Banking competition and the use of shadow credit: Evidence from lending marketplaces

Abstract

The purpose of this study is to determine whether banking competition can affect the creditworthiness of borrowers relying on shadow credit. Upon analyzing the granular data from a leading online lending marketplace in China, we discover that marketplace borrowers from concentrated banking markets are generally more creditworthy than those from competitive banking markets. This phenomenon is more pronounced when new banks contribute to competition in the banking market and when borrowers are young or new to the marketplace. These findings suggest that borrowers may migrate from banks to lending marketplaces when the banking market is concentrated and that banking competition can improve the financial inclusion of individuals and households through relaxed credit checks.

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