Project Research Theme 1: Firms, Frictions and Spillovers, and Industrial Policy, Research Theme 5: Political Economy and Public Investment

Financial Technologies and Credit Markets in Africa

Active project

Years active

  • to

Funding category

  • Larger Research Grants

Financial institutions play a key role in alleviating poverty and stimulating investment and welfare during the initial stages of structural transformation. Nonetheless, questions remain on how to increase the effectiveness and size of financial institutions in low-income countries. The overarching objective of this project is to investigate the role played by mobile technologies in facilitating access to the formal banking system. The arrival of high-speed internet has led to a political and economic revolution in Africa, and a profound transformation of the banking system. Indeed, African banks reacted to the availability of fast internet by restructuring their business model towards new financial technologies to reduce financial frictions and information asymmetries. This research intends to offer empirical evidence on how high-speed internet via mobile technologies facilitates the transition from microfinance to the banking sector.

The recent and massive investments in digitalization make Rwanda a suitable country for this investigation. The research employs detailed loan-level data from all credit institutions, together with information on mobile phone coverage. The research team study the period 2008-2016 and address the endogeneity of internet diffusion by means of instrumental variables. Specifically, they use two instruments. First, the lightning strikes frequency, which negatively affects mobile connectivity. Second, the incidental coverage, as proposed by Björkegren (2019), which relies on the heterogeneous costs of covering different areas depending on their position relative to the pre-existing electric grid. After corroborating the instruments' relevance, our preliminary evidence suggests a shift in the behaviour of borrowers from microfinance to commercial banks when new technologies become available. Finally, the researchers propose a possible mechanism to explain the beneficial effects of mobile internet on bank lending: mobile internet seems to play an important role in promoting the market of land titles, which, in turn, are used as collateral for bank credit.

By identifying the channels and constraints of the credit market, this research could be of substantial help for the introduction of targeted policies that promote credit, productivity, and enhance financial inclusion, or reduce loan delinquencies. It can also provide insights to local policymakers, to the IMF or to the World Bank on which investments are to be favoured. Additionally, by exploring the impact of mobile banking, this study can help regulators, private sector actors and NGOs to understand the potential risks of a rapid expansion of credit through mobile lending and the role of information sharing in credit access. Hence, this research represents a significant contribution to the literature on internet and banking, as it focuses on the granular financial data of an African country and provides valuable information to elucidate the mechanisms behind the aggregate effect of internet availability on the financial system

Larger Research Grants

Closed • Deadline • Larger Research Grants

Research Team

Related content

Active project

Clean Water

Research Theme 1: Firms, Frictions and Spillovers, and Industrial Policy • Larger Research Grants
Active project

Private Colonisation

Research Theme 0: Data, Measurement, and Conceptual Framing • Larger Research Grants
STEG Working Paper Series

Worker Mobility in Production Networks

Marvin Cardoza, Francesco Grigoli, Nicola Pierri, Cian Ruane • Research Theme 1: Firms, Frictions and Spillovers, and Industrial Policy
STEG Working Paper Series

The Great Upgrade

Alexandros Ragoussis, Jonathan Timmis • Research Theme 1: Firms, Frictions and Spillovers, and Industrial Policy
STEG Working Paper Series

Spatial Production Networks

Costas Arkolakis, Federico Huneeus, Yuhei Miyauchi • Research Theme 1: Firms, Frictions and Spillovers, and Industrial Policy
STEG Working Paper Series

Bureaucratic Nepotism

Juan Felipe Riaño • Research Theme 5: Political Economy and Public Investment
STEG Working Paper Series

Occupational Inheritance in Africa

Nicolas Syrichas • Research Theme 2: Labour, Home Production, and Structural Transformation at the Level of the Household