Mobile Money, Trade Credit and Economic Development: Theory and Evidence

Working Paper: CEPR ID: DP10848

Authors: Thorsten Beck; Haki Pamuk; Ravindra Ramrattan; Burak R. Uras

Abstract: Using a novel enterprise survey from Kenya (FinAccess Business), we document a strong positive association between the use of mobile money as a method to pay suppliers and access to trade credit. We develop a dynamic general equilibrium model with heterogeneous entrepreneurs, imperfect credit markets and the risk of theft to account for this empirical pattern. Mobile money dominates fiat money as a medium of exchange in its capacity to avoid theft, but comes with higher transaction costs. The interaction between risk of theft and limited access to trade credit generates demand for mobile money as a payment method with suppliers and the use of mobile money in turn raises the value of a credit relationship and hence the willingness to apply for trade credit. Calibrating the stationary equilibrium to match a set of moments that we observe in Kenyan FinAcces enterprise survey data and quantifying the importance of the endogenous interactions between mobile money and trade credit on entrepreneurial performance and macroeconomic development, we find that the availability of the mobile money technology increases GDP by 0.33-0.47%.

Keywords: Kenya; Mobile Money; Small Business Finance; Trade Credit

JEL Codes: D14; G21; O12; O16

Causal Claims

Cause	Effect
Mobile money usage (E40)	Trade credit access (F19)
Trade credit access (F19)	Mobile money usage (E40)
Mobile money usage (E40)	GDP (E20)
Mobile money usage (E40)	Probability of using trade credit for purchasing inputs (D25)
Mobile money lowers theft risk (E40)	Trade credit constraints alleviated (F34)
Mobile money usage enhances value of credit relationships (E40)	Greater willingness to apply for trade credit (G21)
Mobile money (E40)	Per capita real income growth (O49)
Mobile money (E40)	Total factor productivity growth (O49)