The past decade has witnessed an explosion in the number of lenders taking advantage of mobile phones to provide small, digital loans to individuals in emerging markets. This new digital lending is similar to more traditional credit cards in that: (1) loan decisions are mostly automated, (2) loans are disbursed both instantaneously and remotely and, (3) borrowers can spend the loan either in digital form or via a cash withdrawal. While extensive research from the credit card industry shows that raising credit limits tends to increase borrowing and indebtedness, there is little work exploring whether changing credit limits affects repayment of small, digital loans dispersed via a mobile phone.
To examine the impact of increasing credit limits, the researcher partnered with an airtime lender that works with a mobile phone operator (MNO) in a low-income country to provide micro airtime loans. The researcher randomly selected 50,000 customers from the over 2.6 million mobile phone subscribers active on the network. For each of the 46,531 customers that the MNO could provide the necessary data, the researcher algorithmically generated a new credit limit based on a customer’s probability of repayment and the amount they had borrowed the prior month. After their next loan, about 64 percent (29,985) of customers saw their credit limit increase, 30 percent (14,025) maintained the same credit limit, and the remaining 5 percent saw their limit decrease. The lender agreed to offer participating customers this new credit limit and provide the data needed, on these borrowers and an additional 29,985 customers who served as a comparison group, to study the impacts of increasing credit limits on customers’ borrowing, loan repayment, and network usage.
Results and Takeaways
Increased credit limits led customers to increase borrowing in the short-term, but this led to a persistent reduction in repayment rates and network usage. Borrowers with increased credit limits immediately responded by borrowing rather than purchasing airtime, increasing their borrowing by more than 10% while increasing their communications services spending by only 1%. Although this increase in borrowing reverted within the following month, the estimated 10 percentage point reduction in the repayment rate, a 15% reduction in airtime usage and a 25% reduction in airtime recharges persisted, and some customers appeared to have left the network with outstanding loans.
However, the research shows useful predictors of which borrowers could manage increased credit limits without these undesirable consequences. More borrowing history (in particular longer time since the first loan, not simply the number of loans) and longer-term patterns of loan size and repayment appear to be mitigating factors. Where high default rates are a function of borrowers’ lack of experience, as these services mature and users gain more experience we may see borrowing less influenced by credit limit changes. Meanwhile, researchers recommend that customers’ should be given a chance to gain experience in borrowing digital loans with smaller, less risky credit limits.
Read the published paper in the The Electronic Journal of Information Systems in Developing Countries (EJISDC) here.
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