Professional Documents
Culture Documents
DISSERTATION
By
Jessica Schicks, MPhil, Dipl.Oec
At the
Centre for European Research in Microfinance (CERMi)
Solvay Brussels School of Economics and Management
Universit libre de Bruxelles
On a Personal Note
In the beginning of a PhD one knows that one will only be able to cover a small part of a
topic. That the research will lack data. That no answers will come without new questions. The
further the research progresses, the more apparent become its limitations. The things it
cannot cover. The shortcomings of the empirical study. The ambivalence of its findings. A
PhD is a powerful reminder of the limitations of our knowledge and methodologies. Of the
lack of an absolute truth.
Nevertheless, these three years have been an exciting personal experience. I have learned so
much. I have been able to follow my passion for this topic with almost unlimited freedom. My
work has been received with unanticipated amounts of recognition, both in academia and
among the practitioners of the microfinance industry. It has been given a lot of attention in
the Ghanaian microfinance sector and in our local results workshops with MFIs, investors,
the Ghanaian Ministry of Finance, and the Ghana Central Bank. It sometimes seems like I
have been able to give something small back to all those borrowers who talked to us in the
course of this research, revealing their personal hardships in the hope of helping
microfinance practitioners design better products in the future.
I am immensely grateful for this opportunity. For this experience. For the trust that people
put in me at the beginning of this project. My thoughts go to all of you who have helped me to
make this project come true and who have been close to me during the last three years, no
matter if you were in Belgium, Ghana, Germany, France, the UK, or the US. You know who
you are.
Thank you!
-i-
Table of Contents
INTRODUCTION
CHAPTER 1
10
12
19
4. Conclusion
32
CHAPTER 2
41
From a supply gap to a demand gap? The risk and consequences of overindebting the underbanked
1. Introduction
42
45
56
4. Conclusion
63
CHAPTER 3
71
72
2. Predicting over-indebtedness
75
79
83
88
6. Conclusion
94
- ii -
CHAPTER 4
114
115
117
127
134
141
162
164
172
187
FULL BIBLIOGRAPHY
197
APPENDIX:
214
- iii -
Introduction
Beginning in the 1970s with a scalable microcredit model based on social collateral
(Armendriz and Morduch, 2010), microfinance has developed from a credit focused nonprofit activity into a semi-commercial industry offering a range of financial services to lowincome populations. However, in spite of the broadened product portfolio offered by
microfinance,
the focus
to
-1-
Even if the above studies on the social impact of microfinance leave room for future research,
their findings on what the positive impact of microfinance may be represent crucial insights
for both microfinance scholars and for policy makers. For example, less belief in the benefits
of microfinance may reduce tolerance for risks created by means of microfinance. It may
reduce the tolerance of the microfinance industry for borrowers struggling severely to repay
their loan. However, microfinance research often does not take the potential negative effects
of microfinance and the struggles of microborrowers into account. There remains an
important need for more research in microfinance on the potential downsides of microloans
and on the difficulties that microborrowers face in repaying their debt.
Over the past 40 years of the microfinance industrys history of growth and
commercialisation, the downsides of credit for the poor have been largely ignored by
academic research. Scholars have identified a risk of mission drift for microfinance
institutions that attempt to combine financial and social objectives. When trade-offs exist
between achieving social results and financial results, MFIs may reduce their efforts to pursue
their social mission and focus on more easily measured financial results instead (Copestake,
2007; Mersland and Strm, 2010; Armendriz and Szafarz, 2011). Some sociologists and
anthropologists have noted the damage that social pressure in group lending could do to the
poor (Besley and Coate, 1995; Montgomery, 1996; Rahman, 1999). More recently, scholars
began highlighting the substantial harm that a debt over-load and repayment problems could
imply for the poor (Brett, 2006; Dichter, 2007; Hulme, 2007; Gurin et al., 2009). Hudon
(2009) highlighted that the idea of a human right to credit follows the tradition of blindness
to credit risks and ignores the danger of over-indebtedness that credit implies. Nevertheless,
the over-indebtedness risks of microfinance remain one of the most urgent and underresearched topics of microfinance.
Today, over-indebtedness is one of the most important challenges faced by the microfinance
industry. It is the most important risk according to Microfinance Banana Skins 2012, a
global report on risks in the microfinance industry (Lascelles and Mendelson, 2012). Several
microfinance markets have reached extreme levels of over-indebtedness that have
materialised in the form of market-wide repayment crises and have put the local microfinance
industry at risk. For example, in the Indian state of Andhra Pradesh, microfinance has almost
come to a halt as the result of an over-indebtedness crisis that has not only threatened the
sustainability of lenders because of widespread default but also has had strong political
repercussions. This crisis triggered a regulatory reaction that fundamentally challenges the
business model of MFIs and has put the future of the local microfinance sector in question.
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Other microfinance markets that in recent years faced substantial crises that included
problems with over-indebtedness are, for example, Bosnia, Nicaragua, Morocco and Pakistan.
Furthermore, the industry does not know to what extent over-indebtedness is prevalent in
microfinance markets around the world that have not yet reached a stage of crisis and thus
whether more markets risk going through similar experiences.
The industry needs to perform research to agree on a definition of over-indebtedness and to
understand the extent to which over-indebtedness is prevalent in microfinance markets
(Kappel et al., 2010). It seeks to understand and be able to mitigate the harm that overindebtedness might cause. To develop solutions to the problem of over-indebtedness, the
microfinance industry must analyse what factors are related to over-indebtedness and may be
potential causes of the phenomenon. It needs to identify the borrowers who are most at risk.
The recent rebalancing in the microfinance industry that has led to a focus on protecting
clients and working towards the social mission of microfinance requires a parallel shift to
research through the lens of customers (Rozas et al. 2011; Copestake, 2007). Contrary to the
wide range of microfinance research at the institutional level, there is now an urgent need for
borrower-level research that considers the perspective of microborrowers and gives
borrowers, as the main stakeholders of microfinance, a voice in the industrys future
development.
