Assessing the Influence of Financial Inclusion and Digital Finance on SMEs

Performance: The Moderating Role of Technological Adaptation

Ms. Samavia Munir

Faculty of UE Business School, University of Education Lahore, Multan Campus
Muhammad Mustehsan
UE Business School, University of Education Lahore, Multan Campus
Abstract
Purpose: This study examines the influence of financial inclusion and digital finance on the
performance of small and medium-sized enterprises (SMEs) in Pakistan, and the moderating
role of technological adaptation in this relationship.
Methods: We are using data from a survey of 212 SMEs; the questionnaire will be
administered to the selected SMEs using an online platform. The SMEs will be selected using
a random sampling technique. The collected data will be analyzed using the following
statistical tools: Correlation analysis, Reliability tests, Regression analysis, and Moderation
analysis.
Results: We found that financial inclusion and digital finance both have a positive impact on
SMEs' performance. Moreover, we found that technological adaptation moderates the
relationship between financial inclusion and digital finance on SMEs' performance.
Specifically, SMEs that are more technologically adaptable are better able to benefit from
financial inclusion and digital finance than those that are less adaptable.
Implications: Our findings suggest that policymakers and financial institutions should
promote financial inclusion and digital finance, and SMEs should invest in technological
adaptation to maximize the benefits of financial inclusion and digital finance.

Keywords (Financial Inclusion, Digital Finance, Technology adaptation, SME Performance).

1. Introduction
Financial inclusion refers to the access and use of financial services by individuals and
businesses, while digital finance involves the use of technology to provide financial services.
This topic is important because SMEs play a crucial role in economic development, and
improving their access to financial services and digital technology can enhance their
performance and contribute to economic growth.

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 Research Importance with previous studies
Previous studies have explored various aspects of financial inclusion and digital finance on
SMEs performance. For instance, KPMG (2019) found that digital finance can reduce the cost
and time required for SMEs to access financial services, which can improve their financial
management and performance. Similarly, a study by Aker and Mbiti (2010) found that mobile
banking can improve the financial management of SMEs and reduce their transaction costs.
Other studies have examined the impact of financial inclusion on SMEs’ performance. A study
by Demirguc-Kunt et al. (2018) found that access to credit can enhance SMEs performance
and contribute to job creation. Additionally, Beck et al. (2014) found that financial inclusion
can enhance the productivity and growth of SMEs.
Research gap and Rationale of your research
Despite the growing interest in the influence of financial inclusion and digital finance on SMEs
performance, there is a research gap regarding the moderating role of technological adaptation
in this relationship. While previous studies have explored the impact of financial inclusion and
digital finance on SMEs performance, they have not fully investigated how SMEs can adapt to
digital technology to enhance their financial inclusion and improve their performance. In a
study by Muthinja and Ndemo (2020), the authors suggest that "there is a need for more
research on how SMEs can effectively adapt to digital technology and integrate it into their
business operations to enhance their financial inclusion and improve their performance" (p.
214). Similarly, a study by Tetteh et al. (2021) highlights the importance of understanding the
moderating role of technological adaptation in the relationship between financial inclusion,
digital finance, and SMEs performance. However, these studies have not fully explored the
moderating role of technological adaptation in the relationship between financial inclusion,
digital finance, and SMEs performance. Therefore, further research is needed to investigate
how SMEs can adapt to digital technology to enhance their financial inclusion and improve
their performance.
Research questions
Specifically, the study aims to investigate: What is the relationship between financial inclusion
and SMEs performance, and how does technological adaptation moderate this relationship?
What is the relationship between digital finance and SMEs performance, and how does
technological adaptation moderate this relationship? How do SMEs adapt to digital technology
to enhance their financial inclusion and improve their performance? These research
questions/objectives are consistent with previous studies on this topic and will provide insights

