Scaling effective solutions

Findings have influenced Malawi’s central bank to support the scale-up of a fingerprinting program.

Research with farmers in Malawi indicated that fingerprinting bank clients when they took out loans substantially increased loan repayment among a bank’s riskiest borrowers, allowing banks to reliably track clients’ payment histories for the first time. The benefits of the technology outweighed the costs by more than two to one. These breakthrough findings influenced Malawi’s central bank to support the scale-up of the fingerprinting program nationwide. IPA has signed agreements with all the legally recognized credit bureaus in Malawi and partnered with microfinance institutions to roll out unique biometric identification in the credit reporting process.  IPA is now working with researchers to evaluate the program nationwide, measuring long-term impact, testing operational and implementation approaches, and evaluating if fingerprinting clients affects bank practices.

The Challenge 
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Malawian farmers gather around a computer to observe the fingerprinting technology used in the study.
CREDIT: 
Dean Yang

Credit enables small-scale farmers and business owners in developing countries to finance crucial inputs such as fertilizer, improved seeds, and business assets, but in Sub-Saharan Africa, fewer than a quarter of adults have access to formal financial services.1  Formal lenders may be discouraged from lending to the rural poor due to difficulties in ensuring repayment from borrowers who lack adequate collateral or verifiable credit histories. Obtaining reliable information on individuals’ credit history can be difficult in countries without unique identification systems, like social security numbers or government-issued photo identification. Borrowers can avoid sanction for past default by simply applying for new loans under different names or from different institutions. When lenders are unable to sanction unreliable borrowers or reward reliable borrowers, they respond by limiting the supply of credit, which may hurt poor borrowers.

The Evidence 

A previous study among paprika farmers in Malawi showed that fingerprinting substantially increased loan repayment among the riskiest borrowers. Researchers Xavier Giné, Jessica Goldberg, Dean Yang found that fingerprinting resulted in a 40 percent increase in repayment by high-risk borrowers. Those farmers who had their fingerprints taken also took out smaller loans, and cultivated more land than their high-risk peers who did not have their fingerprints taken. Furthermore, the technology proved to be cost-effective; the benefits outweighed the costs by more than two to one.

Read more about the original evaluation here.

The Impact 

After IPA and researchers shared findings from the initial study with Malawian officials, the central bank decided to support efforts to expand the biometric fingerprinting program nationwide.  IPA also signed agreements with all the legally recognized credit bureaus in Malawi and partnered with a quarter of the microfinance institutions that engage in lending in Malawi, who have all agreed to include unique biometric identification in the credit reporting process. The roll-out is now underway. Looking ahead, participating microfinance institutions will be able to request a potential borrower’s credit history based on their unique biometric ID. Providing the lender with a reliable way to access clients’ credit history may ultimately make it easier for low-income borrowers to access credit. IPA is now implementing a new, two-year evaluation that will measure the large-scale impacts of fingerprinting on lenders and borrowers from microfinance institutions across Malawi. The evaluation will capture roughly 50 percent of Malawi’s microfinance borrowers. As we learn what works, we will work with our partners to refine the program. 

Read more about the evaluation of the scale-up here.

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If you know of other organizations that are using these results, or have any corrections or updates to make to this case study, please contact comms@poverty-action.org. 

Sources

1.  International Finance Corporation. “Access to Finance: Sub-Saharan Africa.” 2013. Available online at
http://www.ifc.org/wps/wcm/connect/e8ea2e004149f9f48008a39e78015671/For+Print+E+FY13+highlights.pdf?MOD=AJPERES

Read more about the evaluation of the scale-up here