Financial inclusion for women has been embraced by policy makers as an important development priority. However, despite women having lower risk preferences and higher creditworthiness, the gender gap in access to finance is still prevalent in the traditional credit market. This is due to various factors, such as differences in employment opportunities, legal obstacles, cultural norms, and limited access to the guarantee mechanism, among others. With advances in digital technology, online peer-to-peer (P2P) lending has emerged as an alternative to traditional lending institutions around the world, allowing lenders and borrowers to bypass banks and remain anonymous. Borrowers can post loan requests without providing collateral while investors can make lending decisions according to the information disclosed by the borrowers. These attributes may help to moderate women’s concerns about potential discrimination.
In a recent study, we analyze data from a leading P2P lending platform operating in the People’s Republic of China and show that lending to female borrowers is associated with better loan performance, including a lower probability of default, a higher expected profit, and a lower expected loss than for their male peers. However, despite women’s higher creditworthiness, we do not find any measurable gender impact on the funding success rate, meaning that female borrowers have to compensate lenders by providing higher profitability to achieve a similar funding probability. This evidence indicates the existence of a gender gap that discriminates against female borrowers.
To moderate biased lending, platforms should analyze the loan performance of different groups of borrowers, for instance men versus women, and incorporate the relevant information into their credit rating systems. At the same time, these platforms should educate lenders on how to judge the creditworthiness of borrowers by using unbiased information. Since the history of P2P lending is still very short, most investors on the platforms are new and not yet sophisticated enough to evaluate the risk of the loan listings accurately or interpret the quality of borrowers’ signals correctly. Addressing the lack of financial literacy is of particular importance for the fintech market, where there are no financial intermediaries and all decisions are decentralized. In addition to providing financing tools, fintech companies like P2P lending platforms should be actively encouraged to improve the public’s average level of financial literacy.
Read the working paper here.