1. Introduction
Expanding access to finance is often cited as one of the most important poverty alleviation policies [
1]. However, it is well recognized that financial institutions face challenges in expanding access to the poor [
2]. The government in China, as in many other developing counties, has actively employed numerous policies to improve financial services in rural areas [
3], often with disappointing results [
4]. Despite the variety of financial institutions—such as Rural Commercial Banks, Agricultural Banks, Postal Savings Banks, Village and Township Banks, and Credit-Only Companies—in Chinese rural areas [
5], as pointed out by He et al. [
6], farmers remain underserved or excluded by the traditional banking sector because of the fundamental questions of high transaction cost, information asymmetry, and the shortage of collateral.
Much hope has, therefore, been placed in the growth of financial digital innovations. The term “digital financial inclusion”, defined as digital access to and use of formal financial services by underserved and excluded populations [
7], has attracted attention from many researchers and policy makers. In particular, in 2016, when China was the leader of the G20, the G20 Global Partnership for Financial Inclusion (GPFI) developed a set of High-Level Principles (HLPs) for digital financial inclusion that encourage governments to use digital technologies to foster inclusive finance. In this decade, successful business models for digital financial inclusion have emerged worldwide, following the introduction in Kenya in 2007 of M-Pesa, a key innovation initially developed for peer-to-peer (P2P) payment—mobile money. Using SMS, it is used mainly for money transfer and cash storage, primarily through mobile network operators [
8]. The service was first expanded to Tanzania, and then to Afghanistan, South Africa, India, Romania, and most recently to Albania.
In China, digital financial inclusion differs in important ways, using a completely different model [
9]. Unlike M-Pesa, mobile financial services in China are offered mainly by third-party payment platforms based on smartphone apps, such as those offered by Alipay or WeChat. In addition, digital financial inclusion is more than a payment innovation in China, which has a broad range of digital financial products and services, such as online banks, peer-to-peer (P2P) online lending, online fund sales, online crowdfunding, and online insurance [
10].
Digital finance, also known as internet finance or FinTech, has experienced explosive development in China since 2013, when Yu’ebao (Yu’ebao is an online sales platform for money market funds, which was launched by Alibaba’s Ant Financial Services in June 2013), an online fund sales platform was launched, and in 2016 the term “digital financial inclusion” began to draw attention when it was formally proposed in G20 HLPs. The providers of digital financial services in China can be divided into two groups—information and communication technologies (ICT) companies providing financial services, such as Alibaba or JD.com, and financial institutions applying ICT to their traditional services, such as the E-Housekeeper services of the Agricultural Bank [
11], which are both crucial to financial inclusion goals [
12]. In fact, providers of such financial services have actively expanded their business in rural China, including e-commerce platforms, P2P lending platforms and traditional financial institutions (see
Appendix A Table A1). The Peking University Digital Finance Development Index (IFDI) shows the rapid development of digital finance at the county level across 30 provinces of China (see
Appendix A Figure A1). The IFDI measures the growth in China’s digital finance with rich data from Ant Financial Services. Several recent papers find a positive correlation between digital financial inclusion and rural economic activities, such as self-employment, income growth, and improvement in income distribution [
13,
14].
However, evidence on the relationship between digital financial inclusion and poverty reduction remains limited, especially at the micro level. This paper is one of the first attempts to provide evidence from rural China regarding the impact of digital financial inclusion on farmers’ vulnerability to poverty. Vulnerability to poverty, defined here as the possibility that a household will fall below the poverty line in the future, is an ex-ante poverty indicator, while poverty represents an ex-post welfare outcome. Vulnerability to poverty is a better indicator in China, given that its government has pledged to lift all people out of poverty by 2020, when what really matters is vulnerability of a household, that is, poverty prevention is more important than alleviation. Using survey data on 1900 rural households, this paper first applies the Asset-Based Vulnerability model to measure farmers’ vulnerability to poverty, then rely on an instrumental variable (IV) and two-stage least squares (2SLS) regression to study the effects of farmers’ use of digital financial services on their vulnerability to poverty. We also examine the potential channels through which digital financial services may affect farmers’ vulnerability to poverty.
The remainder of the paper is organized as follows.
Section 2 first reviews the existing literature and then develops our hypothesis.
Section 3 presents the research design.
Section 4 reports the estimate results including the endogeneity tests.
Section 5 presents additional robustness checks, and
Section 6 concludes with a brief discussion of policy implications.