It is this practical and scholarly need for answers to the microfinance industrys questions of
over-indebtedness that has set the research agenda for my PhD. The first paper addresses the
conceptual challenges of defining and measuring over-indebtedness. Based on a thorough
analysis of the interdisciplinary literature on the over-indebtedness of consumers in developed
countries and on the existing research within microfinance, this paper develops an innovative
definition of over-indebtedness. It defines over-indebtedness according to the sacrifices
microborrowers experience related to their loans. Moreover, in addition to proposing the first
definition of over-indebtedness in the microfinance literature that is appropriate for customer
protection purposes, the paper suggests a practicable way to use this definition in empirical
research.
In a second step, the paper analyses the potential causes of over-indebtedness. It unites the
contributions of economics, sociology and psychology into a comprehensive framework of
the causes of over-indebtedness that, to the authors knowledge, does not exist in the literature
to date. The framework identifies the role of lenders in pushing borrowers into overindebtedness due to an exaggerated marketing and growth focus, due to inappropriate lending
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products or due to sub-optimal lending procedures. It equally highlights the role of borrowers,
working with insights from behavioural economics and psychology on the impact of cognitive
biases on borrowing decisions and taking the sociological influences of, for example, societal
pressures into account. The paper identifies economic and socio-demographic borrower
characteristics related to consumer over-indebtedness in developed countries, which are likely
to at least partially represent causal effects. Moreover, the framework of the causes of overindebtedness identifies external influences on over-indebtedness, which include both those in
the institutional and macroeconomic environment that may prevent or facilitate overindebtedness ex-ante and those in the form of adverse economic shocks that affect borrowers
and turn a healthy debt situation into over-indebtedness ex-post.
The second paper of this PhD develops the customer protection perspective on overindebtedness further by analysing in detail what consequences over-indebtedness may have on
borrowers and on lending institutions. The paper shows that from the viewpoint of customer
protection, the consequences of over-indebtedness reach far beyond the risk management
concerns that primarily affect MFIs and investors. It details the material effects of overindebtedness on borrowers, the potential social cost of being over-indebted and the substantial
effects that over-indebtedness can have on psychological well-being. With regard to
microfinance institutions, this paper indicates that the potential consequences of overindebtedness on lenders are much more complex than the common focus on portfolio
problems in the form of delinquency and default suggest. It points out that there are also
significant indirect consequences of over-indebtedness on earnings, operational cost, staff
retention, and customer satisfaction. The analysis extends to other stakeholders in identifying
briefly the second-order effects that over-indebtedness can have on third parties that are not
directly part of the lending contract between an MFI and its borrowers. It recognises the
effects that microfinance over-indebtedness can have on borrowers who are not overindebted, on MFI customers who are not borrowing, on other MFIs and the financial system,
as well as on the microfinance industrys investors, donors and support organisations.
The second paper then moves on to comprehensively review the empirical research on
microfinance over-indebtedness to date. It identifies early research on over-indebtedness in
microfinance from the first microfinance crisis in Bolivia but notes that microfinance scholars
did not grasp the broader structural lessons of this crisis at the time. Instead, the interest in
over-indebtedness as a microfinance topic quickly faded away again, followed only by
individual pieces of research that were not specific to over-indebtedness but recognised the
potential downsides of the group-lending methodology. The paper then reviews a number of
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papers related to microfinance markets with debt problems in the aftermath of the global
financial crisis but also points out that the phenomenon of over-indebted microborrowers does
not appear to be specific to crisis markets. Looking through a lens of competitive equilibrium
and identifying the challenges of a market characterised by a simultaneous demand gap and
supply gap, the paper analyses the existing empirical studies with regard to our knowledge on
the extent of over-indebtedness in microfinance markets. It shows that there are alternative
scenarios for how over-indebtedness in microfinance will develop in the future and notes a
need for further research, where the findings from the existing literature are not yet
conclusive.
The third paper works with a unique empirical data set from Ghana collected by means of an
in-depth survey among 531 microborrowers in Accra, Ghana, at the end of 2010. Respondents
represent a random sample from five of Ghanas most important microfinance institutions:
ProCredit Ghana, Opportunity International Ghana, Sinapi Aba Trust, EB-ACCION and
Advans Ghana. They were interviewed anonymously in a research project that was enabled by
the cooperation of the microfinance industrys global customer protection organisation, the
Smart Campaign, and the German development bank KfW. The paper measures the overindebtedness of microborrowers from a customer protection perspective, putting into practice
the definition and measurement developed in Chapter 1. It identifies the share of overindebtedness in the local population of microborrowers and analyses what sacrifices
borrowers experience related to their loans, how frequently they repeat these sacrifices and
how acceptable the various sacrifices are from the subjective perspective of microborrowers.
The paper proceeds to compare the common risk management indicators of over-indebtedness
to the customer-protection definition based on borrower sacrifices. Using econometric
regression techniques, it develops a model to predict over-indebtedness from the customer
protection point of view by means of more easily available indicators. At the same time, it
analyses to what extent the risk management perspective and the customer protection
perspective are in line or whether a risk management approach may be inadequate for
customer protection purposes.
Finally, the fourth and last paper of this dissertation identifies borrower-level factors related
to over-indebtedness. It tests factors identified in the first chapter of this dissertation for their
relationship to over-indebtedness among microfinance borrowers in Accra. The paper uses the
primary database from Ghana to run a logistic regression model that tests the relationship of
poverty, adverse economic shocks, returns on investment, and financial literacy to over-5-
-6-
References
Armendriz, B. and J. Morduch (2010) 'The economics of microfinance (2nd ed.).
Cambridge, Mass: MIT Press.
Armendriz, B. and A. Szafarz (2011) 'On Mission Drift In Microfinance Institutions' In B.
