Digital financial services and livelihood diversification in rural Ghana

Abstract

The emergence of digital financial systems, especially mobile money, has significantly changed the financial services space in sub-Saharan Africa in ways that promote financial inclusion among the poor, including those in rural communities. Focusing on mobile money, which is the main avenue for digital financial services for rural households in Ghana, this study investigates whether digital finance affects rural households’ livelihood diversification, using a nationally representative data on Ghana. Employing several econometric methods, including instrumental variable techniques to address potential endogeneity bias, the study finds mobile money to be positively associated with households’ choice of non-farm business as a livelihood option as well as their engagement in livestock production. However, we find a negative relationship between mobile money and diversification in crop production including the extent to which households engaged in the crop sector are able to diversify crop production. The implication is that when rural households have access to mobile money services, they produce fewer number of different crops while exploring non-farm activities and livestock production as additional livelihood options. The results underscore the need to address constraints that limit rural households’ access to digital financial tools, especially mobile money, in Ghana and in similar developing country contexts.

Impact Statement

This study employs a nationally representative micro-data from rural Ghana to investigate the effect of digital finance on livelihood diversification using several econometric methods including instrumental variables to address potential endogeneity bias. The study represents a significant attempt at addressing an important gap in the existing literature which is about whether digital finance brings any value addition to livelihood diversification efforts by rural households. The key finding is that when rural agricultural households have access to digital financial services through mobile money, they produce fewer different crops, while exploring non-farm activities and livestock production as additional livelihood options. The finding implies that access to digital finance may influence rural households’ ability to reallocate productive resources to areas that yield higher returns to their livelihoods and/or mitigate the risk of income loss. Expanding upon this finding with an exploration of the key correlates of diversification and access to digital finance, the study shows that addressing constraints to access to digital finance or mobile money (particularly, the limited mobile phone connectivity, electricity access or supply challenges, and low education or digital illiteracy in rural areas) is important for deepening livelihood diversification in rural Ghana.

Keywords:

• Digital finance
• mobile money
• livelihood diversification
• crops
• livestock
• non-farm enterprises

Reviewing Editor:

• Goodness Aye, University of Agriculture, Makurdi Benue State, NIGERIA

Subjects:

• Economics and Development
• Economics
• Development Studies
• Finance
• Rural Development

JEL CLASSIFICATIONS:

• G50
• I31
• Q00
• O39

Data availability statement

The main data underlying this study are available upon request from the Ghana Statistical Service (https://microdata.statsghana.gov.gh/index.php/catalog/97/study-description).

Author contributions

Richmond Atta-Ankomah: Conception, methodology, data management and analysis, writing draft and discussion; revising and editing the intellectual

Kwame Adjei-Mantey: Literature review, writing draft and discussion, revising and editing the intellectual contents

Akuffo Amankwah: Literature review, writing draft and discussion, revising and editing the intellectual contents

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The authors obtained an anonymized version of the data from GSS and did not directly engage any of the participants of the survey. Hence, the research activities conducted by the authors of this study are very less likely to lead to a violation of any research ethics.

2 This study uses the ten regions that existed at the time of the GLSS 7 survey. The regional boundaries have since been re-demarcated to create additional six regions in the country.

3 The full regression results are displayed in Table A2 in the Online Appendix.

4 The full results are presented in Table A3 in the online appendix.

5 The full results are shown in the Online Appendix in Tables A4 and A5.

Additional information

Funding

This study received no funding.

Notes on contributors

Richmond Atta-Ankomah

Richmond Atta-Ankomah is a development economist and Senior Research Fellow at the Institute of Statistical, Social and Economic Research, University of Ghana. His research interest is diverse but largely converges around development issues Concerning households and firms in sub Saharan Africa.

Kwame Adjei-Mantey

Kwame Adjei-Mantey is researcher at the Department of Applied Economics, University of Environment and Sustainable Development, Somanya, Ghana. His research interests are in the areas of energy and environmental economics, development economics and behavioral economics.

Akuffo Amankwah

Akuffo Amankwah is an Economist for the Living Standards Measurement Study (LSMS), the World Bank’s flagship household survey program housed at the Development Data Group. His primary areas of research are poverty, labor, aquaculture, agriculture and rural development, and methodological studies to improve household surveys.