56709 Finance & PSD Impact MAY 2010 The Lessons from DECRG-FP Impact Evaluations ISSUE 11 The eleventh in our series of impact notes profiles an innovative attempt to improve access to credit in Malawi through the use of biometric technology. Using biometric technology in rural The Experiment credit markets: The case of Malawi To look at the impact of biometric Xavier Giné technology, we implemented a field experiment using smallholder paprika A biometric is a measure of identity based farmers that applied in 2007 for an on a physiological (fingerprint, face, eye iris agricultural input loan. Farmers in the study or retina) or behavioral (speech or signature) were randomly allocated to either a control characteristic. It is an effective personal group or to a treatment group where each identifier because it is unique to and member had a fingerprint collected as part embodied in each person, so it cannot be of the loan application. Both treatment and forgotten, lost or stolen. Recent control groups were given a training session advancements in recognition technology on the importance of credit history in coupled with increases in digital storage ensuring future access to credit. capacity and computer processing speed have made biometric technology increasingly feasible in a number of developing country settings. One new application is in approving access to credit and insurance markets, especially in countries like Malawi without a unique identification system. In these places, identity fraud is rather common. Lenders tell anecdotes of past borrowers purposefully defaulting and trying to obtain a fresh loan from the same or another institution. The response of lenders has been to restrict the supply of such services. Biometric technology 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 to reward responsible past Results borrowers with increased credit. As a result, The study found that for the individuals may take out smaller loans or subgroup of farmers with the highest ex ante avoid borrowing altogether; borrowers may default risk, fingerprinting led to increases have greater incentives to ensure that in the repayment rates of about 40 percent. production is successful, either by exerting By contrast, fingerprinting had no impact on more effort or choosing less risky projects, repayment for farmers with low ex ante and ­whenever production could cover the default risk. This higher repayment rates are loan repayment­ may be less likely to due to fingerprinted borrowers requesting default intentionally or opportunistically. smaller loan sizes and devoting more land and other inputs to paprika. Do you have a project you want evaluated? DECRG-FP researchers are always looking for opportunities to work with colleagues in the Bank and IFC. If you would like to ask our experts for advice or to collaborate on an evaluation, contact us care of the Impact editor, David McKenzie (dmckenzie@worldbank.org) A rough cost-benefit analysis of the reports that only 80 per cent of the cases pilot experiment suggests that the benefits could be correctly verified, younger from improved repayment greatly outweigh individuals being more successful than the costs of equipment and fingerprint older. In Malawi, everyone selected collection. during demonstration sessions was Challenges in the implementation of correctly identified. biometric systems People may have a negative attitude Despite the encouraging results from the towards providing their biometrics. pilot in Malawi and the success of biometric People may be reluctant to place their technology in controlled laboratory fingers on the scanners due to hygiene environments, there are still a few concerns concerns; due to a perception that and challenges when collecting and using such information in actual environments and fingerprinting is linked to the criminal when trying to establish an identification justice process; or for fear of persecution system at a national level. by authorities or others that gain illegal access to such biometric records. In Not everyone can be enrolled in a Malawi, the authors did not encounter fingerprint-based identification system. any resistance from the farmers, perhaps Fingerprints can be unrecognizable due because it was a very novel technology. to cuts or burns; older individuals may The cost of collecting biometrics can have poor fingerprints; and in some be high in some cases. The costs of areas recovering from years of conflict, using different types of biometric individuals may lack fingers altogether. technology starting from basic In Malawi, only about 2 per cent of the fingerprinting techniques to voice and sample of 1,600 fingerprinted farmers iris recognition software can be had the left thumbprint recorded, rather prohibitively expensive. In India there than the required right thumbprint are legitimate concerns that the costs of because the scanner failed to capture it. rolling out biometric technology may These farmers grow tobacco which mean a huge opportunity cost for the requires the heavy use of fingers in the provision of social benefits for over 700 transplanting of seedling. Over the years, million Indians living in poverty. their fingerprint ridges had become too Biometric technology is not worn to be captured. infallible. While biometric technology The accuracy of biometric technology can be big step forward to combating remains to a large extent untested. issues of identity theft, fraud, and Biometric companies report very high money-laundering efforts, it is accuracy rates from highly controlled essentially a technological application. trials which typically use artificially As is the case with any other technology, generated data. However, because the it can be hacked, infiltrated, or runs the performance of a technology depends risk of having data fall into the wrong greatly on the context, trials using real hands. life data are far less impressive. For example, the UK Passport Service Trial Despite these concerns, biometric effectively and be used to resolving technology presents an exciting and identification and authentication issues innovative opportunity for increased access remains to be seen. to financial markets and better public service delivery. Whether it can be scaled up For further reading see: X. Giné, J. Goldberg, and D. Yang, "Identification Strategy: A Field Experiment on Dynamic Incentives in Rural Credit Markets", World Bank, mimeo 2010 Recent impact notes are available on our website: http://econ.worldbank.org/programs/finance/impact