The Substitution Effect of Peer-to-Peer Lending: Evidence from Indonesian Provinces
DOI:
https://doi.org/10.5281/zenodo.20961504Keywords:
P2P Lending, Substitution Hypothesis, Financial Inclusion, Banking DensityAbstract
Purpose – Peer-to-peer (P2P) lending is regarded as a solution to financial exclusion in developing countries, yet robust evidence testing its role as a substitute for traditional banks in these contexts remains scarce. This study provides the first empirical test of this "substitution hypothesis" in Indonesia, examining whether P2P lending per capita is higher in regions with weaker banking infrastructure.
Design/data/methodology – We employ a Two-Way Fixed Effects model on a panel dataset of 31 Indonesian provinces from 2020-2024 (N=1,736). The model identifies the within-province relationship between P2P lending per capita and two banking density measures: bank credit to GRP and bank branches per capita, while controlling for unobserved regional and time-specific factors. Robustness checks replace credit‑based banking density with deposit‑based density and substitute P2P depth (lending scaled by GRP) for the dependent variable.
Findings – The main results support the substitution hypothesis: P2P lending per capita is significantly higher in provinces with lower bank credit to GRP (β = –0.098, p < 0.01) and fewer bank branches per capita (β = –7.865, p < 0.001). A strong positive time trend confirms sustained sector growth. However, robustness checks reveal that substitution is specific to the credit dimension of banking and to per capita P2P lending. When banking density is measured by deposit mobilization, the relationship becomes positive, suggesting a complementary dynamic. The substitution effect is not robust when P2P activity is scaled by GRP.
Originality/value – This study provides evidence that P2P lending substitutes for bank credit in Indonesia, particularly in underserved regions, while coexisting with broader deposit‑based banking infrastructure. It refines the substitution debate by showing context‑dependent roles of FinTech, offers guidance for financial inclusion policies, and highlights the need for differentiated regulatory approaches.
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