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| Fintech, Financial Inclusion and Illegal Fundraising Risks |
| ZHANG Bo, ZHANG Xiaofan, CAI Ziyang
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School of Economics, Shandong University;
Agriculture Development Bank of China, Shandong Branch |
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Abstract Illegal fundraising, which refers to the behavior of absorbing funds from the general public by promising repayment of principal and interest or offering other investment returns without the permission of financial regulatory authorities or in violation of the financial supervisory regulations of the government, have long existed in China and severely disrupted the order of financial market. In recent years, the illegal fundraising activities have displayed a rising trend and the characteristics of large sums of money involved, numerous victims and widespread geographical impact became increasingly obvious. Therefore, intervening and cracking down on illegal fundraising activities, which have received considerable attention from policymakers and academics, is an important measure to prevent and resolve financial risks and maintain financial security.
Theoretically, the relationship of the rise of fintech on illegal fundraising risks is still ambiguous. On the one hand, financial crimes relying on information technology have greater concealment, higher propagation efficiency and wider scope, indicating that fintech development may exacerbate the illegal fund-raising risks. On the other hand, the advent of fintech can alleviate credit constraints by solving the information asymmetry with the help of technological innovation such as big data and machine learning algorithms and also improve households' financial knowledge. The vital role played by fintech in promoting financial inclusion can reduce the risks of illegal fundraising.
To empirically test these two competing hypotheses, this paper extracts data of criminal court cases on illegal fundraising from 286 prefecture-level and above cities in China from 2014 to 2021, as well as China Household Finance Survey data in 2015 to examine the impact of fintech development on illegal fundraising risks and the potential mechanism, by applying machine-learning techniques to identify the number of fintech patents in each prefecture. Specifically, we collected a total of 33,999 illegal fundraising court cases from 2014 to 2021, extracting useful information of each case such as the number of investors involved, the amount of money invested. The case-level data are aggregated to the prefectural-level and the density of cases and defendants involved are employed to measure the illegal fundraising risks. We use the number of fintech-related patents normalized by total number of authorized patents to proxy for fintech development. The estimation results of the two-way fixed effects model show that the development of fintech significantly reduces the number of illegal fundraising cases and defendants per million population. This negative effect remains robust after addressing endogeneity concerns through the use of Difference-in-Difference estimation and instrumental variable techniques, alternative variable measurements, sample refinements and other estimating methods.
Next, we explore the cross-sectional heterogeneity of our baseline results and investigate the effects of fintech on household behavior based on CHFS data to substantiate the channels through which fintech affects financial crimes. The results illustrate that the development of fintech patents related to data analysis have significantly negative effects on illegal fundraising risks and this effect is more pronounced for prefectures with lower credit availability. It is also shown that households residing in regions with higher density of fintech patents tend to have stronger financial literacy and the effects of fintech on reducing illegal fundraising risks are greater for households with poor financial knowledge. All these results demonstrate that the working channel through which fintech exerts its negative impact on illegal fundraising lies in that fintech development improves financial inclusion and alleviates the degree of households' credit constraints through data analysis technology innovation, as well as accumulates their financial knowledge, thereby reducing illegal fundraising risks.
The causal evidence provided in our paper on using fintech to prevent financial crimes not only expands the emerging research on the economic effects of fintech development and the growing literature on the determinants of illegal fundraising risks, but also provides a theoretical basis for the fundamental solution to combat illegal fundraising by adhering to the principle of prevention first by eliminating economic incentives, blocking as a supplement. From the perspective of policy prescriptions, our study implies that resolving financial risks and serving real economic growth should mainly rely on promoting high-quality financial development and improving financial inclusion through the deepening of the structural reform of the financial supply side.
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Received: 24 December 2023
Published: 01 February 2025
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