Bridging the Financial Divide: The Impact of Mobile Money and Digital Lending Platforms on Household Savings and Consumption in Developing Economies

Abstract

This paper presents an empirical investigation aimed at identifying the distinct economic impacts of two segments within the Digital Financial Services (DFS) ecosystem: Mobile Money (transactional infrastructure) and Digital Lending (algorithmic credit), on household capital accumulation and consumption resilience. The study used a staggered Difference-in-Differences (DiD) identification design based on a high-frequency longitudinal sample of 18,840 household observations within 2018-2023 to isolate the causal impact of agent networks and 4G infrastructure rollout on larger trends in modernisation, taking advantage of the fact that the rollout was exogenous and spatially and temporally sequential. The findings showed a dichotomous effect. The adoption of Mobile Money had a causal effect of enhancing the depth of formal savings by 6.2 percentage points, caused through a safe storage mechanism, which was observed to be the strongest among rural households. On the other hand, although Digital Lending decreased aggregate consumption volatility by 25 per cent, the effect is localised in the middle-to-high income cohorts. In the case of the poorest quartile, high-interest digital credit did not even protect consumption, as low-cost social insurance was replaced with costly debt. These results oppose the unified approach to financial inclusion and suggest a dualistic structure in which the algorithmic lending platforms should be subject to more stringent consumer protection and debt-to-income limits, and implement more stringent payment rails universality to avoid predatory inclusion at the bottom of the pyramid.