Financial returns or social impact? What motivates impact investors’ lending to firms in low-income countries

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I analyze 70,000 transactions by retail impact investors on a peer-to-peer lending platform that intermediates loans to firms in low-income countries. Loans pay interest to investors and publicize indicators of expected social impact. Financial returns significantly influence investors’ decisions: a one percentage point increase in the interest rate increases funding speed seven-fold, investment probability two-fold and transaction size by 122 Euro. Expected social impact influences investors’ perception but has no influence (for female empowerment, employees and beneficiaries) or limited influence (for turnover) on investors’ funding decisions. When all available loans pay the same interest rates, female borrowers - but not firms with many employees or beneficiaries - are more likely to be chosen, suggesting that variation in financial returns can crowd out salient dimensions of social impact. The study implies that peer-to-peer lending platforms should function as gatekeepers of social impact and cannot outsource the evaluation of social impact to retail impact investors.
Original languageEnglish
Article number106224
JournalJournal of Banking and Finance
Publication statusPublished - 2022


I thank the editor Thorsten Beck and an anonymous referee for constructive suggestions that improved the paper. Eric Bartelsman, Louis Putterman, Diana Garcia Rojas, Martin Wiegand, conference participants of the Royal Dutch Economic Association New Paper Session 2020, the Spanish Finance Association Mentoring Day 2020, the European Economic Association's (Virtual) Congress 2020 and seminar participants in the Spatial Economics, Economics and Finance departments at Vrije Universiteit Amsterdam provided excellent comments. I particularly thank Remco Oostendorp for detailed and valuable comments on earlier drafts of this paper and the team at Lendahand for the fruitful collaboration. This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

FundersFunder number
European Economic Association's
Royal Dutch Economic Association New Paper Session
Spanish Finance Association

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