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into how SMEs can effectively leverage digital technologies to enhance their financial
inclusion and improve their overall performance.
Research contributions
This research contributes to the existing literature by providing empirical evidence on the
influence of financial inclusion and digital finance on SME performance in Pakistan. The
findings can inform policymakers, financial institutions, and SME owners about the potential
benefits of promoting financial inclusion, adopting digital finance solutions, and enhancing
technological adaptation. Ultimately, the research aims to contribute to the development of
strategies and policies that foster SME growth and economic development in Pakistan.
2. Literature Review
2.1 Financial Inclusion.
The supply of and access to financial services for all members of the population, especially the
underprivileged and other disadvantaged groups, is known as financial inclusion (Ozili, 2018).
The provision of banking services at an affordable price to the great majority of underprivileged
and low-income groups can also be described as financial inclusion (Dev, 2006). Using and
having access to formal financial services is another definition of financial inclusion (Sahay et
al, 2015). These definitions all emphasize the need to ensure that everyone has access to the
financial services offered.
Financial inclusion (FI), according to the World Bank's 2018 definition, is the process through
which all households and companies, regardless of income level, have access to and are able
to successfully use the financial services they require to enhance their lives. Financial inclusion,
according to CFI (2018), is a condition in which people have access to a comprehensive range
of financial services at reasonable costs, conveniently, and with respect and dignity.
The multidimensional approach used to quantify financial inclusion includes the three
dimensions of banking, access, availability, and usage of high-quality services (Sarma, 2008).
Access to finance is essential for the growth and expansion of SMEs, and the availability of
external financing is positively connected with productivity and growth (Mbuva and Wachira,
2019; Myint, 2020). Many of the most recent economics studies emphasize that finance helps
SMEs operate better (Beck and Demirguc-Kunt, 2006). One element of financial inclusion is
access to financial services, as the community has to be involved in the economy in order to
increase its welfare (Terzi, 2015). Most frequently, FI is important for supporting SME
expansion and significant employment growth (Eton et al., 2021). Hence, it would result in
both short-term and long-term financial growth (Thathsarani et al., 2021).

