts.This group saw a 25 percent increase in business profits and a 17 percent increase in business capital compared to the control. Furthermore, they found that women who received the mobile disbursement treatment gave significantly less money to their spouse—nearly 50 percent less—whereas the control group increased the amount they gave to their spouse after receiving their business loan. 
  • These findings suggest that the privacy mobile money affords women is a key driver for the impact observed, and this is echoed by numerous other studies. It also adds context to the narrative around the minimal effects of MFI loans and suggests that finding ways to remove the barriers women face in investing the loan into their business could improve business outcomes. 

Digital merchant payments—more than a way to accept digital payments 

  • In Kenya, between 2015 and 2017, researchers tested the effect of easing barriers to access Safaricom’s Lipa Na M-Pesa service. Lipa Na M-Pesa is a product specially designed to facilitate retail transactions by MSMEs. Lipa Na M-Pesa was available for all interested businesses at the time of the intervention, but the researchers encouraged adoption in the treatment group by mitigating potential adoption barriers, like lack of information or technical know-how and costs. All merchants in the treatment group were provided with (1) leaflets highlighting the benefits and the costs of the technology, (2) a short video featuring the experiences of successful relatable MSMEs using Lipa Na M-Pesa and, (3) no-cost account opening. 
    • Adoption: Uptake was increased by 30 to 35 percent through the treatment. They found that business owners who are more open about their businesses’ financial situation and had past exposure to mobile money products are more likely to be willing to adopt the technology.
    • Loan access: Lipa Na M-Pesa allows Safaricom to track business transactions and thus observe creditworthiness. Sixteen months post intervention, the number of Safaricom loans increased by 60 percent compared to the control group.This increase was significantly more pronounced for smaller scale businesses. 
    • Consistent sales: Smaller businesses in the treatment group had less volatile sales over a 12 month period than the control group. The sales smoothing induced by the Lipa Na M-Pesa treatment complements the findings in a recent M-Shwari study, which showed that the Safaricom M-Shwari product enabled households to bridge cash flow gaps. 
    • Safety: Businesses in the treatment groups reported a significant 3.5 percent increase in perceived safety during their business operation.This was more pronounced for businesses operating in relatively unsafe areas, underscoring the role of digital money in raising retail transaction safety among MSMEs.

Overall, this study illustrates the role of certain adoption barriers in preventing the uptake of digital payments and the potential impact that merchant payments—linked to digital loans—have on smoothing volatility and improving perceptions of security for MSMEs. 


  • Very few studies have examined the impact of digital financial service use explicitly on MSMEs.When they have, they focused predominantly on women and exclusively on offline MSMEs. 
  • Digital savings has a clear role to play in business development, but the impacts are greatly enhanced when coupled with investment in additional business training. 
  • By digitizing the delivery channel of business loans using mobile money women benefited from reduced visibility of the loan and, as a result, reduced pressure to use the loan for non-business purposes. This appeared to promote the use of the loan for business purposes and to significantly improve women’s business outcomes and had a positive downstream effect on household outcomes. 
  • The adoption of a merchant payment system that is linked to credit access both smoothed sales volatility and increased perceived safety, especially for smaller businesses. These findings are echoed in general P2P studies as well as in digital credit studies.

While at this point the few available studies do not represent the number or diversity of currently available MSME digital financial solutions, the studies outlined above provide encouraging early insights. Given Africa’s rapidly growing population and the need to strengthen support for MSMEs in Africa, evidence about which digital financial services work for both online and offline MSMEs is critical to continue effectively supporting their growth. 

The studies in the EGM represent our best knowledge of digital finance impact insights. New studies are continuously emerging and thus the EGM will continue to evolve. If you have questions on the EGM, are interested in discussing research priorities, or know of relevant digital finance impact studies that meet the inclusion criteria, please contact