In the early stages of structural transformation, financial institutions play a crucial role in reducing poverty and stimulating investment and welfare. However, uncertainties remain on how to promote the effectiveness and size of financial institutions in low-income countries. A path worth exploring is the role of new financial technologies. 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. The purpose of this project is to provide empirical evidence on how high-speed internet via landline cable and mobile technologies affects the demand and supply of bank credit.
The recent and massive investments in digitalisation make Rwanda a suitable country for this investigation. The project employs detailed loan-level data from all credit institutions, along with data on mobile phone coverage and terrestrial cables referring to the national fibreoptic backbone. Since internet technologies are unlikely to be randomly allocated across areas, the research team use an instrumental variable strategy, exploiting two sources of quasi-experimental variation. First, they leverage the exogenous changes in mobile coverage due to the frequency of lightning, which negatively affect mobile connectivity. Second, we use the route of post-colonial surfaced roads to predict the placement of landline fibreoptic cables. Other than corroborating the instruments' relevance, preliminary evidence suggests a possible shift in the behaviour of borrowers from microfinance to commercial banks when new technologies become available. A further investigation delves into the mechanisms of this transition, highlighting the role of broadband on the supply side and mobile internet on the demand side.
By identifying the channels and constraints of the credit market, this research can help introduce targeted policies to promote credit, productivity, and enhance financial inclusion, or reduce loan delinquencies. It can also allow local policymakers, the IMF, and the World Bank to favour investment in one technology over another. Additionally, by exploring the impact of mobile banking, this study can help regulators, private sector actors, and NGOs understand the potential risks of rapid credit expansion through mobile lending and the role of information sharing in credit access. Finally, this represents a significant contribution to the internet and banking literature, focusing on the granular financial data of an African country and providing valuable information to elucidate the mechanisms behind the aggregate effect of the internet on the financial system.