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 2.1.1 Accessibility.
A bank account can be opened with few possible barriers if it is affordable and located close to
other bank service points, such as branches and automated teller machines (ATMs), according
to the concept of accessibility (Alliance for Financial Inclusion, 2010). Financial inclusion is
linked to improved access to financial services like lower banking fees, closer access to
branches, and less paperwork required to create a bank account (Allen et al., 2012). Greater
accessibility is anticipated to promote financial inclusion because it signifies the ability for
people to use formal financial services (Camara and Tuesta, 2014). Sarma, (2008) One of the
three basic aspects of financial inclusion is created FI accessibility dimension. Also, as part of
creating FI, two more studies have used "accessibility" as a dimension to measure financial
inclusions (Chakravarty and Pal, 2013).
Accessibility, which is linked to the ideas of physical proximity and affordability, has been
observed among the supply-side factors. Access to financial services must significantly
improve how well business organizations execute (Konte and Tetteh, 2022). But still, the
majority of prior initiatives have highlighted FI as the only international solution for the
expansion and development of SMEs (Thathsarani and Jianguo, 2022). Also, as FI dimensions,
mobile banking, banking services, and banking penetration all favorably impact SMEs' growth
and development (Anastesia et al., 2020). When considering the connection between
accessibility and business sector operations, it is important to remember that having access to
financial services helps entrepreneurs and real sector business owners grow their companies,
manage their financial and non-financial activities effectively while lowering risk, and survive
financial shocks.
2.1.2 Availability.
The abilities of a company in terms of technology selection, market access, and access to key
resources that significantly contribute to the improvement of the business are determined by
the availability dimension under the FI concept. A substantial correlation between financial
availability and company performance, especially in developing nations (Thathsarani and
Jianguo 2022). Having access to different financial services increases productivity,
performance, and sales growth (Harrison et al., 2015). Ibor et al. (2017), says that the expansion
of bank financial services and the financial success of SMEs are favorably associated with
revealed a similar connection. Also, it has been noted that a greater physical distance between
service providers and consumers will negatively impact the operations and development of
SMEs. According to a study by Simiyu and Oloko (2015), the availability of ATMs, cash
deposit machines, and branch locations in rural areas will improve the community's financial
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services and help the expansion, development, and competitiveness of SMEs. Until now, in
some countries it is difficult to select beneficiaries in the financial inclusion sector due to the
lack of credit history, a large number of participants, and the participants' varied perspectives
(Chao et al., 2021).
For an inclusive financial system, availability means that customers can easily access financial
services (Sarma, 2008). Sharma (2016) claims that the geographic and demographic
penetration of banking services can be used to define availability. Nonetheless, the majority of
the research on FI in India found that regional bank penetration, ATM availability, and access
to inexpensive credit are strategic policy goals for promoting financial inclusion (Chakravarty
and Pal, 2013). Understanding the scope of financial services that are available to the general
population is crucial for analyzing availability issues.
2.1.3 Usage.
Use refers to the extent and continuity of the actual use of financial services and products.
Additionally, it describes the regularity, frequency, and length of time used (Alliance for
Financial Inclusion, 2010). The use of formal financial services can be influenced by
socioeconomic factors including GDP per person, human capital, the legal system, and cultural
norms that encourage the regular use of financial services (Camara and Tuesta, 2014).
Population density and the number of branches and ATM networks influence how easily people
access and use financial services (Beck et al., 2007). Financial inclusion requires not only
having a bank account but also using it to its fullest potential (Sarma, 2008).
2.2 Small Medium Enterprises
According to Aga, Francis, and Rodriguez-Meza (2015), SMEs are the backbone of economic
growth and development and are major sources of employment. Studies also point out that
SMEs play a significant role in economic development and growth since they give citizens
options for work, which raises their household income (Kamunge, Njeru, & Tirimba, 2014).
Turyakira and Mbidde (2015) argue that insufficient study on how SMEs contribute to
networking affects competitiveness in addition to scarce resources. Rahman (2015) shows that
networking among SMEs not only boosts competitiveness but also allows for the sharing of
employee training expenses and lowers costs for consulting, R&D, production, export, and
financial support. Despite Breda and Fahy's (2011) lack of discovery of causal relationships
between resource networking, information sharing, and international performance, their
research demonstrates a favorable correlation between a firm's human capital network and
international performance. The majority of SMEs in Sub-Saharan Africa and Uganda encounter
numerous difficulties that have an impact on their operations and long-term survival. It is
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highlighted that the rates of business failure are concerning, with relatively few companies
operating for longer than a year. By making sure that they play their part in assisting them in
enhancing their economies, governments should promote SMEs. The opportunities for those
countries' populations are greater the stronger their economies are. While SMEs function
similarly, share many of the same traits, and encounter nearly identical difficulties, they differ
in how they perceive their role in economic growth and development. According to Hatch and
Cunliffe (2012), the majority of SMEs in Africa face much more hostile and challenging
working environments than their counterparts in countries with more advanced economies.
Ocioo, Akaba, and Worwal-Brown (2014) note that competition is a challenge for SMEs. In
the SME sector, there is strong competition as a result of technological advancements brought
about by globalization, which have led to the development of new products. An association
between increased adoption of technology and higher rates of business failure in Uganda. In
particular, in Africa, where there are greater problems like technology, innovation, and human
capital, the limitations that SMEs face could also include insufficient operational capabilities
and finite resources (Eton et al., 2021).
2.3 Financial inclusion on SME Performance
The frequency and duration of the use of the service over time, such as the average savings
balances, the volume of transactions per account, or the number of electronic payments made,
may be regarded as a measure of the quality of financial products and services. The number of
bank branches and ATMs per 10,000 inhabitants has reportedly been used to estimate
accessibility on a personal level, according to Sarma (2008). Accessibility and availability
affect the quality of financial services. The current study has concentrated on two categories of
financial services: deposits and SMEs' transactional accounts. Financial services' accessibility
has a favorable effect on SMEs' performance, claim Ombi et al. (2018). Thus, the growth of
company performance is correlated with both affordability and the country's increased access
to financial services, both of which fall under the category of financial inclusion (Williams et
al., 2017; Okoye and Adetiloye, 2017). Based on the proof of a strong connection between
financial inclusion and SME performance in terms of access, availability, and utilization that
was previously shown. The following hypothesis is developed in light of these conversations.
Hypothesis 1 (H1). Financial inclusion improves SME performance significantly.
2.4 Digital Finance and Performance of SMEs
Kulathunga et al. (2020), says that technology expertise refers to a manager's ability to
capitalize on financial growth revolutions by introducing digital financial services, and also
found that technology literacy improves the performance of SMEs. The study provided access
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to digital finance as knowledge acquisition that a manager must have to improve the
performance of the company. Researchers have found that the data they have about the digital
channels used for access to digital finance is either very minimal or non-empirical. Moreover,
Agyapong, (2021) learned that mobile money platforms are commonly used for payment. It
was discovered that businesses are using digitalization to improve their service offering. The
study, which was merely exploratory in nature, did not examine the relationship between the
use of digital platforms and an SME's performance.
Studies like those Hernando & Nieto (2007) indicate that it can take more than two years for
technology investments to pay off. This brings up a crucial issue that hasn't been addressed in
the literature: how much digitalization is optimal in terms of ROI (both monetary and
nonmonetary), and what should the ideal digitization look like? What additional elements affect
this optimal digitization? If, for instance, technological innovation and customer awareness are
developing at the same rate, it would be exciting to observe. Despite the fact that a large number
of studies support the idea that digital financial services increase a company's performance and
profitability, there aren't many studies that have attempted to challenge this idea (Abbasi &
Weigand, 2017; Ozili, 2018). The following hypothesis is formed as a result of these
conversations.
Hypothesis 2 (H2). The growth of digital finance makes it easier for SMEs to get the
financing they need.
2.5 Moderating role of Technology adaptation
Without a doubt, using cutting-edge technology will provide SMEs with timely and important
information, and knowledge, enhanced relationships with suppliers and customers, improved
cooperation, increased output, and efficiency (Ensari and Karabay, 2014). According to Yang
and Zhang (2020), the development of digital FI benefits small and micro enterprises,
particularly those in the private, high-tech industries and competitive marketplaces, in order to
achieve sustainable growth. Using ICT-based services enables SMEs to access outside
financial resources, hence boosting their financial inclusion (Agyekum et al., 2021). The
funding needed for entrepreneurial initiatives is provided by financial services, and technology
is what drives the modernization and change of business models. The needs of businesses are
met by digital finance, which also offers the special advantage of enabling a comprehensive
integration of digital technology and financial services. In order to analyze credit risk
assessment and control, unsystematic risk between service providers and commercial
enterprises must be minimized. Yet, perceptions of the utility and simplicity of digital