Armendriz & M. Labie (Eds.), The Handbook of Microfinance (pp. 341366). London,
Singapore: World Scientific Publishing.
Besley, T. and S. Coate (1995) 'Group lending, repayment incentives and social collateral'.
Journal of Development Economics, 46(1), 118.
Brett, J. A. (2006) '"We Sacrifice and Eat Less": The Structural Complexities of Microfinance
Participation'. Human Organization, 65(1), 8.
Collins, D., J. Morduch, S. Rutherford and O. Ruthven (2009) 'Portfolios of the Poor, How
the World's Poor Live on $2 a Day'. Princeton, NJ: Princeton Univ. Press.
Copestake, J. (2007) 'Mainstreaming microfinance: social performance management or
mission drift?'. World Development, 35(10), 17211738.
Dichter, T. (2007) 'Can microcredit make an already slippery slope more slippier?: Some
lessons from the social meaning of debt' In T. Dichter & M. Harper (Eds.), What's wrong
with Micofinance? (pp. 918). Warwickshire: Intermediate Technology Publications.
Duvendack, M., R. Palmer-Jones, J. Copestake, L. Hooper, Y. Loke and N. Rao (2011) 'What
is the evidence of the impact of microfinance on the well-being of poor people?'. EPPICentre, Social Science Research Unit, Institute of Education, University of London,
London.
Gurin, I., M. Roesch, O. Hlis and Venkatasubramanian (2009) 'Microfinance, Endettement
et Surendettement: Une tude de cas en Inde du Sud [Microfinance, Indebtedness and
Over-indebtedness: A case study in Southern India]'. Revue Tiers Monde, 197, 131146.
Hudon, M. (2009) 'Should Access to Credit be a Right?'. Journal of Business Ethics, 84, 17
28.
Hudon, M. and D. Traca (2011) 'On the Efficiency Effects of Subsidies in Microfinance: An
Empirical Inquiry'. World Development, 39(6), 966973.
Hulme, D. (2007) 'Is microdebt good for poor people? A note on the dark side of
microfinance' In T. Dichter & M. Harper (Eds.), What's wrong with Micofinance? (pp. 19
22). Warwickshire: Intermediate Technology Publications.
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Kappel, V., A. Krauss and L. Lontzek (2010) 'Over-Indebtedness and Microfinance Constructing an Early Warning Index'. Center for Microfinance, University of Zurich,
responsAbility, Council of Microfinance Equity Funds, Triodos Investment Management
Zurich.
Karlan, D. and N. Goldberg (2011) 'Microfinance Evaluation Strategies: Notes on
Methodology and Findings' In B. Armendriz & M. Labie (Eds.), The Handbook of
Microfinance (pp. 1758). London, Singapore: World Scientific Publishing.
Karlan, D. and J. Zinman (2009) 'Expanding Microenterprise Credit Access: Using
Randomized Supply Decisions to Estimate the Impacts in Manila'. Financial Access
Initiative Cambridge, MA.
Labie, M. (2004) 'Introduction'. Mondes en Dveloppement, 126(2), 78.
Lascelles, D. and Mendelson, S. (2012) #Microfinance Banana Skins 2012, The CSFI survey
of microfinance risk: Staying Relevant. Centre for the Study of Financial Innovation
(CSFI), Kent, UK.
Mersland, R. and R.. Strm (2010) 'Microfinance Mission Drift?'. World Development,
38(1), 2836.
Montgomery, R. (1996) 'Disciplining or protecting the poor? Avoiding the social costs of peer
pressure in micro-credit schemes'. Journal of International Development, 8(2), 289305.
Rahman, A. (1999) 'Micro-credit Initiatives for Equitable and Sustainable Development: Who
Pays?'. World Development, 27(1), 6782.
Rozas, D., I. Barrs, C. Connors and E. Rhyne (2011) 'Implementing Client Protection in
Microfinance: The State of the Practice, 2011'. Center for Financial Inclusion Center for
Financial Inclusion Publication No. 14. Washington DC.
-8-
Chapter 1
The Definition and Causes of
Microfinance Over-Indebtedness:
A Customer Protection Point of View
Jessica Schicks*
Centre for European Research in Microfinance (CERMi)
Solvay Brussels School of Economics and Management
Centre Emile Bernheim, Universit Libre de Bruxelles
With over-indebtedness emerging among microfinance customers, the industrys sustainability and
social impact are both 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 misconceptions include the belief that default-based risk management indicators can present
the customer protection perspective, the dangers of consumption loans, and the benefits of
competition, regular instalment schedules, the zero-tolerance policy, and Annual Percentage Rates
(APRs). 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. While a sound evaluation of repayment capacity is essential, adapting products to
clients needs also reduces over-indebtedness.
*The author is grateful to Marie-Christine-Adam Foundation for its financial support. She thanks
Prof. Marek Hudon, Richard Rosenberg and Christoph Kneiding, William Steel, Meritxell Martinez
and Katja Kirchstein as well as two anonymous referees for their valuable comments and
suggestions. Further thanks go to seminar and conference participants at the University of Oxfords
CSAE conference, the 2nd European Research Conference in Microfinance, and at ULB.
-9-
1. Introduction
1
Over the last decade, the microfinance industry has achieved immense growth and public
recognition. Its aim to reduce global poverty has been complemented by sizeable profits for some
microfinance institutions (MFIs) and their investors. However, the fairy tale is beginning to show
cracks. The impact on poverty alleviation may be an illusion, and the social microfinance industry
faces increasing criticism for exploiting and over-indebting poor customers in the service of profits.
