Over-indebtedness in microfinance - An empirical analysis of related factors on the borrower level

This paper analyzes the over-indebtedness of microborrowers in Ghana from a customer protection perspective. It measures over-indebtedness as a subjective indicator based on loan-related sacrifices that borrowers report. It finds that male microborrowers are more likely to be over-indebted. So are borrowers with adverse economic shocks, low returns on investment, and non-productive loan use. Over-indebtedness is lower for borrowers with good debt-literacy. General financial literacy and numeracy seem insufficient to reduce over-indebtedness. The paper details the relationship of the above factors to the specific sacrifices borrowers make and suggests that policy measures address the full complexity of the over-indebtedness phenomenon. © 2013 Elsevier Ltd.SCOPUS: ar.jinfo:eu-repo/semantics/publishe

The sacrifices of microborrowers in Ghana – A customer-protection perspective on measuring over-indebtedness

This paper measures the over-indebtedness of microborrowers in Ghana. It defines over-indebtedness from a customer-protection perspective, considering borrowers over-indebted if they continuously struggle with repayment and experience unacceptable sacrifices related to their debt. We find that 30% of borrowers in our urban African population of microborrowers are over-indebted. The paper provides a detailed analysis of the sacrifices borrowers experience. In a second step, it tests the risk-management indicators of debt problems as predictors of the customer-protection measurement of over-indebtedness. Over-indebtedness is strongly related to delinquency and to the debt-to-income ratio but not to total debt amounts or to multiple borrowing. We construct a model that correctly predicts 72.6% of cases. However, even the best indicators for over-indebtedness identify only a small portion of cases of over-indebtedness. To protect customers from unacceptable struggles, the industry needs to measure customer experiences directly. Sound risk management is not enough to protect customers against over-indebtedness.info:eu-repo/semantics/publishe

From a supply gap to a demand gap? The risk and consequences of over-indebting the underbanked

In the past, the microfinance industry focused mainly on growth and outreach. Addressing financial exclusion implied a huge supply gap. Recent over-indebtedness crises in several countries have shown that this gap can turn into over-supply. The industry urgently requires research to understand the magnitude and consequences of this shift. This chapter reveals the broad spectrum of consequences over-indebtedness can have on borrowers and other stakeholders, mainly MFIs. It emphasizes that over-indebtedness consequences reach far beyond the risk management concerns that MFIs and investors have on top of their mind. In a second step the chapter reviews the existing empirical research on microfinance over-indebtedness and examines how prevalent over-indebtedness is in microfinance markets today. It highlights the evidence for over-indebtedness in crisis markets and non-crisis markets, especially when markets mature. Only if the extent of the problem is known and its effects are properly understood, can the microfinance industry develop appropriate measures against over-indebtedness and adapt to the challenge of oversupply.info:eu-repo/semantics/publishe

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

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 over-indebtedness 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.info:eu-repo/semantics/publishe

Surendettement des emprunteurs en microfinance: analyse de la perspective de la protection des clients

Microfinance, the provision of financial services to the poor, has been celebrated for its win-win proposition of reducing poverty while operating on a financially sustainable or even profitable basis. However, the industry has recently experienced several crises that have challenged both its financial sustainability and its social reputation. As a result, the focus of the microfinance sector on commercialization has given way to a new emphasis on client-focused products and services and on customer protection as the industry’s current priorities. Given the risks it implies both to the social impact of microfinance and to institutional sustainability, the main focus of the current client protection efforts in microfinance is on protecting borrowers against over-indebtedness. However, customer protection efforts are struggling with a significant gap of knowledge about the prevalence, causes and consequences of over-indebtedness. There is no agreed definition or measurement of personal over-indebtedness. Especially, there is no appropriate definition for customer protection purposes and for the specific circumstances of microfinance. Existing over-indebtedness definitions mostly centre on default, thus avoiding portfolio quality problems for the lending institutions. They do not take into account that borrowers already experience severe consequences of over-indebtedness before reaching the stage of default. Findings on the empirical prevalence of over-indebtedness and on its causes and consequences may differ based on a definition that takes the borrowers’ over-indebtedness experiences and thus the customer protection perspective into account.The first paper of this PhD develops an over-indebtedness definition that is suitable for customer protection purposes in the microfinance context. The definition is based on the sacrifices that microborrowers experience related to their loans. Working with the economics, psychology, and sociology literatures on both microfinance and consumer finance, the paper provides a conceptual analysis of the demand and supply side factors that cause over-indebtedness as well as the role of adverse economic shocks. The second paper reveals the broad spectrum of consequences that over-indebtedness can have on borrowers and on MFIs. It then reviews the empirical studies on over-indebtedness in the microfinance industry to date to shed light on the prevalence of over-indebtedness in microfinance. In an empirical field research supported by the Independent Evaluation Department of KfW Entwicklungsbank and the Smart Campaign at ACCION’s Center for Financial Inclusion, the PhD applies the customer protection definition of over-indebtedness that results from the first paper to the microfinance market of Accra in Ghana. The third paper uses this unique database to pinpoint the prevalence of over-indebtedness in this market and analyse the debt experiences of microborrowers. In a second step, by means of a logistic regression of alternative measurements on the customer protection measurement of over-indebtedness, it provides empirical confirmation for the important differences between the risk management perspective on over-indebtedness and the customer protection point of view. Finally, the fourth paper of the PhD tests socio-demographic and economic factors on the borrower level for their relationship to over-indebtedness. It sheds light on how the potential over-indebtedness causes that emerge from the analysis of paper 1 relate to the likelihood of a borrower being over-indebted. It also works with the primary database from Ghana and uses econometric regression methods to confirm to what extent theses potential causes of over-indebtedness relate to over-indebtedness in the given microfinance setting.Doctorat en Sciences économiques et de gestioninfo:eu-repo/semantics/nonPublishe

