Islamic credit-card users pay their debts when they receive reminders to do what’s right, a new study finds.
“The Prophet (Peace and blessings be unto Him) says: ‘When Allah wishes good for someone, He bestows upon him the understanding of the Book’ (Imam al-Bukhari). Please pay your credit card balance at your earliest convenience. Call …”
This isn’t research rooted in religion, but rather an economic behavioral study of how a consumer’s moral compass points him or her to repay debts.
A group of researchers borrowed from Muslim teachings to show that an Indonesian bank issuing an Islamic credit card could significantly increase debt repayment by reminding consumers about their moral obligation to pay what they owe. Repayments also rise when the consequences of delinquency inhibiting the future ability to obtain credit are highlighted to customers, they discovered.
A morality play stimulated the increase in payments and not religious beliefs.
“We were not expecting the results to be so big, for sure,” says paper coauthor Daniel Gottlieb, assistant professor of economics at Washington University in St. Louis. The findings will appear in the Journal of Political Economy.
“What’s interesting is, the payoff from appeals to morality are comparable to the effect you get from the threat of a substantial financial penalty—which, in Indonesia, can be a 24-month shutdown of a consumer’s credit. These were pretty surprising findings,” he says.
The evidence confirmed that a morality play stimulated the increase in payments and not religious beliefs.
“We did the randomized experiment with everyone,” Gottlieb says. “Even people who were not from particularly religious regions seemed to respond to that.”
It’s payback time
Islamic banking is a sizable and growing industry in Indonesia and elsewhere. There are 300-plus banks in more than 75 countries offering Sharia-compliant products, but overall they emphasize ethics more than religion, hence the non-Muslim clientele.
Partnering with a large Indonesian bank they cannot divulge, the researchers sent varying degrees of text messages to late-paying customers of this popular Islamic credit card, with more than 200,000 users. The bank sent text messages—frequently containing religious and moral content—to customers starting the day after a minimum payment was overdue.
From an overall pool of 14,429 customers who were one week past due at least once between the study period of February 2015 through April 2016, researchers sent text messages:
- 4,120 participants in a control group receiving straightforward texts that translated as “Your (credit card) has reached the due date. Please make a payment at your earliest convenience. If you have already paid, ignore this text.”
- 2,244 participants in a moral-incentive group that received the Sunni Islam religious quotations citing Allah noted earlier.
- Another 1,186 researchers assigned to a similar sub-group received messages without (parenthetical) references to the prophet as in the message above.
- Under the same moral-incentive umbrella, 1,180 received texts that were non-religious, removing any Prophet reference and replacing the Arabic-origin term for “injustice” (kezaliman) with the Indonesian word “ketidakadilan”: “Non-payments of debts by someone who is able to repay is an injustice. Please repay your credit card balance at your earliest convenience.”
- The remaining participants received some different types of messages, such as one reminding them of the financial consequences of delinquency: “Late payments are reported monthly to Bank Indonesia Sistem Informasi Debitur (SID), which all banks consult. This will diminish your ability to get credit in the future. Please repay your card balance at your earliest convenience.”
All of the above were benchmarked by messages containing a cash-rebate incentive up to 50 percent of their current outstanding minimum payment due.
The researchers’ dataset included a range of demographic details, such as age, gender, religion, province, monthly income, and credit limit. For example, the average customer in the study was male, 41, with an income of $375 in US dollars, an outstanding debt on this credit card of $580 US, and a credit limit of $750 US.
Moral (text) messages
The researchers found a decrease in late payments between 3.8 and 5.2 percentage points across all groups when they received the moral message on delinquency. Gender, age, religion, or if they were a late-payer previously didn’t matter: there was an effect across those demographics. The effect proved stronger for customers with lower debt-to-income ratio, the researchers say.
“Some researchers have been looking at morality more generally,” Gottlieb says. “A lot of governments have been trying to tell people it’s immoral not to pay their taxes properly. There is a cable TV company somewhere trying to get people to pay for their cable using morality. Even businesses who portray themselves as socially responsible are pulling on those same strings. I think there might be a lot of new lessons coming from this.”
It may not happen as much in Western culture, but Gottlieb foresees the possibility that the banking business could try to meet its consumers’ moral compass in the middle: “To some extent, if the consumers hear about the morality aspect, the banks may act in a way that’s more aligned with the consumers’ reality,” he says.
Researchers from the University of Chicago; University of California, San Diego; and the World Bank contributed to the study.
The UCLA Anderson Center for Global Management, UCLA Anderson Price Center, and World Bank funded this research.