Although the social mission of microfinance places particular importance on protecting customers,
the 2008/2009 global banking crisis has shown that unsustainable financial services based on
irresponsible lending imply much broader risks. Over-indebtedness is currently one of the most
serious risks in microfinance, endangering both social impact and the industrys stability (Hudon,
2009). Over-indebtedness can push customers further into poverty, accompanied by the material,
psychological, and social consequences of debt (see Schicks (in press) for details). It puts MFIs, their
portfolio quality, and institutional stability at risk. The consequences can spill over to investors,
donors and the industry as a whole. While the individual experiences differ, several countries such as
Bosnia, Morocco, Nicaragua, Pakistan and India have already experienced crises with important
elements of over-indebtedness among microfinance clients.
From a customer protection perspective, this paper contributes to our understanding of microfinance
over-indebtedness and its causes. There is widespread ambiguity surrounding the definition and
indicators of over-indebtedness. Scholars end up implicitly discussing different things depending on
whether they focus on risk management or customer protection. A clear definition is required to
assess the extent of the problems in microfinance markets around the world and to provide empirical
insights into the phenomenon of over-indebtedness. However, the definitions and indicators that
researchers have relied on to date are grounded in a risk management framework. The current need
for customer protection creates different requirements. This paper develops an innovative definition
of over-indebtedness based on borrower sacrifices. It suggests a practical approach for using this
definition in empirical research.
Understanding the risks of over-indebtedness and developing solutions also requires an inclusive
understanding of the causes of over-indebtedness. To the author's knowledge, no studies
comprehensively analyse the drivers of debt problems. In the consumer finance literature on
1 This paper focuses on institutional microfinance following the solidarity banking, village banking or individual lending models.
Although microfinance has expanded to a broad range of financial services, this paper focuses on its original product: microloans.
2 Earlier crises, although different in many regards, took place in Bolivia and South Africa in the late 1990s and early 2000s.
- 10 -
developed countries , our knowledge of the causes of over-indebtedness is spread across different
strands of research. We need a comprehensive framework that unites the insights of economists,
sociologists and psychologists. In the microfinance literature, academic work on the causes of over4
indebtedness hardly exists. The literature on repayment problems focuses on repayment incentives
and ignores many of the findings that consumer finance research offers regarding the origins of debt
problems. Therefore, a framework that informs microfinance scholars and practitioners and enables
them to better address the current over-indebtedness challenges must gather our knowledge
regarding over-indebtedness among microfinance customers and
3 In contrast to the paradigm of microenterprise finance, this paper uses the consumer finance literature as a reference. Microfinance
primarily relies on character-based lending techniques, and a sizable amount of microcredit is used for consumption purposes.
Microborrowers make personal rather than professional credit decisions. Furthermore, being personally liable for their loans,
microborrowers face the same personal consequences of over-indebtedness that are discussed in the consumer credit literature.
4 See Godquin (2004) for a review of the empirical literature.
- 11 -
scientific lens, data availability, and the threshold for over-indebtedness. There have been several
attempts to analyse the different types of definitions and their advantages (e.g., Betti et al., 2007).
However, to the author's knowledge, no structured analysis of all options exists.
Figure 1. Dimensions of over-indebtedness definitions
Figure 1 provides a systematic overview of the dimensions that distinguish the definitions of overindebtedness used in the microfinance and consumer finance literatures. Definitions differ depending
on the purpose of the research, their academic orientation, their precision in distinguishing between
6
5 There is an equivalent macroeconomic debate on sustainable debt on a country level, especially with regards to debt relief for
Heavily Indebted Poor countries (HIPC). For details see e.g., Benno (2008).
6 As they are often subject to discussion, Appendix 1 provides an overview of the different dimensions of quantitative overindebtedness measurements.
- 12 -
argue that all of a households cash flows should be considered. In the microfinance context, the
appropriate unit may even be a borrowers extended kin support network (Gurin et al., 2009b).
In terms of method, over-indebtedness definitions apply either single or multiple criteria. Applying
multiple criteria selectively risks extending a definition too far (Disney, Bridges and Gathergood,
2008), applying them simultaneously increases precision. Over-indebtedness can either be defined as
a quantitative threshold (e.g. a debt-to-income ratio) or in qualitative terms such as a perceived
burden. Although, in legal contexts, qualitative definitions produce uncertainty for lenders seeking to
comply, these definitions are more flexible and better able to account for the circumstances of
individual borrowers. Definitions are considered more reliable if they are based on objective
information. However, many researchers emphasise the merits of a subjective definition of overindebtedness (Lea et al., 1993; Betti et al., 2007; Gurin et al., 2009b). They consider individuals the
best judges of their own debt situation. Gurin et al. (2009a) point out that for borrowers, overindebtedness may be a question of perceptions and social consequences rather than a material
problem of disequilibrium among assets, revenues and debt. Debt conditions are heterogeneous in
meaning. Whether debt is a burden depends on the nature of the debt relationship rather than the
amount (Gurin et al., 2009b). As a result, for many poor borrowers, the total amount of debt is not
meaningful. Self-reports are considered less reliable than external data and provide better
information about a borrowers circumstances and future income prospects, as well as the meanings
of debt. For example, in their study on over-indebtedness and financial literacy in the US, Lusardi
and Tufano (2009) completely rely on self-reports.
The essential dimension of an over-indebtedness definition is severity. Most researchers only
consider borrowers over-indebted if their debt problems are structural and persistent over a certain
time horizon (Canner and Luckett, 1991). According to the Life Cycle Hypothesis (Modigliani and
Brumberg, 1980) and the Permanent Income Hypothesis (Friedman, 1957), consumers aim for stable
consumption over a long time horizon. Permanently high debt levels at a young age may be rational,
if income is expected to increase. The correct reference for measuring over-indebtedness would thus
be a permanent, life-long estimate of a borrowers income (Betti et al., 2007). Conversely, given the
short-term cash management challenges of microborrowers and their high level of uncertainty about
the future, microborrowing focuses on a rather short time horizon.
Researchers use various severity levels of repayment problems as the threshold of over-indebtedness.
Some only count legally bankrupt borrowers, whereas others include cases of default or arrears (e.g.
