Impact of Digital Innovation on Financial Inclusion of SME Sector of Pakistan

Abstract

This study investigates the relationship between digital financial innovation—specifically mobile money and e-payment usage—and access to formal credit among small and medium-sized enterprises (SMEs) in Pakistan. Utilizing a structured secondary dataset from the State Bank of Pakistan, the research analyzes 1,300 firms' financial activities through descriptive statistics, cross-tabulations, t-tests, and regression models. The findings reveal limited adoption of digital financial tools, with only 25.7% of firms using mobile money and more than half reporting no e-payment activity. Regional and sectoral variations emerged, with higher usage in Khyber-Pakhtunkhwa and Islamabad and among medium-sized enterprises, highlighting digital divides across the country. Despite the growing use of digital platforms, logistic regression analysis found no significant link between mobile or e-payment use and access to formal credit, with only 1.08% of firms reporting active loans. Regression models also indicated that digital financial behaviors did not significantly predict loan amounts. The study identifies deep-rooted structural barriers in Pakistan’s financial system—including strict collateral requirements, low digital literacy, and regional disparities—that overshadow the potential benefits of digital financial innovation for financial inclusion. Recommendations emphasize region-specific policies, sector-focused interventions, improved digital infrastructure, trust-building measures, and the integration of digital payment histories into credit scoring systems. This research underscores the need for a holistic approach that bridges technological adoption with regulatory reforms and tailored financial products to enhance SME financial inclusion in Pakistan.