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

• Date: 01 December 2020
• Author: Junhui Xu,Jitka Hilliard,James R. Barth
• Published date: 01 December 2020
• DOI: http://doi.org/10.1111/irfi.12242

On Education Level and Terms

in Obtaining P2P Funding:

New Evidence from China*

JUNHUI XU

†

,JITKA HILLIARD

‡

AND JAMES R. BARTH

‡

†

School of Public Administration, Guangzhou University, Guangzhou, China and

‡

Department of Finance, Raymond J. Harbert College of Business, Auburn University,

Auburn, AL 36849

ABSTRACT

This paper examines the role of education in China’s fast-growing peer-to-

peer (P2P) lending market. The level of education, as part of a borrower’s pro-

file, 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

borrower’s 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 find 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 first such platform was established

in 2006 (Huang 2017). Five years later, there were 50 platforms,

1

but then the

number jumped to 2235 as of August 2016, according to Crowdfund Insider.

2

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 Certified Accountants (2015, p. 5).

2 See http://www.crowdfundinsider.com/2016/10/91829-development-internet-finance-china/

© 2018 International Review of Finance Ltd. 2018

International Review of Finance, 20:4, 2020: pp. 801–826

DOI: 10.1111/irfi.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 difficult to obtain funding from China’s traditional

banking system (Huang 2017).

Despite the size and importance of China’s 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 firm Shanda Group).

3

We therefore examine how a borrower’s pro-

file affects the cost and amount of funding obtained in this particular market.

More specifically, we empirically investigate the relationship between a bor-

rower’s 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 lending”insofar as they are likely to be less financially sophisti-

cated and less likely to dispute transaction terms.

4

2017However, we do not test

for predatory lending by trying to disentangle these different effects.

5

We collect and use data from the Beijing-based Renrendai.com, one of the

more popular P2P lending firms in China. Since its establishment in early 2010,

the firm 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.

6

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 profitable and solvent, while thou-

sands of other P2P lenders have suspended operations or closed in recent years.

7

In addition, the firm’s 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) find 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 financing platforms

encountered financial difficulties in 2015 and as a result almost 1600 P2P lenders exited the

market the following year.

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