Intervention (Hidden)
Ethiopia lags behind Sub-Saharan countries in terms of key financial inclusion indicators (Achew et al., 2021, Demirgüç-Kun et al., 2022). For instance, around 81.4% of the rural adult population has been unbanked (CSA, 2020). The standard banking service has been offering loans to a limited number of customers, mostly to large firms (NBE, 2019). All banks in the country combined offered loans to only around 300 thousand customers in 2018/19 (NBE, 2020), which is infinitesimal for the country of over 109 million population. Around 70% of MSEs had no credit access, and 61% of them never applied for loan due to primarily lack of collateral (Gebreeyesus et al., 2018. Almost all of the MSEs (95.7%) used their savings to establish their businesses (Gebreeyesus et al., 2018). That could be why credit constraint is one of the major barriers for the growth for MSEs in the country (Assefa et al., 2014; Endris and Kassegn, 2022; Gebreeyesus et al., 2018). To curtail the problem, the Ethiopian government has recently promoted digitalization of the financial sector, including the introduction of mobile money and digital credit services (Ndulu et al., 2023). Digital credit has a promising potential to improve living standards by smoothing consumption for consumers, leveraging liquidity constraints of farmers and small businesses (Brailovskaya, 21; Johnen et al, 2021). An apt example is when Cooperative Bank of Oromia (COOP) launched the first bank-based digital credit in Ethiopia in January 2022, it received over 160 thousand digital credit applications from MSEs, and offered uncollateralized digital credit to over 92 thousand customers since its launch (COOP, 2023).
Digital credit brings both opportunity and risk in Ethiopia. On the one hand, it offers great opportunity to access credit for consumers, farmers and MSEs which otherwise have had scant credit access from the banks. The credit access may increase income, profit, employment, resilience and consumption among the target population who are mostly subsistent and self-employed households engaged in micro and small enterprises. On the other hand, digital credit may have a net negative impact on the households’ welfare since (i) the interest rate is very high when compared with the interest fee from the standard loans from financial institutions, (ii) the duration of the credit period is short in that the loan period may be insufficient to do a profitable business and return the credit along with the interest, and (iii) most of the people in Ethiopia have had very limited financial literacy in that the borrowers may use the credit unwisely, leading to loss, default and being blacklisted on their future credit applications (Johnen et al., 2021; Robinson et al., 2022). Hence, it is essential to systematically investigate the impact of digital credit on borrowers’ welfare.
To this end, we randomize digital credit using random control trial approach to investigate the impact on borrowers.
We propose to randomize two interventions. First, we propose to randomize the digital credit itself. Credit constraint is a major problem for MSEs in Ethiopia, hindering their growth (Assefa et al., 2014; Endris and Kassegn, 2022). Digital credit may leverage this constraint. However, little is known about the impact of digital credit on borrowers’ welfare. Second, we propose complementing the digital credit with financial literacy training since financial literacy is poor in Ethiopia (CSA, 2020; Demirgüç-Kun et al., 2022). Evidence shows that addressing a bundle of constraints simultaneously has a multiplier effect, greater than the sum of the effects of addressing each constraint separately (J-PAL and CEGA, 2022; Suri and Udry, 2022). Hence, this study allows to investigate if provision of digital credit improves the borrowers’ welfare and if combining digital credit with financial skill trainings improves the performance digital credit. Our primary outcome variable will be profitability of the digital credit for the borrowers. Secondary outcome variables include consumption and employment.