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Impact of Credit Limit Changes on Digital Loan Repayment

Financial Inclusion

Credit: Eilin Francis

The past decade has witnessed an explosion in the number of lenders who are 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 the following ways: (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. Yet while extensive research from the credit card industry shows that often people increase their spending when offered higher credit limits on their credit cards, there is a lack of research exploring whether changing credit limits affect repayment of small, digital loans dispersed via a mobile phone. To examine the effect of decreasing, maintaining, and increasing credit limits on customers’ borrowing patterns and loan repayments, 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 3 million mobile phone subscribers active on the network. For the 46,531 customers that the MNO could provide the necessary data, the researcher used an algorithm to determine the probability that a borrower will pay back all of their loans and then multiplied this probability by the total amount borrowed in the month prior to the study to create a new credit limit. About 64 percent of customers saw their credit limit increase, 5 percent saw their limit decrease, and the remaining customers’ credit limit stayed the same. The lender agreed to offer customers this new credit limit and provide the data needed to study future borrowing behavior and repayment. With the support from DCO, the investigator will travel to the research site and coordinate closely with the lender on the implementation of the experiment. Results forthcoming.

  • Alain Shema


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