Financial Inclusion via Blockchain: Evidence from a Natural Experiment

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.

This paper was accepted by Will Cong, finance and will be included in the Virtual Special Issue on Digital Finance.

Funding: Financial support from the Research Grant Council of the Hong Kong Special Administrative Region, China [Grant T35-710/20-R] and the National Natural Science Foundation of China [Grant 71988101] is gratefully acknowledged.

Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.02303.