Reducing comparison frictions in the Ugandan credit market

Many first-time borrowers tend to find out about loans exclusively from providers — unaware of the total cost. Financial institutions obscure prices especially for new and naive consumers to maximise profits (Atuhumuza et al. 2020), preventing many consumers from making well-informed borrowing decisions. Therefore, credit markets are characterised by substantial price dispersion (i.e., price for the same product) even for identical borrower. Even in the face of price dispersions, consumers rarely engage in comparison shopping (i.e., compare the price of products between multiple retailers). As a result, it becomes costly for borrowers, limits credit market competition, and contributes to high interest rates spreads and cost of credit in Uganda. These raises the following questions:

  • What constraints do financial consumers face that stops them from comparing loans to one another (i.e., comparison shopping)?
  • Are there barriers to accessing information?
  • Is it due to the difficulty (i.e., cognitive constraints) of understanding and taking individual price components (e.g., interests and various fees) to calculate the total cost of credit (TCC)?

A pilot project in Kampala in 2018 obtained information of borrowers’ willingness-to-pay (WTP) for comparative pricing information, which increased with the desired loan size. This project will take a larger sample of 3,000 loan applicants in Greater Kampala, and measures the WTP for a randomised subsets of participants given the following information:

  1. Personalised comparative information on loan price components across products and institutions.
  2. Personalised comparative information on the TCC across products and institutions.

These participants will be compared with a control group who receives neither information which allows the trial to assess the impact of information access on comparison shopping and negotiation behaviour of borrowers, and most importantly, the lending terms. Will informed borrowers access cheaper and or larger loans?

Outputs

  • Research in progress.

    Project last updated on: 4 Apr 2022.