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Leveraging Digital Financial Solutions To Promote Formal Business Participation

Leveraging Digital  Financial Solutions  To Promote Formal Business Participation Author: Leora Klapper, Margaret Miller And Jake Hess

Date Published: 3:21:39 PM Thursday, 23-January-2020

In recent years, we have seen the enormous potential of digital technology to catalyze financial inclusion. By giving unbanked people access to financial services via mobile phones or the internet, technology is creating a brighter future for millions around the world. Digital financial services may also help break down one of the remaining impediments to full financial inclusion: the informal nature of many businesses worldwide. Although financial inclusion is particularly beneficial to entrepreneurs, the majority of micro- small-, and medium-sized enterprises (MSMEs) do not participate in the formal financial system. Business-owners are often skeptical that the costs of formality, including paying taxes and abiding by regulations, are outweighed by the benefits. The evidence shows, however, that formality can help firms enter new markets, join global value chains, reach foreign buyers, or access credit. For workers, being part of the formal economy offers legal protections and social benefits that are often otherwise lacking. In other words, formalization enables economic inclusion. And given that many MSMEs are owned by women, informality among small firms also represents a missed opportunity to close the gender gap in access to financial services.