On Education Level and Terms in Obtaining P2P Funding: New Evidence from China*

Date01 December 2020
AuthorJunhui Xu,Jitka Hilliard,James R. Barth
Published date01 December 2020
On Education Level and Terms
in Obtaining P2P Funding:
New Evidence from China*
School of Public Administration, Guangzhou University, Guangzhou, China and
Department of Finance, Raymond J. Harbert College of Business, Auburn University,
Auburn, AL 36849
This paper examines the role of education in Chinas fast-growing peer-to-
peer (P2P) lending market. The level of education, as part of a borrowers pro-
le, is an important yet relatively neglected factor that can affect both the
demand and supply of credit in an increasingly more technologically
oriented marketplace. With this in mind, we test the relationship between a
borrowers education level and the interest rate, loan amount, and loan
maturity based on more than 10,000 transactions from Renrendai.com. Con-
trolling for a variety of other factors, we nd on average that an individual
with a higher education level obtains a lower interest rate, larger loan
amount, and longer maturity. In contrast, less educated individuals pay
higher interest rates, obtain smaller loans, and for shorter time periods.
Accepted: 9 July 2018
Peer-to-peer (P2P) lending in China has experienced explosive growth during
its existence, in terms of both the number of borrowers and the total value of
loans extended on these web platforms. The rst such platform was established
in 2006 (Huang 2017). Five years later, there were 50 platforms,
but then the
number jumped to 2235 as of August 2016, according to Crowdfund Insider.
More than 1.4 million borrowers obtained funding on these P2P lending plat-
forms in that month alone, and there was a total of 680 billion RMB in out-
standing loans, making the Chinese P2P lending market the largest in the
world. The fact that the interest rate for online lending was 12.5% across China
as compared to a bank deposit rate of 1.5% at the end of 2015 provided a strong
*Acknowledgments: This research was partially supported by the National Social Science Foundation
of China under Grant No.14BJY196, Guangdong Department of Education Fund under Grant No.
2014WTSCX059, Guangdong Provincial Project of International and the Regional Collaborative
Innovation Platform of Science and Technology in Colleges under Grant No.2014KGJHZ009.
1 See Association of Chartered Certied Accountants (2015, p. 5).
2 See http://www.crowdfundinsider.com/2016/10/91829-development-internet-nance-china/
© 2018 International Review of Finance Ltd. 2018
International Review of Finance, 20:4, 2020: pp. 801826
DOI: 10.1111/ir.12242
incentive for many people to supply funds in this market (Huang 2017). At the
same time, many individuals and small businesses turned to the online market
having found it quite difcult to obtain funding from Chinas traditional
banking system (Huang 2017).
Despite the size and importance of Chinas P2P lending market, most
research still focuses on US platforms like those operated by Prosper Market-
place and the Lending Club (whose largest shareholder is now the Chinese
investment rm Shanda Group).
We therefore examine how a borrowers pro-
le affects the cost and amount of funding obtained in this particular market.
More specically, we empirically investigate the relationship between a bor-
rowers education level and the interest rate charged, loan amount obtained,
and maturity of a loan, while controlling for several personal characteristics
and other factors. The focus is on education because only 10% of the working-
age population in China are college graduates. We are therefore able to assess
whether this particular group receives more favorable treatment when obtain-
ing P2P loans, even when controlling for income, debt, and other factors. More
educated individuals might be less risky since education might be a proxy for
lifetime earnings, or more stable employment. We therefore test whether there
is indeed a differential treatment of individuals based on educational level per
se. At the same time, individuals with lower levels of education may be subject
to predatory lendinginsofar as they are likely to be less nancially sophisti-
cated and less likely to dispute transaction terms.
2017However, we do not test
for predatory lending by trying to disentangle these different effects.
We collect and use data from the Beijing-based Renrendai.com, one of the
more popular P2P lending rms in China. Since its establishment in early 2010,
the rm has grown substantially. By the end of December 2015, more than
200,000 individuals had obtained funding via the platform, and the total cumu-
lative funding provided had reached more than 13 billion RMB.
Renrendai.com is a good source of data for several reasons. It is one of the top
10 P2P companies in China. It has remained protable and solvent, while thou-
sands of other P2P lenders have suspended operations or closed in recent years.
In addition, the rms online platform enables us to obtain detailed personal infor-
mation about its borrowers, including age, marital status, educational level,
whether owning a house or automobile, job title, monthly income, and
employee-company information. (Prosper.com does not provide such detailed
information, although it does allow borrowers to post pictures of themselves.)
3 See http://www.reuters.com/article/us-lendingclub-investment-tianqiao-idUSKCN0Z61ER.
4 In the case of the US, Demyanyk et al. (2017) nd that “… P2P loans resemble predatory
loans in terms of the segment of the consumer market they serve .
5 In future research, one might wish to do so by examining the ex post performance of loans,
data that is not available to us.
6 See https://www.we.com/event/jibao/20160121/index.html.
7 In particular, Beliunas (2017) reports that nearly one-third of online nancing platforms
encountered nancial difculties in 2015 and as a result almost 1600 P2P lenders exited the
market the following year.
© 2018 International Review of Finance Ltd. 2018802
International Review of Finance

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