Disney, Bridges and Gathergood, 2008; Kappel et al., 2010) or even all borrowers who struggle with
an unhealthy debt balance (e.g. Collins, 2008). Bankruptcy is easy to measure on an aggregate level,
- 13 -
but represents a limited understanding of over-indebtedness that is difficult to compare among legal
systems. Defaults or permanent arrears are common criteria of over-indebtedness in developed
markets, but Gurin et al. (2009b) point out that they may not be suitable in developing countries,
where informal lending agreements (that often do not specify explicit payment deadlines) play a
large role. Conversely, a system of juggling debts, where borrowers continuously borrow anew to
repay old loans, may hide over-indebtedness before it appears in the form of arrears. Manifest
7
repayment irregularities are thus rather a lagging indicator of over-indebtedness. For unhealthy debt
balances, the main challenge is that a no threshold can account for the circumstances of all
borrowers. A debt-to-income ratio that is unsustainable for one borrower can be manageable for
another. Furthermore, all of these measurements fundamentally focus on repayment and, thus, riskmanagement. Although using unhealthy balances as measurements leaves room to bring in borrower
experiences, their typical application is institution centric.
A common feature in definitions of over-indebtedness is that problems exist despite the will of the
borrower, who gets into trouble innocently or at least unintentionally. Gonzalez (2008) provides an
exception, and asserts that overindebtedness occurs when the repayment outcome of a loan contract
does not correspond to the original expectations of either the borrower or the lender or both. Thus,
over-indebtedness can result from an unwillingness to repay, an inability to repay, or costly actions
that are required to repay. In fact, most indicators of over-indebtedness cannot distinguish the
borrowers intentions.
Definitions of over-indebtedness also differ in the sacrifices they expect from borrowers. In many
countries, bankruptcy proceedings require debtors to give up their incomes and assets above a
minimum existence level (see, e.g., European Commission, 2008). Similarly, microfinance
practitioners display the attitude that microcredit must not deprive borrowers of their basic survival
capacity (DeVaney, 2006). In developing his concept of debt-capacity, von Pischke (1991)
implies that microborrowers should be able to repay on time without suffering hardship. He states
that debt-capacity is not only about loan recovery but also about determining the loan amount that
can be safely provided to borrowers while protecting their interests and avoiding unacceptable risks.
A less severe definition considers borrowers over-indebted if they need to reduce expenditures
beyond the level they are accustomed to or make more sacrifices than expected (Murray, 1997). The
deprivation of any liquidity buffer for emergencies (European Commission, 2008) is a similar
7 This makes over-indebtedness from the customer protection point of view a potential lead indicator of arrears in MFI portfolios,
similar to earlier attempts to use drop-out rates or exit monitoring from lending programms as lead indicators for both social and
financial performance of MFIs, including arrears (see Copestake (2002)).
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feature. The most generous definitions count every sacrifice by the borrower as a sign of overindebtedness (Canner and Luckett, 1991). This expectation is common in microfinance, because the
loans aim to make borrowers better off. In many definitions of over-indebtedness (e.g., insolvency
regulations) the sacrifice limit is only implicit. Canners explicit sacrifice considerations come
closest to meeting the needs of the customer protection movement and represent a borrower-centric
approach. However, this approach ignores the possibility that borrowers may deliberately sacrifice
their consumption levels to reach a certain goal.
This paper requires a definition that promotes a customer protection perspective. It should specify
what customers, not lenders, are to be protected from. Default or arrears are inappropriate criteria as
they do not sufficiently represent the borrowers perspective: For example, borrowers who manage
to meet their repayment obligations but who must take children out of school or skip meals to do so
should count as over-indebted.
Definitions of consumer insolvency for developed countries at least partly account for this customer
protection element by guaranteeing borrowers a minimum existence level. Many microfinance
markets however lack defined minimum existence levels and most borrowers already live below any
objective minimum level of income before assuming a loan. Therefore, they are the only ones who
can decide on an acceptable level of sacrifices. The definition requires qualitative elements to
account for individual borrower circumstances and will use the borrowers subjective perceptions as
the best judgments of their debt situations. The current EU definition of over-indebtedness includes a
similar element in considering the criterion that borrowers perceive their fixed monthly payments as
a heavy burden and their payment capacity as difficult or very difficult (European Commission,
2008). Subjective approaches which account for suffering as a subjective experience are in line with
the academic literature on subjective, self-reported measures of well-being and happiness (see Dolan
et al., 2008; Oshio and Kobayashi, 2010; Angner, 2010). Viewing the aim of development practice and for our case of microfinance- though a lens of impact on well-being, allows to distinguish
several mental models of well-being and thus of desired and non-desired outcomes (see Copestake,
2008, 2011). A subjective, person-centred view of over-indebtedness recognizes that well-being
importantly depends on peoples own feelings and that mere material measures ignore important
aspects of the broader needs, rights or local solidarity-based mental models of well-being.
This paper considers over-indebtedness a household level or individual phenomenon because
broader kin support should not be the reason that borrowers manage to repay their debt. It does not
refer to one-off struggles but implies that debt problems are more than transitory. At the same time,
- 15 -
our definition should account for the limited time horizons of microloans and the implications of
severe sacrifices even over short periods of time.
Therefore, this paper proposes a sacrifice-based definition of over-indebtedness that is unique in the
academic literature8: A microfinance customer is over-indebted if he/she is continuously
struggling to meet repayment deadlines and has to make unduly high sacrifices related to
his/her loan obligations that have more than transitory effects.9
This definition excludes borrowers who strategically default or deliberately accumulate
unsustainable amounts of debt. Although the boundaries are blurred, the criterion of unduly high
sacrifices precludes deliberation. To allow for sacrifices willingly incurred by borrowers, we deem
sacrifices to be unduly high if they exceed the costs that borrowers consider acceptable for the
purpose of the loan. The definition excludes mere short-term difficulties by specifying that, for
borrowers to count as over-indebted, their struggles need to be a continued phenomenon over time.
