Digital Collateral

Abstract

A new form of secured lending utlitizing ``digital collateral" has recently emerged, most prominently in low and middle income countries. Digital collateral relies on ``lockout" technology, which allows the lender to temporarily disable the flow value of the collateral to the borrower without physically repossessing it. We explore this new form of credit both in a model and in a field experiment using school-fee loans digitally secured with a solar home system. We find that securing a loan with digital collateral drastically reduces default rates (by 19 pp) and increases the lender's rate of return (by 38 pp). Employing a variant of the Karlan and Zinman (2009) methodology, we decompose the total effect and find that roughly one-third is attributable to (ex-ante) adverse selection and two-thirds is attributable to (interim or ex-post) moral hazard. Access to school-fee loans significantly increases school enrollment and school-related expenditures without detrimental effects to households' balance sheet.

Keywords: Collateralized Lending, Microfinance, Moral Hazard, Adverse Selection, Education

JEL Classification: G20, I22, O16