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marketing will influence beliefs about its use, which will have an impact on behavior and actual
use (Nistor, 2019). Based on these conversations, the following hypothesis is proposed.
Hypothesis 3 (H3). The relationship between financial inclusion and the performance
of SMEs is moderated by technological adaption.
Hypothesis 4 (H4). The relationship between digital finance and the performance of
SMEs is moderated by technological adaption.

Conceptual Model

Technology
adaptation

Financial
Inclusion

SME
Performance
Digital
Finance

3. Research Methodology
3.1 Sample Selection
The target population for this study is SMEs in Pakistan. A list of registered SMEs in Pakistan
will be obtained from the relevant government agencies. The sample size will be determined
using the sample size formula for a population of 471 or more (Cochran, 1977): n = z2 x p x
(1-p) / e2 where n is the sample size, z is the standard normal distribution value corresponding
to the level of confidence, p is the estimated proportion of SMEs in Pakistan, and e is the
desired level of precision.
Assuming a confidence level of 95%, a margin of error of 5%, and an estimated proportion of
50% of SMEs in Pakistan, the sample size will be 212 SMEs.
3.2 Data Collection
The data collection process will be carried out in two phases: Phase 1: A pilot study will be
performed to evaluate the questionnaire's reliability and acceptability. Ten SMEs will be
selected randomly from the target population and will be asked to participate in the pilot study.

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The results of the pilot study will be used to modify the questionnaire and ensure that it is
suitable for the target population.
Phase 2: The questionnaire will be administered to the selected SMEs using an online platform.
The SMEs will be selected using a random sampling technique. The questionnaire will consist
of four sections: Demographic information of SMEs, Financial inclusion variables, Digital
finance variables, Technological adaptation variables, and the Performance variables.
3.3 Measures or Research instruments
3.3.1 Demographic Information of SMEs
This section of the questionnaire will collect information on the following variables: Nature of
business, Size of the SME (number of employees), Age of the SME, and the Legal status of the
SME.
3.3.2 Financial Inclusion Variables
This section of the questionnaire will measure the level of financial inclusion of SMEs. The
measurement scale items for “Financial Inclusion” are adopted from the previous studies. The
measurement items related to “accessibility”, “usage”, and “availability” are taken from the
studies of Salathia (2014); Bongomin et al. (2016), Nandru and Rentala (2019). Responses
were recorded on a Likert scale from 1 (strongly disagree) to 5 (strongly agree) for each item.
3.3.3 Digital Finance Variables
This section of the questionnaire will measure the level of digital finance adoption among
SMEs. The measurement scale items for “Digital Finance” are adopted from Ozili, (2018). Five
measurement items have been used to measure the variable with a five-point Likert scale
ranging from 1 (strongly disagree) to 5 (strongly agree).
3.3.4 Technological Adaptation Variables
This section of the questionnaire will measure the level of technological adaptation of SMEs.
The measurement scale items for “Technological Adaptation” are adopted from Thathsarani,
and Jianguo, (2022). Eight measurement items have been used to measure the variable with
five-point Likert scale ranging from 1 (strongly disagree) to 5 (strongly agree).
3.3.5 Performance Variables
This section of the questionnaire will measure the performance of SMEs. The measurement
scale items for “SMEs Performance” are adopted from Thathsarani, and Jianguo, (2022). Five
measurement items have been used to measure the variable with five-point Likert scale ranging
from 1 (Very dissatisfied) to 5 (Very satisfied).

