Algorithmic Credit, Digital Financial Literacy, and Institutional Safeguards: Evidence from Digital Lending Adoption in an Emerging Market

Abstract

The rapid expansion of digital lending platforms and algorithmic credit scoring systems has reshaped access to credit in emerging market economies. While algorithmic credit is widely promoted as a driver of financial inclusion, growing evidence suggests that expanded access does not necessarily translate into improved borrower welfare. This study examines how algorithmic credit adoption influences borrower financial outcomes and investigates the moderating roles of digital financial literacy and institutional safeguards in an emerging market context. Guided by financial inclusion theory, behavioral finance, and institutional governance perspectives, the study employs a quantitative, cross-sectional research design using primary survey data from adult users of digital lending platforms. Descriptive statistics, correlation analysis, multiple regression, and moderation analysis were applied to examine the effects of algorithmic credit adoption on repayment behavior, perceived financial stress, and financial resilience, as well as the conditional roles of borrower capability and governance mechanisms. The results revealed that algorithmic credit adoption is significantly associated with improved repayment behavior and enhanced short-term financial resilience, but also with increased perceived financial stress among borrowers. Importantly, digital financial literacy significantly strengthened positive financial outcomes and mitigates stress-related effects, while institutional safeguards further moderate these relationships by enhancing transparency, accountability, and consumer protection. These findings indicate that the welfare effects of algorithmic credit are conditional rather than uniform. The study contributes to the digital finance and financial inclusion literature by demonstrating that algorithmic credit systems are neither inherently inclusive nor inherently harmful. Instead, their impact depends critically on the interaction between technological adoption, borrower capability, and institutional governance. The findings underscore the importance of integrating digital financial education and robust regulatory safeguards into fintech-driven financial inclusion strategies to promote sustainable and responsible digital lending in emerging markets.