A new form of secured lending utilizing “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 both in a model and in a ﬁeld experiment using school-fee loans digitally secured with a solar home system. We ﬁnd that securing a loan with digital collateral drastically reduces default rates (by 19 pp) and increases the lender’s rate of return (by 38 pp). Employing a variant of the Karlan and Zinman (2009) methodology, we decompose the total eﬀect and ﬁnd that roughly one-third is attributable to (ex-ante) adverse selection and two-thirds is attributable to (interim or ex-post) moral hazard. Access to a school-fee loan signiﬁcantly increases school enrollment and school-related expenditures without detrimental eﬀects to households’ balance sheet.
This research was supported by USAID, CGAP and IFC (as part of the HIFI program), and JPAL’s Post-Primary Education program and UC Berkeley’s Lab for Inclusive FinTech (LIFT). We are very grateful to Jenya Kahn-Lang, Renping Li, Sanghamitra Mukherjee, Derek Wolfson, Hilary Yu, and especially Robert Pickmans for excellent research assistance. Laura Steiner provided exceptional project management, and we are also grateful to the whole team at IPA Uganda. We are also grateful to Efraim Benmelech (discussant), David Levine, Isabel Macdonald, David Sraer, and Antoinette Schoar for useful comments and suggestions as well as participants at the Harvard/Yale/Berkeley EEE seminar, NBER Corporate Finance Meetings, the University of British Columbia, Columbia University, and University of California, Merced. The experiment described in this paper is registered at the AEA RCT Registry under the code AEARCTR-0004191. The protocol was granted IRB approval by the University of California at Berkeley under the code 2018-10-11516. The authors declare that they have no ﬁnancial or material interests in the results discussed in this paper. The views expressed in this article do not necessarily represent the views of the United States or the U.S. Department of the Treasury. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.