Financial Returns or Social Impact? What Motivates Impact Investors’ Lending to Firms in Low-Income Countries (Link to Working Paper)

I study investment decisions on a peer-to-peer lending platform which intermediates loans from impact investors to firms in low-income countries. Using transaction-level data of over 55,000 loans, I find that investment decisions are predominantly driven by financial returns, even if loans vary considerably in the degree of social impact that they create. A one percentage point increase in the interest rate increases funding speed sevenfold, investment probability two-fold and funding per transaction by 122 Euro. I find no significant influence of social impact, measured as income generation, employment creation and contribution to female empowerment. My results contrast previous findings from the US-based platform Kiva, where interest-free loans are provided by philanthropic lenders. However, there is no evidence that financial incentives, the main difference between my setting and Kiva, leads to the crowding out of intrinsic pro-social motivation. Instead, I argue that social impact remains important for decisions on the extensive margin, whether people participate in impact investment in the first place. The study implies that peer-to-peer lending platforms, just like impact investment funds, need to function as gatekeepers of social impact and cannot outsource the evaluation of social impact to individual investors. Instead, such a strategy could backfire by crowding out high social impact borrowers that are unable to promise the high financial returns that drive individual investment decisions.

Bad News Travel Fast … and Decrease Credit Supply in Peer-to-Peer Lending

Using a new dataset of transactions on a Dutch peer-to-peer lending platform, I investigate the stability of credit supply when investors experience repayment delays. I exploiting a natural experiment, where some investors experience repayment delays in impact investment loans and show that the delays cause affected investors to decrease their credit supply by 206€ on average, resulting in a shortage of credit of almost 400,000€ to borrowers unconnected to the delays. Repayment delays thus have substantial negative externalities on the ability of firms to raise capital through the peer-to-peer lending platform.