The rise of digital finance: Financial inclusion or debt trap?

TLDR

Digital finance has expanded household access to credit markets while simultaneously raising the risk of debt traps. The study provides evidence that digital finance increases the likelihood of financial distress and explains the channel through which this occurs. Widespread digital finance use boosts credit market participation and raises household consumption by altering marginal propensity to consume, yet it also heightens the risk of households falling into 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.