Study Overview
A form of secured lending using “digital collateral” has recently emerged, most prominently in low- and middle-income countries. Digital collateral relies on lockout technology which allows the lender to temporarily disable the flow value of the collateral to the borrower without physically repossessing it. This research explores this form of credit in a model and a field experiment using school-fee loans digitally secured with a solar home system.
Study Results
Securing a loan with digital collateral drastically reduced default rates (by 19 percentage points) and increased the lender’s rate of return (by 49 percentage points). Using a variant of the Karlan and Zinman (2009) methodology, we decompose the total effect on repayment and find that roughly two-thirds is attributable to moral hazard, and one-third to adverse selection. In addition, access to digitally secured school-fee loans significantly increased school enrollment and school-related expenditures without detrimental effects on households’ balance sheets.
Intervention: Household loans relying on digital collateral using PayGo technology
Intervention Partner: Fenix International (now ENGIE)
Populations: low income households
Journal Publication: Paul Gertler, Brett Green, Catherine Wolfram, Digital Collateral, The Quarterly Journal of Economics, Volume 139, Issue 3, August 2024, Pages 1713–1766, https://doi.org/10.1093/qje/qjae003
IBSI Funding Acknowledgement: Lab for Inclusive FinTech (LIFT)
News & media
Testing financial innovations: Increasing loan repayment using digital collateral
June 18, 2021
We argue that collateral need not be physically repossessed in order to serve a useful role in access to credit. Recent technological innovations have facilitated the use of digital collateral without the need for costly and inefficient physical repossession, where our findings help validate how securing a loan with digital collateral can lead to positive benefits for both borrower and lender.