The rise of digital finance: Financial inclusion or debt trap

TL;DR

This paper examines how digital finance promotes financial inclusion but also raises the risk of households falling into debt traps, highlighting the dual effects on credit access and financial distress.

Contribution

It provides empirical evidence on the channels through which digital finance influences household credit behavior and debt risk.

Findings

Digital finance increases credit market participation.

Access to digital credit raises household consumption.

Digital finance heightens the risk of debt traps.

Abstract

This study focuses on the impact of digital finance on households. While digital finance has brought financial inclusion, it has also increased the risk of households falling into a debt trap. We provide evidence that supports this notion and explain the channel through which digital finance increases the likelihood of financial distress. Our results show that the widespread use of digital finance increases credit market participation. The broadened access to credit markets increases household consumption by changing the marginal propensity to consume. However, the easier access to credit markets also increases the risk of households falling into a debt trap.