Digital Collateral

Abstract

A new form of secured lending using “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 in a model and a field experiment using school-fee loans digitally secured with a solar home system. Securing a loan with digital collateral drastically reduced default rates (by 19 pp) and increased the lender’s rate of return (by 49 pp). Employing a variant of the Karlan and Zinman (2009) methodology, we decompose the total effect on repayment and find that roughly two-thirds is attributable to moral hazard, and one-third is attributable to adverse selection. In addition, access to digitally secured school-fee loans significantly increased school enrollment and school-related expenditures without detrimental effects on households’ balance sheets.