Fingerprinting improves micro-loan repayment rate in Malawi
Biometric fingerprinting works well in impoverished countries like Malawi that lack a national identification system where even identification as basic as a birth certificate is rare, according to an academic study published in the American Economic Review.
The scholarly journal published an account of a randomized field experiment in Malawi examining borrower responses to being fingerprinted when applying for loans.
The study found that the process of fingerprinting improved the lender’s ability to implement dynamic repayment incentives, allowing it to withhold future loans from past defaulters while rewarding good borrowers with better loan terms.
As predicted by a simple model, fingerprinting led to substantially higher repayment rates for borrowers with the highest risk of default, but had no effect for the rest of the borrowers.
The study showed that 85 percent of the fingerprinted farmers considered to be high-risk borrowers repaid their loans in full. In the control group, only 44 percent of the high-risk borrowers paid back their loans. High-risk borrowers also took out smaller loans when they knew the lender could easily identify them.
For every dollar invested in fingerprint technology, the study found that its implementation resulted in an additional US$2.34 of profit for the micro-finance bank.
The study provided unique evidence that this improvement in repayment rates is accompanied by behaviors consistent with less adverse selection and lower moral hazard.