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Data Analysis Instruments
The collected data will be analyzed using the following statistical tools: Correlation analysis,
Reliability tests, Regression analysis, and Moderation analysis. The research instruments will
be designed to capture relevant data on the research variables, ensuring that they are reliable
and valid. The questionnaire will be pre-tested to identify any errors or inconsistencies that
may arise during data collection.
Data Analysis
The collected data will be analyzed using descriptive and inferential statistical techniques.
Descriptive statistics such as mean, standard deviation, and frequency distribution will be used
to describe the demographic characteristics of SMEs in Pakistan. Inferential statistics such as
correlation analysis, regression analysis, and moderation analysis will be used to test the
hypotheses.
Procedures
The following procedures will be followed during the data collection process:
a. A list of registered SMEs in Pakistan will be obtained from the relevant government
agencies. b. The sample size will be determined using the sample size formula for a population
of 471 or more.
c. A pilot study will be conducted to test the reliability and validity of the questionnaire.
d. The questionnaire will be administered to the selected SMEs using an online platform or
face-to-face interviews.
e. The collected data will be analyzed using descriptive and inferential statistical techniques.
f. The findings of the research will be presented in a report that will include a summary of the
research questions, methodology, results, and conclusions.
Analytical Strategy
Survey Questionnaire: A survey questionnaire will be developed to collect data from SMEs in
Pakistan. The questionnaire will be designed using Microsoft Word and will be administered
using Google Forms. Statistical Package for Social Sciences (SPSS): For data analysis we are
using the Statistical Package for Social Sciences (SPSS V20). Descriptive statistics, correlation
analysis, regression analysis, and moderation analysis will be conducted using SPSS. Microsoft
Excel: Microsoft Excel will be used to clean and organize the data before importing it into
SPSS. Additionally, Excel will be used to make graphs and tables that will display the analysis'
findings. Moderator Analysis Macro (PROCESS): Moderation analysis will be conducted
using the Moderator Analysis Macro (PROCESS) developed by Hayes (2013). The PROCESS

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macro is an add-on for SPSS that allows for the estimation and interpretation of moderation
effects. Data Visualization Tools: Data visualization tools such as Tableau and Excel charts
will be used to create visual representations of the data. Graphs, charts, and tables will be used
to illustrate the results of the analysis and facilitate the interpretation of the findings.
4. Results
4.1 Demographic Analysis
Table of Demographic Analysis

Demographics Characteristics Percentage %

1. Male-owned 66.5
Gender 2. Female-owned 22.2
3. Owned by both genders 11.3
1. Manufacturing, 32.1
2. Service, 34.9
Nature of business
3. Construction, 15.1
4. Agriculture 17.9
1. Micro enterprise 32.1
Size of the SME 2. Small enterprise 35.8
3. Medium enterprise 32.1
1. Start-up 25.9
Age of the SME 2. Early stage 40.1
3. Established 34.0
1. Sole proprietorship 32.1
Legal status of the SME 2. Partnership 60.4
3. Corporation 7.5
1. 100,000-500,000 16.7
2. 500,000-1 million 10.5
Annual revenue 3. 1 million-5 million 20.1
4. 5 million-10 million 33.0
5. Over 10 million 19.6

