Economic and Moral Incentives for Debt Repayment

Under the auspices of the World Bank a multi-authored paper titled ‘Moral Incentives: Experimental Evidence from Repayments of an Islamic Credit Card’ concludes based on empirical research in Indonesia that ‘moral appeals strongly increase credit card repayments.’ The methodology was as follows: the day after payments became overdue customers received a text message simply stating that ‘non-repayment of debts by someone who is able to repay is an injustice.’ This message alone the paper finds increased repayment by close to 20%. The control group received an ‘Islamic quote’ unrelated to debt or a reminder without a moral message neither of which effected rates of repayment. The morally weighted message was more effective than a purely financial incentive (a cash rebate equal to half of the minimum required repayment). The paper also concludes ‘that removing religious aspects from the quote does not change its effectiveness, suggesting that the moral appeal of the message does not necessarily rely on its religious connotation.’

An obvious question is whether the results would be replicable in other countries. The paper proposes that (p 1) ‘even in a comparatively secular country such as Indonesia, consumers care about ethical and religious issues when making financial decisions.’ As the largest Muslim population contained within a single country, where religious minorities are small in number, it may be queried whether the religious aspect of the appeal is as incidental in its results as the authors suggest, and the rationale for the site of the research may be queried. In addition the credit card in the experiment is issued ‘by one of Indonesia’s leading Islamic banks’ ( p 1). Interestingly though (p 1 note 6) 10 percent of the customers at this bank were not Muslim (the same percentage as the article reports is non-Muslim country wide).

From the standpoint  of Islamic economics the premise of the study that debt should be the focal point (or even that interest bearing debt is at all permissible) is clearly tendentious. Having said that, the realities of Islamic financial services do include credit (not merely debit or charge) cards, and these are especially widespread in Southeast Asia — in addition to Indonesia, also in Malaysia, Brunei, and Singapore — and in other jurisdictions outside the region as well.

The precise topic of late payment (and the boon it can be for credit institutions, bane though it be for the consumer) is an important one given the controversial nature (or the plain prohibition, depending upon one’s Islamic legal position) of late payment fees. It is also an interesting set of findings regarding the congruity of Islamic financial services and investments as compared with ethical finance and investments without any religious meanings attached. In this regard the paper (p 4) states:

‘We find that all variations of the moral appeal had exactly the same effect. That is, a non-religious moral statement was just as powerful as the same moral statement identified as a quote from the Prophet, attributed to a well-known religious test. There are two possible interpretations of this result. The first possibility is that the key component of the treatment is indeed the moral appeal, rather than its religious connotation. An alternative possibility is that customers associated the bank with religion, and therefore interpreted a purely moral message as related to religion.’

In relation to the existing literature on non-monetary incentives the paper draws some parallels with the fair trade and ‘environmentally clean’ practices or companies donating to charities (p 5). In addition the paper aims to contribute to literatures on religion and economic behaviour, and on efforts to enable consumers to make better financial decisions (p 5).

The paper concludes (p 19) that ‘[w]hile moral considerations may influence many important economic decisions, economists typically focus on material incentives as the main determinant of behaviour. In this paper we provide novel evidence that moral incentives can strongly affect a financially important and a recurrent economic choice: the decision to repay one’s debts.’ As a preliminary inquiry the paper does deliver on this promise. Having said that should a bank rely upon an 18% (the exact uplift, at page 2) increase in repayment and lack recourse to monetary incentives (positive or negative) — presuming the case of Indonesia to be illustrative – it does seem questionable whether the bank could long remain solvent.


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