Abstract

Peer-to-peer lending and its potential to promote financial inclusion by expanding credit has been an increased topic of interest. The theory of financial inclusion suggests P2P lending platforms may alleviate information asymmetry and improve the accessibility of financial services to a wider ranger of borrowers (Balyuk, 2023; Maskara, Kuvvet, & Chen, 2021). The consumer credit market, signaling theory, and lender’s risk function suggest that P2P lending platforms may offer lower interest rates to credit-constrained individuals, substituting payday and pawnshop loans and complementing banks. Based on these theories, this project proposes the following hypothesis: P2P lending expands access to credit for underbanked individuals.
To test this hypothesis, this thesis uses Iowa’s 2011 legislative change that prevented its constituents from utilizing the most popular P2P lending platforms (Prosper and LendingClub) to estimate difference-in-differences and synthetic control models. The results show that, after Iowa’s restriction of P2P lending, Iowans experienced an increase in the use of payday and pawnshop loans and a decrease in fully banked status compared to other states with similar socio-economic characteristics. As P2P lenders serve as substitutes for these alternative forms of credit, an increase in payday and pawnshop loans after the restriction of P2P lending implies that P2P lenders enabled individuals to avoid high-cost alternative financial services before the
2011 regulatory change. Thus, this thesis finds that P2P lending expands access to credit to underbanked individuals by complementing banks and substituting payday and pawnshop loans, which is further corroborated by existing literature (Maskara et al., 2021; Balyuk, 2023)

Advisor

Moledina, Amyaz

Department

Economics

Keywords

peer-to-peer lending, financial inclusion, information asymmetry, credit market, risk function, payday loans, pawnshop loans, difference-in-differences, synthetic control

Publication Date

2024

Degree Granted

Bachelor of Arts

Document Type

Senior Independent Study Thesis

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