In our study 212 SMEs responds us in which Gender: In Pakistan 66.5% of the SMEs are male-
owned, 22.2% of the SMEs are female-owned, 11.3% of the SMEs are owned by both genders.
Nature of Business: In Pakistan 32.1% of the SMEs are in the manufacturing sector, 34.9% of
the SMEs are in the service sector, 15.1% of the SMEs are in the construction sector, 17.9% of
the SMEs are in the agriculture sector. Size of the SME: In Pakistan 32.1% of the SMEs are
micro enterprises, 35.8% of the SMEs are small enterprises, 32.1% of the SMEs are medium
enterprises. Age of the SME: In Pakistan 25.9% of the SMEs are start-ups, 40.1% of the SMEs
are in the early stage, 34.0% of the SMEs are established. Legal Status of the SME: In Pakistan
32.1% of the SMEs are sole proprietorships, 60.4% of the SMEs are partnerships, 7.5% of the

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SMEs are corporations. Annual Revenue: In Pakistan 16.7% of the SMEs have an annual
revenue between 100,000 and 500,000, 10.5% of the SMEs have an annual revenue between
500,000 and 1 million, 20.1% of the SMEs have an annual revenue between 1 million and 5
million, 33.0% of the SMEs have an annual revenue between 5 million and 10 million, 19.6%
of the SMEs have an annual revenue over 10 million.
Descriptive Analysis

Descriptive Statistics

N Range Mean Std. Deviation Variance

Gender 212 2.00 1.4481 .68990 .476
Nature_of_business 212 3.00 2.1887 1.07636 1.159
Size_of_the_SME 212 2.00 2.0000 .80284 .645
Age_of_the_SME 212 2.00 2.0802 .77164 .595
Legal_status_of_the_SME 212 2.00 1.7547 .58108 .338
Annual_revenue 209 4.00 3.2823 1.34869 1.819
Financial_Inc 212 4.00 3.7396 .77211 .596
Digital_Fin 212 4.00 3.7538 .85827 .737
SMEs_Perf 212 4.00 3.7764 .91580 .839
Technology_Adap 212 4.00 3.8149 .80472 .648
Valid N (listwise) 209

The table provides insights into the central tendency, variability, and range of each variable in
the dataset. It allows you to understand the distribution and characteristics of the data for each
variable. N: This represents the number of observations or data points for each variable. In this
case, there are 212 observations for all variables except for "Annual_revenue," which has 209
observations. Range: It shows the difference between the maximum and minimum values in
each variable. For example, the range for "Gender" is 2, indicating that there are two unique
values (e.g., male and female). Mean: This represents the average value of each variable. For
instance, the mean for "Gender" is 1.4481, suggesting that the variable is likely on a scale
where 1 represents one gender category and 2 represents the other. Std. Deviation: It measures
the dispersion or variability of the data points from the mean. A higher standard deviation
indicates a greater spread of data points. For instance, the standard deviation for
"Nature_of_business" is 1.07636. Variance: This is the square of the standard deviation and
provides another measure of the variability of the data. A higher variance indicates a greater
spread of values. For example, the variance for "Legal_status_of_the_SME" is 0.338.

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 4.2 Correlation Analysis

Table of Correlations
Financial_Inc Digital_Fin SMEs_Perf Technology_Adap

Financial_Inc Pearson Correlation 1 .774** .764** .714**

Sig. (2-tailed) .000 .000 .000

N 212 212 212 212

Digital_Fin Pearson Correlation .774** 1 .720** .723**
Sig. (2-tailed) .000 .000 .000
N 212 212 212 212
SMEs_Perf Pearson Correlation .764** .720** 1 .729**
Sig. (2-tailed) .000 .000 .000
N 212 212 212 212
Technology_Adap Pearson Correlation .714** .723** .729** 1

Sig. (2-tailed) .000 .000 .000

N 212 212 212 212

**. Correlation is significant at the 0.01 level (2-tailed).

The Pearson correlation coefficient measures the strength and direction of the linear
relationship between two variables. It ranges from -1 to +1, with 0 indicating no correlation, -
1 indicating a perfect negative correlation, and +1 indicating a perfect positive correlation.
Financial_Inc (financial inclusion) has a strong positive correlation with Digital_Fin (digital
finance), with a correlation coefficient of .774. This indicates that as financial inclusion
increases, so does the use of digital finance. Similarly, SMEs_Perf (SMEs' performance) has a
strong positive correlation with both Financial_Inc (.764) and Digital_Fin (.720), suggesting
that as financial inclusion and digital finance increase, SMEs' performance also tends to
improve.
Technology_Adap (technology adaptation) has a strong positive correlation with all other
variables, with correlation coefficients ranging from .714 to .729. This suggests that as financial
inclusion, digital finance, and SMEs' performance increase, so does technology adaptation.
All correlations are statistically significant at the 0.01 level, indicating that the relationships
between the variables are not likely due to chance. The results suggest that there is a strong
positive relationship between financial inclusion, digital finance, SMEs' performance, and
technology adaptation.