Sacrifices only represent signs of over-indebtedness if they have more than just transitory effects.
The definition is similar to an impact-based approach. If loans make borrowers suffer and worse off
because the sacrifices exceed the benefits, then these loans can cause over-indebtedness. However,
as in Western insolvency regulations, the definition does not postulate causality between the loan
and over-indebtedness. First, establishing causality between loans and struggles is highly impractical
due to the general attribution problems related to impact assessments (Hulme, 2000). Second,
beneficial loans that an emergency renders unbearable to repay also fall under the definition. The
next section will show that borrowers can be over-indebted for a complex set of reasons and that the
original cause of the problem is not necessarily a loan that is too large. Third, non-beneficial loans
for customers who do not get into serious struggle in spite of the negative loan impact do not fall
under the definition. There are thus cases of negative loan impact that are not cases of overindebtedness. This approach implies that a low level of over-indebtedness exists in any lending
market, particularly markets with poor and vulnerable borrowers. Preventing all loans for
8 The notion of sacrifice in microcredit repayments was first suggested by Brett (2006) who finds that microborrowers rely on cash
support from their families and social networks, assume additional debt, sell assets, reduce the quantity and quality of their food, and
take on additional paid labour to repay their debts on time. Gonzalez (2008) develops a broader definition that accounts for sacrifices
but includes strategic defaults. In Bolivia, he identifies similar sacrifices as well as reductions in human capital investments which can
reduce income generating capacity and household welfare in the long run. This research is in line with earlier findings on the coping
strategies of poor households by Corbett (1988).
9 Other versions of the papers based on this PhD use the term structural rather than more than transitory. See Appendix 2 for the
categories applied to this definition of over-indebtedness.
- 16 -
investments that fail or to borrowers who get hit by emergencies is impossible and would restrict
credit supply below its social optimum. However, such cases should be minimised.
Finally, the definition has parallels with an approach of rational choice under uncertainty that would
consider borrowers as over-indebted if, with hindsight, they regret the amount of debt they took on.
Under an ontology of complexity and uncertainty, borrowers who make rational loan decisions may
take loans that they would not take if all information was available and understandable to them
loans that they will regret ex-post. Behavioural economics allows for further deviations from the
original homo oeconomicus assumptions that explain why individuals may take debt that they will
regret (see next section for related literature and detailed arguments). If borrowers could be
considered rational in the sense of regretting loans as soon as their impact was negative, this
argument would be the same as the impact argument, but regret allows for some more flexibility and
circumvents the challenges of impact measurement. Nevertheless, a borrower may regret borrowing
without having reached a stage of over-indebtedness. And even an over-indebted borrower may not
regret having borrowed if for example a medical emergency drove him to get indebted or if the
borrowers mental representations see the cause of over-indebtedness rather in, lets say, a failed
investment than in the act of borrowing for investment. Regretting ones situation with ones debt
does not automatically equal attributing ones regret to the debt.
To put this definition into practice and empirically measure over-indebtedness in microfinance,
Figure 2 suggests using a funnel of over-indebtedness criteria that filters out borrowers at each step
until only the over-indebted remain. Researchers can collect the information by conducting
household surveys, interviewing respondents about their debt struggles and collecting detailed lists
of the sacrifices that respondents experience related to their loans. Respondents subjectively weight
their sacrifices by acceptability and indicate the frequency of each sacrifice they experience. We
consider sacrifices to be unduly high if they are unacceptable to the borrower. They are considered to
have more than transitory effects, if they have been performed repeatedly (e.g., more than three
times) or if even a one-off occurrence is a sign of non-transitory problems (e.g., asset seizures).
- 17 -
All Borrowers
Over-indebted
Borrowers
Make
unacceptable
Struggle to
always repay sacrifices
on time
Experience
sacrifices that
indicate structural
problems1 or
Make non-structural
sacrifices
repeatedly
As in any research that leverages the power of subjective measures, subjectivity reduces the claims
to universality that can be made. Over-indebtedness is a context-specific phenomenon and the
borrowers subjective perceptions of what constitutes a sacrifice and how acceptable the different
sacrifices are depend on cultures, local contexts and individual borrower characteristics. This
reduces the comparability of over-indebtedness based on this measurement across settings, as well as
the validity of findings based on this measurement for the microfinance industry in general.
Nevertheless, the subjective measure allows for important insights into the real nature of overindebtedness that remain obscured by looking at more simplified, objectivised measures of overindebtedness. In an unavoidable trade-off, the more universal and interculturally comparable a
measurement is, the less it reflects local realities (Copestake, 2008).
Currently a number of research projects are using similar approaches to gather empirical data about
the sacrifices of over-indebted borrowers. These projects will reveal the degree to which
microborrowers struggle with debt in various markets. As extensive survey work is costly, future
research should analyse to what extent simpler indicators (e.g., debt-service ratios, delinquency, or
the number of credit arrangements) represent workable proxies for this definition. Doing so will also
show to what extent credit risk management reduces over-indebtedness from a customer protection
perspective. Until then, simply relying on the existing risk management indicators for customer
protection purposes is inappropriate and risks ignoring many struggling borrowers who manage to
avoid delinquency by making heavy sacrifices.
- 18 -
10 From a profitability perspective, lenders may accept some arrears and defaults as long as the costs of improving risk management
exceed the costs of delinquency. Apart from the indirect impact through customer satisfaction, lenders only consider repayment
performance, not the sacrifices of borrowers. In some cases, even repayment problems may be in a lender's interest, as they can
increase the interest earned on a given loan or keep the borrower dependent on the lender.