5. Additional Robustness Checks
Our main results above show that farmers with higher use of digital finance are associated with lower vulnerability, a finding that is robust to the different choices of poverty line and to instrumental variable estimation. In this section, we present further robustness checks and these results further confirm the positive effect of digital financial inclusion on reduction in farmers’ vulnerability to poverty.
First, we use an alternative variable to measure farmers’ use of digital financial services in order to reduce the possibility of measurement error. Specially, we construct the frequency of farmers’ use of digital payments () based on the following survey question.
Question 4: How often do you use the digital payment?
a. Never; b. Only once or twice; c. Sometimes; d. Often
In Question 4,
takes a value of 0 if the response is a, 1 if the response is b, 2 if the response is c, and 3 if the response is d. We instrument the
index with the average value of the
index of the same age group in the same township. Results of OLS and 2SLS regressions in
Table 8 show that
has a significant impact on farmers’ vulnerability regardless of which poverty line is considered.
Second, we further calculate farmers’ vulnerability according to a higher international poverty lines of
$3.20 USD, which is more typical of national poverty lines found in lower income economies. Results of OLS and 2SLS regressions in
Table 9 show that the coefficients of
remain significantly negative while using the higher international poverty lines.
6. Conclusions and Policy Implication
After the important stages of microcredit, microfinance, and financial inclusion, the development of financial inclusion has arrived at a fourth stage: digital financial inclusion, which has experienced explosive growth in China. However, evidence on the relationship between digital financial inclusion and poverty reduction remains limited, especially at the micro level. Using survey data on 1900 farmers in rural China, this paper sheds light on this relationship and its potential impact channels. The main conclusions are as follows.
First, farmers’ broader participation in digital financial inclusion has a sizable positive effect on reduction in their vulnerability. Our empirical results show that farmers’ vulnerability tends to be alleviated as a result of the use of digital financial services. Digital financial services are different from traditional financial services and have a great potential to expand farmers’ access to finance. It also has a potential impact on information transmission, social networks and e-commerce.
Furthermore, the effect of digital financial services provided by ICT companies is more pronounced than that provided by traditional banks. We split the sample based on the provider types and the results show that digital financial services provided only by ICT companies have a statistically significant effect. Compared with traditional banks, the ICT companies have a comparative advantage in information technology and collection mechanisms, which further strengthens the potential impact of digital financial services on information transmission, social networks and e-commerce.
Second, our results shed a light on a channel through which digital financial inclusion reduces farmers’ vulnerability. To investigate the potential impact channels, we decompose farmers’ vulnerability into structural vulnerability induced by asset endowments and risk-induced vulnerability due to risk events. Our empirical results show that the use of digital financial services has a significant impact on risk-induced vulnerability but not on structural vulnerability. These results, as a theoretical prediction, highlight the channel of ability to cope with risk through which digital financial inclusion can reduce fluctuations in consumption and thereby alleviate farmers’ vulnerability.
Our results have important policy implications. One direct policy implication is that farmers’ access to and use of digital financial services, especially digital financing, should be expanded. First, more targeted efforts and programs may be needed to improve farmers’ understanding of digital financing. According to our survey data, 80.76% of the respondents seemed unwilling to borrow money through the P2P platforms or online banks because they were unfamiliar with the tools or worried about security. Therefore, financial knowledge is as important as infrastructure, such as the internet penetration rate or smartphone, for expanding farmers’ participation in digital financial inclusion. Second, a rich information database is one of the most important parts of the development of digital financial models. To improve information transmission and collection, policy makers should stimulate the development of rural e-commerce, which provides invaluable data about farmers’ buying habits, as well as selling conditions. For instance, based on the rich data on buyers and sellers collected from the e-commerce platform, Ant Financial of the Alibaba Group established three digital financial products targeting farmers in rural areas. At the same time, local governments can support the availability of information by establishing a public information sharing system, including direct credit information, such as credit default records, and indirect information, such as tax and social security records.
In addition, paying attention to the effect of digital financial services on sustainable income growth is crucial if policy makers wish to reduce farmers’ vulnerability through digital financial inclusion. Our results show that digital financial services have little impact on labor market outcomes which has a direct effect on structural vulnerability induced by lower asset endowments. This is consistent with the evidence showing that digital finance reduces the level of farmers’ demand for credit for production but that increases their demand for credit for consumption [
37]. Therefore, more targeted products and services for credit for production should be encouraged to expand in China’s rural areas.