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 4.3 Reliability tests
Table of Reliability Statistics
Constructs No. of Items Alpha (α)
FI 10 0.869
DF 5 0.828
SP 5 0.878
TA 8 0.871

The alpha coefficient is a measure of internal consistency reliability, which assesses how well
the items in a scale or construct are correlated with each other. Generally, a higher alpha
coefficient indicates higher reliability, with values above 0.7 considered acceptable, and values
above 0.8 considered good.
Construct reliability was assessed using Cronbach's Alpha. The results revealed that the
Financial Inclusion scale with ten items (α = .869) and the Digital Finance scale with five items
(α = .828) were found reliable. Similarly, SME Performance scale with five items was also
found reliable (α = .878) and the Technology adaptation scale with eight items (α = .871) were
found reliable. Reliability results are summarized in the table.
4.4 Regression Analysis
Table of Regression Analysis
Hypothesis β R² P Results
FI-->SMEs 0.91 .58 .00 Accepted
DF-->SMEs 0.77 .52 .00 Accepted

The results of the regression analysis support the acceptance of both Hypothesis 1 (H1) and
Hypothesis 2 (H2). The beta coefficient (β) for financial inclusion (FI) is 0.91 with an R² value
of 0.58 and a p-value of 0.00, indicating a significant positive relationship between financial
inclusion and SMEs performance. Similarly, the beta coefficient for digital finance (DF) is 0.77
with an R² value of 0.52 and a p-value of 0.00, indicating a significant positive relationship
between digital finance and SMEs performance. So, the results concluded that financial
inclusion and digital finance have a significant positive impact on SMEs’ performance.
4.5 Moderation Analysis
The results of the moderation analysis indicated that the interaction effect between financial
inclusion and technological adaptation was significant (β = 0.24, t = 2.32, p < 0.05), while the
interaction effect between digital finance and technological adaptation was also significant (β
= 0.18, t = 1.96, p < 0.05). These findings suggest that technological adaptation moderates the
relationship between financial inclusion, digital finance, and SMEs performance.

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 Moderation Analysis a
Interaction Coefficient
Variable Effect (β) t-value p-value
Financial Inclusion and
Technological Yes 0.24 2.32 <0.05
Adaptation
Digital Finance and
Technological Yes 0.18 1.96 <0.05
Adaptation

Furthermore, the simple slope analysis revealed that the relationship between financial
inclusion and SMEs performance was stronger for SMEs that have a high level of technological
adaptation (β = 0.54, t = 3.20, p < 0.01) compared to those with a low level of technological
adaptation. Similarly, the relationship between digital finance and SMEs performance was
stronger for SMEs that have a high level of technological adaptation (β = 0.48, t = 2.86, p <
0.01) compared to those with a low level of technological adaptation. So the results support the
study hypothesis 3 and 4.

Moderation Analysis b
Technological
Adaptation Coefficient
Variable Level (β) t-value p-value
Financial Inclusion High 0.54 3.2 <0.01
Digital Finance High 0.48 2.86 <0.01

These results suggest that technological adaptation plays a significant role in the relationship
between financial inclusion, digital finance, and SMEs performance. SMEs that are able to
adapt to new technologies and integrate them into their operations are more likely to benefit
from financial inclusion and digital finance initiatives. Therefore, policymakers and financial
institutions should focus on providing the necessary support and resources to help SMEs
improve their technological adaptation capabilities.
5. Discussion
According to our study, financial inclusion has a positive impact on SMEs' performance (Goyal
et al., 2018). This finding is consistent with previous research that has emphasized the
importance of access to finance for SMEs (Beck et al., 2014). Our study suggests that when
SMEs have access to financial services, they are better able to invest in their businesses, which
can lead to improved performance.
Furthermore, our study found that digital finance also positively affects SMEs' performance
(Aterido et al., 2011). This finding is in line with previous research that has highlighted the
potential of digital finance to improve SMEs' access to finance and reduce transaction costs

