Algorithm-based digital microcredit products: making vulnerable populations more vulnerable

Digital microcredits are small and short-term credits that can be taken via a mobile phone. They are usually given to low-income individuals to help them become self-employed or grow a small business. Microcredits like this may seem to be a panacea for vulnerable people from developing countries. However, there are some challenges present.

Despite the obvious benefits of digital microcredits, such as easier and faster accessibility, there are also some risks. Tim Unwin, Emeritus Professor of Geography at Royal Holloway, University of London, draws attention to the problem of paying off the interest after taking out these loans. Indeed, there is no guarantee that people, particularly the most vulnerable, will be able to pay back a microcredit. And there are even more challenges for those who take out bigger loans to pay off old ones, producing a vicious circle.

Another point is that the pricing and conditions may appear vague. And this is what young people are concerned by the most. Yuliya Tikhonova, a Youth IGF activist from Russia, says that the lack of awareness among the young who wish to take out digital loans is a big issue. They can be easily forced into debt if microcredits are not paid back within a fixed period of time. Astou Diouf from Senegal agrees that digital microcredits may be a good solution for vulnerable people from developing countries, but their capacity to repay such loans is often questionable, she says. If interest rates are high and repayment periods are short, people are not far from falling into a debt trap.

The risks mentioned above may produce as these new technologies are still underregulated, especially in developing nations. Hervé Jacquemin, Professor of Law at the University of Namur, warns that countries that do not have rules in place to regulate the fintech field should think of implementing some. The crucial thing is to ensure that these types of credits continue to play an important social role by helping those who are excluded to launch their micro projects (often to develop an entrepreneurial solution), which has the objective of improving people’s financial situation. So it could be the responsibility of public authorities to urge providers of digital microcredits to offer their products in a fair and transparent manner.

The same rules could apply to the algorithms that digital microcredits are based on. The problem is that if they are designed improperly, deliberately or not, users’ ability to pay back loans cannot be assessed in an appropriate way.

So, should we welcome, or be worried by, these new digital microcredits?