Cultural differences affect online lending, says new study by Professor Sunil Wattal

Professor Sunil WattalWhat factors drive us to lend money online to people in far and distant lands? That’s the question behind Professor Sunil Wattal’s latest study, which sought to determine whether cultural differences and/or geographic proximity affected someone’s inclination to lend money through an online platform. Findings suggest that we’re more likely to give to someone similar to us, even when donating through a website that seeks to neutralize cultural gaps.

To compile data, Wattal and his team analyzed more than three million transactions that took place between 2005 and 2010 via, an online investing platform that helps fund entrepreneurs in developing countries. Through a crowdfunding model, Kiva facilitates peer-to-peer lending from individuals (i.e. investors) to burgeoning businesses across the world.

While cultural differences have previously been studied as a source of friction in extended interactions, the goal of this study was to determine how said differences affected the act of selecting a transaction partner. The conclusion? Lenders do, in fact, prefer someone both culturally similar and geographically proximate to themselves.

Further research revealed that cultural differences are actually more distancing than physical geography—as one standard deviation in cultural differences resulted in 30 fewer lending acts, compared to one standard deviation of physical distance, which resulted in a decrease of only 0.23. Equally noteworthy was an apparent “substitution effect,” which showed that an increase in physical distance mitigated the effect of cultural difference—as if to suggest that we are more comfortable being cultural different from someone far away from us than physically near.

In addition to its findings, the study recommends to Kiva approaches to overcome this cultural barrier to lending, specifically with respect to their “reputation rating system” for microfinance intermediaries. The team also discusses the broader implications for pro-social lending, online crowd funding, and electronic markets.

Professor Wattal was recently appointed Associate Editor of the prestigious MIS Quarterly, which seeks to enhance and communicate knowledge concerning the development of IT-based services. Wattal’s study is forthcoming in MIS Quarterly.


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