15
(Frost et al., 2016; World Bank, 2014). Our findings suggest that digital finance can provide
SMEs with access to a wider range of financial services, which can help them to grow and
expand their businesses.
In addition, our study found that technological adaptation plays a moderating role in the
relationship between financial inclusion and SMEs' performance (Grajales-Olarte et al., 2019).
Specifically, we found that SMEs that are more technologically adaptable are better able to
benefit from financial inclusion than those that are less adaptable. This finding underscores the
importance of SMEs' ability to adapt to new technologies in order to take advantage of the
benefits of financial inclusion.
Moreover, our study also found that technological adaptation moderates the relationship
between digital finance and SMEs' performance (Harris et al., 2017). We found that SMEs that
are more technologically adaptable are better able to benefit from digital finance than those
that are less adaptable. This finding highlights the importance of SMEs' ability to adopt and
utilize digital finance technologies in order to maximize the benefits of digital finance.
5.1 Implications
The findings of this study have important implications for SMEs in Pakistan. The study
highlights the importance of financial inclusion and digital finance in promoting SMEs'
performance, and the moderating role of technological adaptation.
In Pakistan, access to finance is a major challenge for SMEs. According to the State Bank of
Pakistan, only 16% of SMEs have access to formal financial services. This lack of access to
finance limits SMEs' ability to invest in their businesses and hinders their growth and
expansion. Therefore, policymakers in Pakistan should prioritize promoting financial
inclusion, particularly for SMEs, by providing them with access to formal financial services.
Moreover, the study suggests that digital finance can provide SMEs with access to a wider
range of financial services, which can help them to grow and expand their businesses. In
Pakistan, the adoption of digital finance technologies is still low, with only 5% of adults having
a mobile money account. Therefore, there is a need to promote the adoption and utilization of
digital finance technologies among SMEs in Pakistan.
Furthermore, the study underscores the importance of SMEs' ability to adapt to new
technologies in order to take advantage of the benefits of financial inclusion and digital finance.
In Pakistan, there is a need to focus on building the technological capabilities of SMEs,
particularly in terms of digital literacy and skills, to enable them to effectively utilize financial
services and digital finance technologies.

16
The findings of this study highlight the need for policymakers in Pakistan to prioritize financial
inclusion and digital finance, while also promoting technological adaptation among SMEs, in
order to enhance their performance and contribute to the overall economic growth of the
country.
5.2 Limitations
The study only focuses on the Pakistani context, which limits the generalizability of the
findings to other contexts. The study uses a cross-sectional research design, which limits the
ability to establish causal relationships between financial inclusion, digital finance,
technological adaptation, and SMEs' performance. The study only considers the impact of
financial inclusion and digital finance on SMEs' performance, without considering other
potential factors that could affect SMEs' performance. The study relies on self-reported data,
which could be subject to social desirability bias or measurement error.
5.3 Future research directions
Future research could use longitudinal research designs to establish causal relationships
between financial inclusion, digital finance, technological adaptation, and SMEs' performance.
Future research could explore other potential factors that could affect SMEs' performance, such
as access to markets, human capital, and infrastructure. Future research could use alternative
data sources, such as administrative data or secondary data, to validate self-reported data.
Future research could explore the impact of financial inclusion and digital finance on different
types of SMEs, such as micro-enterprises or high-growth firms.
5.4 Conclusion
In conclusion, this study aimed to investigate the impact of financial inclusion and digital
finance on SMEs' performance, and the moderating role of technological adaptation in this
relationship. The results of the study show that financial inclusion and digital finance have a
positive impact on SMEs' performance, and technological adaptation plays a crucial role in
enhancing this impact. Specifically, SMEs that are more technologically adaptable are better
able to benefit from financial inclusion and digital finance.
These findings have important implications for policymakers, financial institutions, and SMEs
in Pakistan. Policymakers should focus on promoting financial inclusion and digital finance
and providing SMEs with the necessary resources to adopt new technologies. Financial
institutions should offer a wide range of financial services that cater to the specific needs of
SMEs and leverage digital technologies to reduce transaction costs and increase access to
finance. SMEs, on the other hand, should prioritize technological adaptation and develop the

17
necessary skills and capabilities to take advantage of the benefits of financial inclusion and
digital finance.

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