FinTech and SME Financing Constraints in Developing Economies: Complementarity, Substitution, and the Limits of Digital Credit

Abstract

Small and medium enterprises in developing economies face well-documented financing gaps, with collateral requirements, information asymmetries, and high transaction costs excluding most firms from formal bank credit. This paper synthesises evidence from 13 empirical studies examining how FinTech adoption affects SME and microenterprise financing across China, Sub-Saharan Africa, Indonesia, India, Ghana, and Sierra Leone. The central question addressed is whether digital finance substitutes for or complements traditional bank credit in relieving SME financing constraints. The evidence is genuinely mixed. In China, digital financial inclusion shows a substitution relationship with local bank branch density in alleviating cash-investment sensitivity, with the interaction term reaching 0.452, but the combined effect of both channels together exceeds either alone. Across 47 African countries, FinTech development raises SME digital finance access most strongly at lower percentiles of existing digital finance, with the effect declining from 4.075 to lower magnitudes as digital finance development increases, indicating diminishing returns. In Indonesia, perceived usefulness and ease of use (β = 0.34 each) drive FinTech adoption among SME owners more than trust or government support. Qualitative evidence from Ghana and Sierra Leone documents that mobile money provides informal businesses and base-of-pyramid entrepreneurs with micro-loans, financial record-keeping capability, and reduced cash-handling risk, but high platform charges and limited interoperability constrain the depth of these benefits. The paper concludes that FinTech's contribution to SME financing is most accurately characterised as relieving specific frictions, transaction costs, information asymmetry, and geographic access, rather than resolving the underlying collateral and risk-assessment constraints that determine formal credit access, and that the complementarity-substitution relationship is itself context-dependent rather than fixed.

JEL codes: G21, L26, O16, M13, O55