Moral Hazard, Adverse Selection, and Capital Structure in Fintech Microfinance in Indonesia

Abstract

This study examines the relationship between moral hazard and adverse selection in Indonesia's fintech-driven microfinance sector. Its objective is to assess the impact of these economic factors on the operational strategies and financial frameworks of fintech-enabled microfinance institutions (MFIs). To achieve this, the study investigates how fintech addresses the issue of informational asymmetry, commonly associated with moral hazard and adverse selection, by way of comparing and contrasting previous literature and empirical studies. The findings suggest that improved credit scoring processes facilitated by fintech have led to a noticeable reduction in adverse selection. However, the existing literature also reveal that while fintech solutions can mitigate moral hazard to some extent, challenges remain due to borrowers' limited digital financial literacy. Furthermore, the adoption of technology has brought about changes in the capital structures of MFIs, resulting in increased efficiency but also introducing new regulatory complexities. This research has two key implications. Firstly, it emphasizes the importance of policymakers developing robust regulatory frameworks that can adapt to the rapid technological advancements in the microfinance industry. Secondly, the findings can provide guidance to the microfinance industry on how to optimize the benefits of fintech. Investing in capacity building and education for borrowers, as well as technology infrastructure, are crucial in harnessing the potential of fintech to enhance the effectiveness and sustainability of microfinance services in Indonesia.