Digital financial inclusion without formalisation? Mobile wallets and informal economic engagement in Malawi

Digital financial inclusion is increasingly promoted as a pathway towards formalisation in developing economies. However, whether digital financial technologies reduce informal economic activity is still an unresolved empirical question. This study investigates the relationship between mobile wallet usage and participation in Informal economic activities in Malawi. The study constructs an informal economic participation index and estimates the effect of mobile wallet usage using a sequential econometric strategy comprising survey-weighted Ordinary Least Squares (OLS), Instrumental Variable (IV) estimation, and survey-weighted IV regression to address potential endogeneity and account for the complex survey design. The findings reveal a positive and statistically significant relationship between mobile wallet usage and participation in informal economic activities. OLS estimates reveal a significant association, while the IV estimates indicate a larger effect after correcting for potential reverse causality and self-selection, suggesting that conventional estimates may underestimate the relationship. The preferred survey-weighted IV specification confirms that mobile wallet usage significantly increases informal economic engagement in Malawi. These findings challenge the assumption that digital financial inclusion automatically promotes economic formalisation. Instead, they suggest that mobile wallets may create a form of digitally enabled informality, where economic actors benefit from financial connectivity while remaining outside formal regulatory systems.