The lack of formal and verifiable credit records among borrowers is a significant barrier to financial inclusion in developing countries. In this paper, we assess the effectiveness of blockchain technology in improving credit information authenticity and enhancing financial inclusion. Using a novel data set from the online prosocial lending platform Kiva, we exploit the implementation of a blockchain-based lending protocol change in Kiva Sierra Leone as an exogenous shock to conduct difference-in-differences analyses. Our results show that borrowers attract more guarantors and larger per-guarantor contributions under the blockchain protocol, thereby increasing their likelihood of being funded on the Kiva platform. Microfinance institutions (MFIs) adopting the blockchain protocol also experience lower portfolio risks and extend larger lending volume to borrowers. In addition, the implementation of the blockchain protocol allows MFIs to achieve both growth in financial revenue and reduction in operational expenses, thus enhancing the sustainability of their lending services in developing countries. We further explore the sensitivities of blockchain effects and find that the blockchain protocol has a greater propensity to benefit borrowers from rural areas, those with weaker financial credit records, and those seeking microloans in sectors such as agriculture, textiles, and the food industry. Our findings are robust against robustness checks and alternative explanations.

Publication:

MANAGEMENT SCIENCE

http://dx.doi.org/10.1287/mnsc.2023.02303

Author:

Jiang, Shangrong

Chinese Acad Sci, Acad Math & Syst Sci, State Key Lab Math Sci, Beijing 100190, Peoples R China

Univ Hong Kong, HKU Business Sch, Hong Kong, Peoples R China

Email address: srjiang@amss.ac.cn

Wang, Shouyang (corresponding author)

Chinese Acad Sci, Acad Math & Syst Sci, State Key Lab Math Sci, Beijing 100190, Peoples R China

Univ Chinese Acad Sci, Sch Econ & Management, Beijing 100190, Peoples R China

ShanghaiTech Univ, Sch Entrepreneurship & Management, Shanghai 201210, Peoples R China

Email address: sywang@amss.ac.cn

Li, Yuze

Chinese Univ Hong Kong, CUHK Business Sch, Hong Kong, Peoples R China

Email address: richardyuzeli@gmail.com