The truth is it isn’t. Anything that helps the lender feel they are reducing their risk in lending will allow them to accept lower interest rates.
Of course, for a person that has no choice but to be in location X, this sucks as the data will suggest lending money to them at a higher rate due to greater perceived risk, but it’s tough to argue with data.
And suppose a location has been found with above average risk. To compensate, we increase interest rates in that area... making it more likely that people are unable to repay their loans, making the area more risky, increasing interest rates... the risk estimation algorithm essentially becomes part of enforcing and maintaining existing economic inequality.
If those people at said particular location _actually_ does not have higher risk, but is only higher due to their location association (e.g., their job is secure, etc), then an enterprising lender could find that out, and thus get the business from those people at a lower interest rate. This would be a form of arbitrage - they will steal marketshare from another lender who is unwilling to lend at the lower rate.
If members of a certain race consistently don’t pay debts in a way that is statistically significant, then it would be prudent to lend to them at higher interest rates due to perceived risk. Sounds racist, but reality has no obligation to conform to our ideas of racial equality. Races can develop habits and cultures amongst themselves that produce certain emergent behaviors. I think arguing against this just makes you seem naive.
In the above example, you are more than welcome to ignore race and lend money to everyone at the same interest rate regardless of race, but I predict you will see worse returns. Reality is what still exists even if you close your eyes and ignore the data.
For instance, if people in location X tend to be bad at paying back their loans, I still don't think it should be legal to purchase location data from some weather app and then incorporate the amount of time someone's phone spends in location X into some creditworthiness score. One might argue that allowing this practice makes credit more accessible for everyone else because we don't have to comingle with all the people in location X, but I still think it should be a prohibited practice (and it is - in the US).
In developing countries with little regulatory sophistication, the law is simply not ready to deal with these things - they are busy dealing with murders, drug dealing, etc., not consumer finance.