Digital Financial Inclusion, MSMEs, and Inclusive Growth: Empirical Evidence from Districts/Cities in Indonesia

Abstract

The transformation of digital financial services—through e-wallets,
QRIS, branchless banking, and fintech—is seen as capable of
reducing transaction costs and expanding access to financing for
MSMEs. This study assesses the extent to which digital financial
inclusion (DFI) drives inclusive growth at the district/city level in
Indonesia. We construct a composite DFI index that emphasizes
three dimensions—access, usage, and quality—and link it to
inclusive growth indicators: real GRDP growth in labor-intensive
MSME sectors, MSME employment, and inequality proxies.
Methodologically, the study adopts a panel data design with twoway
fixed effects, enriching identification through a spatial panel
model (to capture spillovers between regions) and a quasiexperimental
strategy (staggered Difference-in-Differences) that
exploits variations in digital transaction adoption/intensification
across time and region. Potential endogeneity is addressed using
instruments based on digital infrastructure availability and
topography. The results show that increased DFI is positively and
economically meaningfully associated with the Inclusive Growth
Index (IGI), through reduced payment friction, market expansion,
and improved MSME financing eligibility. Heterogeneity findings
indicate greater marginal benefits in regions with higher digital
readiness, while evidence of spatial spillovers suggests spillover
effects to neighboring regions. Policy implications emphasize
accelerating infrastructure and ecosystem (agent/merchant)
density, reducing microtransaction costs, strengthening digital
financial literacy, and integrating transaction data for inclusive
financing with consumer protection. The novelty of this study lies
in the construction of a district/city-level DFI index that focuses on
use and quality, a truly inclusive growth measurement, and a
combination of spatial identification and quasi-experimental
methods that strengthen causal inference.