Using Biometric Technology in Rural Credit Markets: The Case of Malawi
This article profiles an innovative attempt to improve access to credit in Malawi through the use of biometric technology, an effective, unique and secure personal identifier system. In countries like Malawi without a unique identification system, identity fraud and purposeful loan default are common.
The study found that biometric technology, like fingerprinting, can make the threat of future credit denial credible because it makes it easier for financial institutions to withhold new loans from past defaulters and discourage defaults. Its findings include:
- In the subgroup of farmers with the highest ex ante default risk, fingerprinting led to increases in the repayment rates of about 40%;
- Rough cost-benefit analysis of the pilot experiment suggested that the benefits from improved repayment greatly outweigh the costs of equipment and fingerprint collection;
- Biometric technology is not infallible as not everyone can be enrolled in a fingerprint-based identification system owing to some clients’ negative attitudes and the high cost of collecting biometrics.
The paper concludes that biometric technology presents an opportunity for better public service delivery but whether it can be scaled up effectively and be used to resolve identification and authentication issues remains to be seen.
