What happens when we relax credit constraints?

Challenges in Banking the Rural Poor: Evidence from Kenya's Western Province
Pascaline Dupas, Sarah Green, Anthony Keats, and Jonathan Robinson

Most people in rural Africa do not have bank accounts. In this paper, we combine experimental and survey evidence from Western Kenya to document some of the supply and demand factors behind such low levels of financial inclusion. Our experiment had two parts. In the first part, we waived the
fixed cost of opening a basic savings account at a local bank for a random subset of individuals who were initially unbanked. While 63% of people opened an account, only 18% actively used it. Survey evidence suggests that the main reasons people did not begin saving in their bank accounts are that: (1) they do not trust the bank, (2) service is unreliable, and (3) withdrawal fees are prohibitively expensive. In the second part of the experiment, we provided information on local credit options and lowered the eligibility requirements for an initial small loan. Within the following 6 months, only 3% of people initiated the loan application process. Survey evidence suggests that people do not borrow because they do not want to risk losing their collateral. These results suggest that, while simply expanding access to banking services (for instance by lowering account opening fees) will benefit a minority, broader success may be unobtainable unless the quality of services is simultaneously improved. There are also challenges on the demand side, however. More work needs to be done to understand what savings and credit products are best suited for the majority of rural households.

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Credit markets, unique identifiers and biometrics

Once in a Starbucks I met a guy who worked in the US credit-rating industry and he told me that one of the biggest under-stated issues in the credit market was the miss-assignment of credit penalties because individuals have the same name (sorry, John Smith). He instructed me to go and check my credit scores to make sure the rating agencies weren't assigning me penalties that were due to someone else's failure to repay a loan (but given my name, I wasn't terribly concerned).  However, I was completely stunned, given the state of technology, that we still rely on names to uniquely identify people.

The same issue hold in poor countries, except it's exacerbated by weaker credit-rating institutions and greater difficulty tracking individual people.  This recent NBER working paper illustrates the importance of unique identification for credit markets and demonstrates how biometric technologies can help.

Credit Market Consequences of Improved Personal Identification: Field Experimental Evidence from Malawi
by Xavier Gine, Jessica Goldberg, Dean Yang

Abstract: We report the results of a randomized field experiment that examines the credit market impacts of improvements in a lender's ability to determine borrowers' identities.  Improved personal identification enhances the credibility of a lender's dynamic repayment incentives by allowing it to withhold future loans from past defaulters and expand credit for good borrowers.  The experimental context, rural Malawi, is characterized by an imperfect identification system. Consistent with a simple model of borrower heterogeneity and information asymmetries, fingerprinting led to substantially higher repayment rates for borrowers with the highest ex ante default risk, but had no effect for the rest of the borrowers.  The change in repayment rates is driven by reductions in adverse selection (smaller loan sizes) and lower moral hazard (for example, less diversion of loan-financed fertilizer from its intended use on the cash crop).