The Role of Digital Financial Services and Sharia Financial Literacy in Improving SMEs Financial Performance

Abstract

Digital transformation is changing how small and medium enterprises (SMEs) manage transactions and daily finances. Two forces stand out in this shift. The first is the expansion of digital financial services. The second is the strengthening of sharia financial literacy among business owners. This study examines how digital finance, digital payment, and sharia financial literacy jointly affect SMEs financial performance in Central Java, Indonesia. A quantitative design was applied using Structural Equation Modelling with Partial Least Squares (SEM-PLS). Primary data were collected from 142 SMEs owners in the culinary, fashion, and handicraft sectors through a structured questionnaire. The measurement model met the required validity and reliability thresholds. The structural model explained 67.9 percent of the variance in financial performance (R² = 0.679; adjusted R² = 0.672). Hypothesis testing shows that digital finance has a positive and significant effect on financial performance. Digital payment shows a positive but statistically non-significant effect. Sharia financial literacy emerges as the strongest predictor, with a positive and significant effect (β = 0.547, t = 6.092, p = 0.000). These findings indicate that SMEs financial performance depends less on payment technology alone. It depends more on the owner’s capacity to apply digital finance wisely within an Islamic financial framework. This study contributes to the literature on digital transformation and Islamic finance. It offers empirical evidence from an underexplored SMEs population. It also offers practical direction for policymakers and financial institutions designing sharia-based digital literacy programs for SMEs.

Keywords: Digital Finance, Digital Payment, Sharia Financial Literacy, Financial Performance