Kollenda, P. (2022). Financial returns or social impact? What motivates impact investors’ lending to firms in low-income countries Journal of Banking and Finance, 136:1--27.

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{\textquoteright} 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{\textquoteright} perception but has no influence (for female empowerment, employees and beneficiaries) or limited influence (for turnover) on investors{\textquoteright} 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.