The Definition and Causes of Microfinance Over-Indebtedness: A Customer Protection Point of View

With over-indebtedness emerging among microfinance customers, the industry's sustainability and social impact are at risk. Filling a void in the literature, this paper develops a definition of over-indebtedness that is appropriate for customer protection purposes. It provides a framework for the causes of over-indebtedness that highlights the role of external influences and the responsibility of lenders. It recognises the role borrowers play in their own over-indebtedness. This paper challenges several misconceptions and oversimplifications about microfinance over-indebtedness. These include the belief that default-based risk management indicators are sufficient to signal concerns in relation to customer protection. Further misconceptions are the undesirability of consumption loans, as well as the benefits of competition, of regular instalment schedules, of a zero-tolerance policy and of annual percentage rates. By enhancing our understanding of microfinance over-indebtedness and its causes, this paper provides the means for measuring over-indebtedness and tailoring solutions to its root causes. The analysis shows that combating over-indebtedness does not automatically mean reducing access to microcredit. Although a soundevaluation of repayment capacity is essential, tailoring products to clients' needs also reduces over-indebtedness. © 2013 Copyright Oxford Department of International Development.SCOPUS: ar.jinfo:eu-repo/semantics/publishe

Microfinance Over-Indebtedness: Understanding its drivers and challenging the common myths

The microfinance industry has been celebrated both for its social impact on poverty alleviation and for its profitability. With issues of over-indebtedness emerging among microfinance customers, both achievements are at risk. This paper contributes to the industry's understanding of the definition and causes of over-indebtedness. It reveals why the 5 myths of microfinance over-indebtedness erroneously oversimplify the reality of microfinance customers. The paper works with theoretical and empirical contributions from economics, psychology and sociology, and unites microfinance specific findings with the general consumer finance literature. In addition to external influences, it highlights the responsibility of lenders in driving microfinance customers into over-indebtedness. It also recognises the role that borrowers involuntarily play in over-indebting themselves. Enhancing our understanding of what microfinance over-indebtedness is and how it is caused, the paper provides the basis for tailoring over-indebtedness solutions to the root causes of the phenomenon and addressing the challenge at all suitable levels. Latest version (June 2011) :http://www.solvay.edu/sites/upload/files/CEB_WorkingPapers/LastUpdate/wp10048.pdfinfo:eu-repo/semantics/publishe

Developmental Impact and Coexistence of Sustainable and Charitable MFIs - Analysing BancoSol & Grameen Bank

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Developmental Impact and Coexistence of Sustainable and Charitable Microfinance Institutions: Analysing BancoSol and Grameen Bank

Based on the current discussion of the development of a commercial market segment of Microfinance Institutions (MFIs), this paper evaluates the developmental impact of charitable MFIs that rely on subsidies in comparison with sustainable MFIs that operate independently from grant funding. BancoSol from Bolivia serves as a case study of a sustainable MFI. Grameen Bank from Bangladesh represents a charitable MFI. The case studies confirm both the theoretical arguments for sustainable MFIs promoted by the institutionist approach to microfinance and the arguments for charitable MFIs advocated by the welfarist approach. The paper argues that both kinds of MFIs are justified and should continue to coexist. The second part of the paper suggests institutional solutions to facilitate the coexistence of both types of MFIs. Cet article repose sur le d�bat actuel portant sur le d�veloppement d'un segment de march� commercial des institutions de microfinances (IMF). Il �value les impacts respectifs sur le d�veloppement des IMF qui d�pendent de subventions et de celles qui en sont ind�pendantes. La Bancosol de Bolivie repr�sente un exemple d'IMF durable (sustainable MFI) et la Grameen bank du Bangladesh un exemple d'IMF caritative (charitable MFI). Les �tudes de cas confirment � la fois les arguments th�oriques, sur les IMF durables appuy�s par l'approche 'institutionniste' et les arguments sur les IMF caritatives appuy�s par l'approche en termes d'Etat providence. L'article justifie les deux types d'IMF et la n�cessit� de leur coexistence. La seconde partie de l'article sugg�re des solutions institutionnelles destin�es � faciliter la coexistence de ces deux types d'IMF.