A Second Chance at Financial Inclusion: The Impact of Repayment Plans and Incentives on Delinquent Digital Credit Borrowers

Context

Digital credit has recently emerged as a source of fast, automated, remotely provided, short-term loans for millions of people in low- and middle-income countries. While the speed and ease of access to digital credit makes these loans very appealing, many borrowers struggle to repay: recent research in Kenya, South Africa, Mexico, Malawi, and Nigeria has reported default rates ranging from 7-27%. Failing to repay may not only limit access to future credit from the lender, but also limit access to credit elsewhere if defaults are reported to a credit bureau.

This study investigates whether there are simple ways to increase repayments, and whether they make borrowers better off. By separately manipulating the benefit and cost of repayment, researchers hope to shed light on whether borrowers can repay, but choose not to, or whether they would like to repay, but need support in doing so.

Researchers are partnering with a large digital lender operating in several African countries. The study takes place in Zambia where the initial digital loan to a new borrower is 50 ZMW (approximately US$3) with a term of 7, 14, or 30 days for a service fee ranging from 10-19%. The lender currently sends SMS reminders about the repayment in advance of the due date, and monthly SMS follow-ups afterwards to borrowers who repay late (who are charged an additional 10% one-time late fee). Successful repayments open the door for larger loans and lower service fees going forward. Failing to repay precludes any future loans from the lender, and results in a credit bureau report.

Study Design

The study sample consists of delinquent borrowers of digital loans, i.e. those who failed to repay their loans within 90 days of the repayment period. The sample will be randomized into the following experimental groups:

CONTROL GROUP:  receive the provider’s standard delinquency communication;

(A) NOTIFICATION: receive a notice reinstating future loan eligibility conditional on full loan repayment;

(B) PLAN: receive a repayment plan dividing their payment into four (weekly) installments;

(A+B) NOTIFICATION + PLAN: receive both the weekly repayment plan and a notification of conditional eligibility.

This design tests multiple mechanisms that could influence repayment: (1) repayment plans could help borrowers overcome procrastination and build momentum towards full repayment; and (2) consumers may be more willing to reduce their spending elsewhere to repay loans in order to preserve access to future loans. Some borrowers may require both, perhaps wanting to repay to reinstate future loan eligibility but unable to do so without the repayment plan, or able to repay given the repayment plan but unwilling to do so unless it restores their loan eligibility. Thus, the study enables researchers to measure the impact of these approaches both individually and in combination, and to understand how borrowers’ ability and willingness to repay a delinquent loan interact.

Results and Policy Lessons

This project is ongoing, results are forthcoming.