Home >News >India >Formal credit gap driving fintech credit growth
Private companies, mostly from the fintech industry, which sell various products such as loans, mutual funds and insurance, use Aadhaar to verify customers.
Private companies, mostly from the fintech industry, which sell various products such as loans, mutual funds and insurance, use Aadhaar to verify customers.

Formal credit gap driving fintech credit growth

Fintech lending platforms have grown over the last few years and are fast reaching unbanked consumers in low-income countries, a new study finds

Formal credit still eludes many small businesses and consumers in poorer countries. This has led to the growth of “fintech credit" in recent years. New research shows this form of lending is growing fast in developing countries, helping small borrowers access loans more easily than before.

In a working paper for the International Monetary Fund, Majid Bazarbash and Kimberly Beaton study marketplace lending, a form of fintech credit that uses digital platforms to directly connect borrowers and lenders. Using data from 109 countries, the authors find that business in the sector trebled in two years to reach $400 billion by 2017 globally.

As much as 98% of the total volume of these loans come from China, UK and US. Marketplace lending is growing rapidly in the rest of the world too, though it is far from replacing traditional financing institutions, the authors say.

In 2017 alone, loans given to individuals grew more than two times faster than loans given to businesses. Such loans made up around 69% of the total size during the year. However, the composition varied across countries and regions.

Countries with higher per-capita incomes and better internet access had more marketplace lending, the authors find. The phenomenon was also stronger in countries where markets were smaller and had less liquidity.

Fintech loans to businesses increased in places where financial institutions were less likely to provide services at reasonable cost. Consumer marketplace lending weakened as lending regulations became more stringent.

Marketplace lending was smaller in size in countries with a more concentrated yet large banking sector, but increased in places with a competitive yet small banking sector. In low-income countries with higher financial access, fintech can attract unbanked consumers by providing them small and flexible loans, the paper finds.

Also read: Filling the Gap: Digital Credit and Financial Inclusion

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