- 19 -
Bouquet et al. (2007) in Madagascar confirms that credit problems are most frequently due to
declining income or rising expenses. In addition to personal shocks (e.g., illness or job loss),
macroeconomic developments (e.g., financial crises) can drive borrowers into difficulties. Typical
factors for developing countries include natural disasters, changes in government policies (e.g. the
displacement of street vendors), and political crises.
Furthermore, the institutional and legal environment influences the behaviour of lenders and
borrowers. For example, the existence of credit bureaus, the efficiency of the judicial system, and the
level of competition can enhance or reduce the risks of over-indebtedness. A common misconception
states that competition among MFIs will always benefit customers by making MFIs more
professional and efficient, bringing down costs and improving customer service. In fact, competition
increases asymmetric information by making information sharing more difficult (McIntosh and
Wydick, 2005), reduces repayment incentives due to the availability of alternative credit sources
(Gonzalez, 2008) and creates pressure on MFIs to overlend, particularly if new market entrants are
aggressive and pay less attention to repayment capacity. Hellmann et al. (2000) show that by
reducing the capitalised value of expected future profits, competition lowers the incentives for
making good loans and incites opportunistic lender behaviour. For clients of Grameen Bank, Matin
(1997) and Chaudhury and Matin (2002) find that access to multiple lending NGOs reduces
repayment performance. Vogelgesang (2003) finds that in Bolivia, competition has positive effects
on repayment in good times but negative effects in times of crisis and over-indebtedness. Only
Krishnaswamy (2007) finds better repayment rates in more competitive branch locations in India.
This may result from an initial effect of multiple borrowing on hiding repayment difficulties.
Incentive structures also result from the priorities of donors and investors. A strong focus on
outreach and sustainability may lead to excessive growth and profit-seeking behaviour from MFIs,
as discussed below. Understanding these external influences on over-indebtedness is a prerequisite
for developing appropriate solutions. The answers may include regulatory measures, promoting
credit bureaus, improving safety nets for borrowers, or simply factoring the likelihood of shocks into
the evaluation of repayment capacity.
Lender behaviour: In all institutional environments, over-indebtedness is ultimately created by the
parties that make the credit decisions, i.e., the lenders and the borrowers. Three major levers of
lending behaviour exacerbate over-indebtedness risks: a) an excessive focus on marketing and
growth, b) unsuitable product characteristics, and c) lending procedures conducive to overindebtedness. All of these factors may be exacerbated by extreme profit-seeking behaviour from
MFIs but are not limited to for-profit institutions. Well-managed for-profit MFIs that take a long- 20 -
term view, rather have reasons to avoid such behaviours and take both portfolio quality and customer
satisfaction into account.
a) MFIs can push borrowers beyond their limits through an exaggerated focus on portfolio growth
and aggressive marketing techniques. The lending focused business model of MFIs can create
pressure on customers to continue borrowing instead of focussing on the protective services that they
need or taking a break when they do not require credit (Collins et al., 2009).11 Another mechanism
driving MFIs to over-indebt clients is the volume-focused incentive system (Rahman, 1999).
Volume-focused incentives reward credit officers for disbursing loans, even if clients struggle to
repay them. Many MFIs mitigate this effect by providing complementary incentives for portfolio
quality to prevent loans to borrowers who will default. However, in existing lending relationships,
portfolio quality incentives can trigger new loans to delinquent borrowers, to enable borrowers to
maintain their repayments beyond their capacity. Finally, aggressive sales techniques can incite
borrowers to borrow beyond reasonable limits. A randomized control trial by Bertrand et al. (2010)
in South Africa shows that advertising content significantly affects demand, particularly by
appealing to intuition rather than reason. Small features such as limiting the numbers of examples
shown, not suggesting what loans should be used for, and adding pictures of attractive women
trigger the same increase in demand as a 25% lower interest rate. This does not yet include
particularly aggressive techniques such as door-step sales, limited time offers, or hiding loan costs.
At the root of the MFIs sales focus are the industry's growth pressure and the desire for financial
returns that may overrule an institutions social mission. In extreme cases, rapid growth may exceed
the institutional capacity of the MFIs information systems, lending policies and governance
structures. Particularly, growth rates above 250 per cent, local growth in existing branch locations,
and growth in countries with a penetration rate above 10 per cent or high aggregate microfinance
growth present risks to the portfolio quality of MFIs (Gonzalez, 2010). According to pre-crisis MIX
Market data12, the gross loan portfolios of Morocco's 10 reporting MFIs grew at a compound annual
growth rate of 110 per cent in 2006 and 2007, with portfolios more than doubling every twelve
months. In 2007, the fastest growing MFI (ARDI) grew at 330 per cent, multiplying its loan
portfolio by more than four in the course of one year.
This growth speed creates certain challenges for an institutions management. Rapid growth leads to
a high share of inexperienced loan officers, who may make poorer loan decisions than their
experienced colleagues and identify less with the values of their institutions. ARDIs personnel grew
11 Banerjee and Mullainathan (2009) explain that MFIs have an incentive to keep profitable borrowers trapped in a cycle of debt.
12 www.mixmarket.org, self-reports of limited liability but sufficient for the purposes of this argument
- 21 -
by approximately 350 per cent in 2007 such that nearly 80 per cent of its employees were new to the
institution. Two years after Moroccos MFIs experienced strong growth, the >30 day portfolio at risk
(PAR) rose from below 1 per cent to an average of 7 per cent. This data excludes ARDI which
stopped reporting its PAR.
Nevertheless, there are also examples of institutions that maintained high growth rates for years
without exceeding their institutional capacities. Fast growth is likely to be most problematic on a
market level when markets approach saturation. To date the concepts of market saturation and
penetration are still poorly conceptualized in relation to microfinance. The above estimates only
provide rough rules of thumb.
b) MFIs further increase over-indebtedness risks if they offer products that are inappropriate to
the borrower's situation. In this case, lenders are not inducing borrowers to take on more credit
than is reasonable. Rather, the impact chain centres on the debtors ability to meet their obligations
from existing contracts. For example, the typical repayment schedule starts too early for most
investments to generate returns. And if maturities are too short and instalment schedules are too
inflexible, it can be difficult for borrowers with volatile incomes to repay their debts on time (Collins
et al., 2009; Gurin et al., 2009a). A high-frequency repayment schedule helps borrowers to repay
because small, regular amounts of money are easier to assemble than larger ones. It also is an
important disciplining mechanism for borrowers and highlights repayment problems early on.
