Microfinance institutions and Peer-to-Peer lending: What does microfinance competition bring?

Abstract

This paper uses detailed data from a Chinese Peer-to-peer lending intermediary to investigate whether local MFIs expansion affects P2P lending. We confirm that increased MFIs coverage enhances loan availability in P2P lending while reducing loan cost. Microfinance competition's positive externalities strengthen the substitution effect between local MFIs and P2P lending by improving borrowers' bargaining power. Furthermore, with improved access to local MFIs, P2P lending weakens credit approval conditions, leading to increased default risk in P2P lending. Finally, we perceive that borrowers with low income, small loans, and females benefit more from microfinance competition, which is consistent with the inclusive finance nature of MFIs and P2P lending. These findings strengthen our understanding of the connection between MFIs and P2P lending. Besides, we should be aware of negative externalities brought by microfinance competition — credit risk accumulation.