Digital financial services and livelihood diversification in rural Ghana

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. 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.