Does P2P lending promote the traditional bank-based financial inclusion? Spatial evidence from 34 developing economies

Whilst prior literature often suggests that P2P lending address the credit needs of borrowers unserved and underserved by the formal banking sector, this paper contends that the significance of P2P lending extends beyond merely bridging the credit gap created by banks. By empowering the borrowers (often marginalised entities) with knowledge, skills, confidence and necessary documentations, P2P lending plays a transformative role, facilitating these borrowers towards their eventual acceptance and integration into the traditional banking system. We then formally investigate the impact of P2P lending on the traditional bank-based financial inclusion for a group of 34 developing countries during 2013–2020, considering spatial dependence amongst these nations. We find that, first, there is positive cross-country spatial dependence in the traditional financial inclusion, substantiating the use of spatial analysis. Second, utilising the Spatial Durbin Model which is found to be the most suitable specification, we find that P2P lending enhances the traditional financial inclusion, both domestically and in neighbouring economies. Third, the above holds when the largest P2P lender amongst developing nations (i.e., China) and/or the impact of the Covid pandemic (i.e., year 2020) is excluded. Fourth, removing the Covid-19 effect strengthens the positive influence of P2P lending on traditional financial inclusion, signifying the importance of economic stability and connectivity in fostering this relationship. Finally, the robustness of these findings is confirmed with an alternative weight matrix.