Can fingerprinting improve micro lending in Africa?
From the Grameen Bank to kiva.org, microfinance has become a widely used vehicle for bringing financial services to the rural poor. However, a big challenge for microfinance institutions is the inability to consistently identify borrowers. In the absence of a formal identification system, high-risk borrowers may avoid penalty for past default by applying for loans under a different identities or from different institutions. This can increase the cost to lenders by allowing for unreliable borrowers. In response, lenders increase their prices and limit their supply of credit, leaving many creditworthy patrons unable to finance their endeavors. Economics Professor Dean Yang, former doctoral student Jessica Goldberg, and World Bank economist Xavier Gine examined whether fingerprinting could help alleviate these problems.
To test their hypothesis, Prof. Yang and his team randomly assigned farmers in rural Malawi to be fingerprinted as part of their loan application. They found that, when compared to their non-fingerprinted counterparts, fingerprinted farmers took out smaller loans and were much more likely to repay their loans; 85% of fingerprinted high-risk borrowers paid back their loans in full, as compared to just 44% of high-risk borrowers in the control group. Finally, the researchers estimated a return of $2.34 to the lender for every dollar invested in fingerprinting technology. The results of this study could inform policy beyond Malawi. In a conversation with Global Michigan, Prof. Yang said, “What we’ve learned in Malawi can most certainly be applied in a wide range of other places. That’s one thing that excites us about this project” (“Fingerprints for finance: Improving micro lending in Africa”).
Prof. Yang continues his study of financial behavior in Malawi with an on-going project that aims to apply insights from behavioral economics in order to find innovative ways to increase formal savings. Current doctoral student Lasse Brune summarizes the research: “A sample of about 2000 rural households in Mulanje, Malawi will be selected to receive subsidized accounts with a bank that has a branch within 10 km distance of respondents' homes. We conduct a field experiment with three main components. In the first, we offer two types of financial literacy trainings to a subset of the study sample – a basic version and an ‘aspirational’ version that aims to inspire people to set savings goals by showing video clips with stories of successful savers. In the second component, we test to what extent designating bank accounts for specific purposes can activate ‘mental accounting’ to reduce use of accumulated savings for unplanned expenditures. In the third component we test how money is spent differently when income streams arrive directly into respondents' accounts via direct deposit compared to receiving money in the form of cash.”
Yang and Brune are currently completing the first stage of the project. Baseline survey, account offers, financial literacy education and direct deposit will take place throughout this year, and endline surveys will be conducted in the first half of 2014.