Ford School Policy Points

10/10/2012

Dean Yang: Fingerprinting helps lenders in Africa

Dean Yang is an associate professor of public policy at the Ford School and in the department of economics.

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{ View transcript here }
Dean Yang says:

The biggest challenge that banks face in lending in Malawi is getting repayment from borrowers. In rich countries, we're very used to securing collateral for loans. Borrowers will pledge their vehicles or their homes or their land as repayment for loans. This doesn't work in countries like Malawi that don't have very strong legal systems.

The main thing that lenders need to do to secure high levels of loan repayment is to make sure that they can withhold loans in the future from borrowers who don't repay currently and also conversely reward borrowers who repay well in the current period with future loans and with larger loans in the future. In order to do that well, one big challenge that lenders face is in reliably identifying borrowers over time. This is the problem of personal identification.

One solution to the problem of identifying borrowers is simply to take fingerprints of everybody who comes in requesting a loan. As a lender, this is a very easy technology to implement.

Our research showed that when you fingerprint borrowers, they become much more likely to repay, and in particular the riskiest borrowers in a lenders portfolio become substantially more likely to repay.

They also in fact do things differently on their farms once they've been fingerprinted. They're more likely to use the loans for the intended purpose. And there's even suggested evidence that their incomes rise over the course of the next year because they use the loans for production purposes rather than other purposes.

For an abstract and full text of the article: http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2923

{ Abstract and full article text }

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