Promises and pitfalls of digital credit: Empirical evidence from Kenya

Abstract

Digital credit is a recent innovation that raises hopes of improving credit access in developing countries. However, up until now, empirical research on the extent to which digital credit actually reaches people who are otherwise excluded from conventional credit markets and whether increased credit access is sustainable or threatened by high default and blacklisting rates is very scarce. Using representative data from Kenya, this article shows that digital credit increases borrowing opportunities, including for people less likely to otherwise have credit access in the conventional credit markets. However, we find that digital credit borrowing is also responsible for 90% of all blacklistings, which is partially driven by higher default rates in the digital credit market but also by a higher probability that digital credit defaults lead to blacklisting of the borrower, compared to defaults in other credit markets.

Digital credit and the gender gap in financial inclusion: Empirical evidence from Kenya

“…In a recent study, Bharadwaj and Suri (2020) conclude that digital banking (which includes digital credit) holds its promise as an important source of financial inclusion. This finding is corroborated by recent studies which show that digital credit increases the total share of (formal) borrowers (Bharadwaj & Suri, 2020; Brailovskaya et al, 2021; Johnen et al, 2021). However, whether men and women profit equally from increases in financial inclusion through formal digital credit usage is not yet determined.…”

Instant Loans Can Lift Subjective Well-Being: A Randomized Evaluation of Digital Credit in Nigeria

“…Despite the strong demand for these loans, critics argue that they may not improve borrowing well-being, since loan terms are opaque and may induce borrowers to fall deep into debt (Donovan and Park, 2019). Interest rates are high -typically from 138% to over 1000% APR (Francis et al, 2017) -and are accompanied by high rates of default (Johnen et al, 2021). Many have criticised providers for using predatory practices on people with little experience with formal financial products (Hindenburg Research, 2020).…”

Is Digital Credit Filling a Hole or Digging a Hole? Evidence from Malawi

“… See Ogada and Hammond (2021),Francis et al (2017), andRobinson et al (2021) for reviews. 2 SeeJohnen et al (2021) for a discussion of credit bureau blacklisting in Kenya.3 For Kenya, see for example "Perpetual Debt in the Silicon Savannah", Boston Review 2019; "Kenya is preparing to crack down on a flood of high-interest loan apps", Quartz Africa 2021; "It's Time to Protect Kenyans from a Digital Lending Laboratory", Center for Financial Inclusion 2020.4 In India, unlicensed lending apps employed predatory lending practices, including aggressive debt collection tactics. The crisis was serious enough that the Reserve Bank of India banned many such apps from the Google Play Store.…”