Over-Indebtedness in Microfinance – An Empirical Analysis of Related Factors on the Borrower Level

Abstract

This paper analyses the over-indebtedness of microborrowers in Ghana. It defines over-indebtedness from a customer protection perspective and considers borrowers over-indebted if they continuously struggle with repayment and experience unacceptable sacrifices related to their debt. It finds that poorer microborrowers are more likely to be over-indebted. The risk of overindebtedness further increases with the occurrence of adverse economic shocks to a borrower's income or expenses. The likelihood of over-indebtedness is higher for borrowers with low returns on their investment and if borrowers use loans, at least in part, for non-productive purposes. It is higher for borrowers with a low, debt-specific financial literacy. General financial literacy has negative effects on over-indebtedness. We find no effect for mere numeracy. The paper also breaks down the relationship of the above factors to the specific sacrifices that borrowers make, to how frequently they repeat them and to how acceptable sacrifices are to borrowers.

Microcredit Loan Repayment Default among Small Scale Enterprises: A Double Hurdle Approach

“…The likelihood of managerial differences between more educated clients and less educated ones might be responsible for this observation. More educated borrowers might have a better economic standing and able to make more advantageous financial decisions (Schicks, 2014). Level of education however, does not influence rate of default.…”

The Causal Relationship of Microfinance and Economic Development: Evidence from Transnational Data

“…Additional ethical issues inherent in the microfinance concept include over-indebtedness risks that are given when MFIs lend multiple credits to the same clients without appropriately advising them. The integrity and financial independence of microfinance clients might then be jeopardized by offensive operating policies such as interest rates of 80 to 100 per cent and improper repayment schemes (e.g., Schicks, 2014). Furthermore, attracted by promises for a win-win solution from which poor clients, financial institutions and economies profit (Morduch, 1999) new and more institutions have entered and expanded the microfinance market.…”

The relationship between the performance and legal form of microfinance institutions

“…In this context, the social performance indicators enable it to be verified whether the MFIs are really providing improvements in the quality of life of the customers and communities they serve. A positive result in the social performance indicators also gives the MFI credibility in the microfinance market and among investors in order for it to continue receiving resources (Schicks, 2014).…”

“…Socially interested investors seek to evaluate MFIs, since they are concerned about credit being diverted to less poor customers (Louis et al, 2013) or about the availability of credit causing adverse social effects in terms of heightened customer debt (Schicks, 2014). Problems related with microfinance have already been reported in various locations: in India, an increase in customer poverty due to excess debt has been observed (Guérin, Roesch, Venkatasubramanian, & Kumar, 2013); in Kenya, higher interest rates charged to customers are associated with higher default rates in communities (Kodongo & Kendi, 2013); in Ghana, heightened customer debt due to the population's lack of financial knowledge and loans without any productive purpose have been reported (Schicks, 2014).…”

“…Problems related with microfinance have already been reported in various locations: in India, an increase in customer poverty due to excess debt has been observed (Guérin, Roesch, Venkatasubramanian, & Kumar, 2013); in Kenya, higher interest rates charged to customers are associated with higher default rates in communities (Kodongo & Kendi, 2013); in Ghana, heightened customer debt due to the population's lack of financial knowledge and loans without any productive purpose have been reported (Schicks, 2014). The high cost of serving poorer customers, together with the pressure from donors and investors for the institutions to achieve economic sustainability, can result in higher interest rates being charged, which in turn can create social problems related with microfinance (Serrano-Cinca & Gutiérrez-Nieto, 2014).…”