Nevertheless, microfinance practitioners need to abandon the myth that only standardised, shortterm, high-frequency loans work, and better adapt to the needs of borrowers and their businesses.
Even if only testing their hypothesis in a low-delinquency environment in urban India, Field and
Pande (2008) find that MFIs can switch from weekly to monthly instalments without reducing the
borrowers repayment discipline. More flexible options should be tested in future research.
The difficulties become exacerbated if MFIs do not reschedule loans for honest borrowers who face
liquidity problems. The zero-tolerance policy promotes the early recognition of repayment
difficulties and keeps borrowers from accumulating obligations (Gonzalez, 2008), differentiates MFI
lending from frequently forgiven government lending, and avoids strategic defaults and spillover
effects of delinquency on non-delinquent borrowers (Krishnaswamy, 2007). The policy improves an
MFIs portfolio quality and has operational benefits in helping MFIs to avoid handling large
numbers of rescheduling requests. However, it prevents loan officers from rescheduling loans for
borrowers facing short-term liquidity problems. By forcing these borrowers into delinquency and
potentially adding late fees or increased interests to their obligations, the zero-tolerance policy may
not only put obligors under avoidable repayment pressures but also turn short-term liquidity gaps
- 22 -
into longer-term problems. For example, in a South African MFI, the zero-tolerance policy was so
pervasive that MFIs proudly reported borrowers going hungry and selling their food to repay on time
(Smets and Bhre, 2004). According to our sacrifice-based definition, these borrowers are overindebted.
A regular instalment schedule and the zero-tolerance policy serve a good purpose and might help
some borrowers to stay out of over-indebtedness. At the same time, these policies are absolutely
inappropriate for other borrowers. Unless the microfinance industry develops a more nuanced
approach, the policies may create the same debt problems that they aim to prevent.
Repayment capacity is also a function of loan use. In Bouquet et al.'s empirical work in Madagascar
(2007), the most frequent product feature that borrowers cite as a reason for repayment problems is
the timing of disbursements. If MFIs disburse too late for the borrowers to exploit their business
opportunities, customers may not earn enough returns. Similarly, scholars frequently identify loans
used for consumption purposes as a source of over-indebtedness as these loans do not provide
debtors with returns for repayment (Vogelgesang, 2003). This argument however should be handled
with care: First, as money is fungible and a distinction hardly ever exists between household and
microenterprise cash flows, many microloans go to household purposes. Second, distinguishing
between consumption and production loan use can be difficult, as in the example of educational
expenses (Collins, 2008). Third, although increasingly rigorous impact studies are challenging the
empirical results of microfinance, microfinance theory is gradually moving away from the
microenterprise approach to a household finance approach. It considers the benefits of microfinance
to be in short-term consumption smoothing and managing the risks of low and volatile incomes
(Collins et al., 2009; Karlan and Zinman, 2009). Therefore, consumption loan use can be both a
cause of and protection from over-indebtedness.
c) Microlenders also contribute to over-indebtedness with their lending procedures. Particularly lax
evaluations of repayment capacity and automatic increases in loan sizes over time create overindebtedness risks. In Bangladesh and Bolivia, larger loan amounts and higher debt-to-asset ratios
are positively related to borrowers repayment problems (Sharma and Zeller, 1997; Vogelgesang,
2003; Godquin, 2004).
Moreover, lending procedures promote over-indebtedness through a lack of transparency. An Indian
study discovered that more than 70 per cent of microcredit clients believed all or most of the rules
regarding their loan contracts not to be communicated in written form (Tiwari et al., 2008).
Excessive interest rates and fees contribute to debt problems, especially if borrowers are not fully
aware of them. There is a misconception in customer protection debates that MFIs should simply
- 23 -
state Annual Percentage Rates (APRs), as APRs are fair measures of borrowing costs that allow for
comparisons among MFIs and are less subject to lenders attempts to hide the full cost of credit. In
reality, the APR is not well aligned with the mental processes of human beings.
People rarely think about spending and borrowing decisions via discount rates as economic logic
suggests. Instead, humans make their spending decisions by utilising simpler mental representations
that fit their cognitive capacities. Ranyard and Craig (1995) combine the original theories of mental
accounts (Thaler, 1985) and psychological accounts (Kahneman and Tversky, 1984) in the concept
of dual accounting: People consider the total cost of a loan and the affordability of the instalments in
every future loan period to make borrowing decisions. In most cases, discounting does not play a
role. Empirical findings confirm that microfinance clients in India think about their loans in terms of
how much they owe on a weekly basis but know little about interest rates or total interest expenses
(Tiwari, Khandelwal and Ramji, 2008). Working with students in Britain, Ranyard and Craig (1993)
find that without information on the total interest charged, borrowers strongly underestimate the
repayment periods and total amount to be repaid. Therefore, they may borrow more than they can
handle.
Finally, Collins et al. (2009) point out that APRs may not represent appropriate measures of price,
especially for short-term microloans. If borrowers make loan decisions for only a few weeks, they
decide based on the actual impact of the loans on their budgets rather than a hypothetical annual
price. Pointing out the high APR of a loan to borrowers equates to dissuading someone from taking a
taxi to the airport based on the cost that they would face if they used taxis all year long. Instead,
many microfinance borrowers perceive the interest on loans as a fee for a service (bridging the
liquidity gap) rather than the intertemporal cost of funds. Therefore, using APRs to represent the cost
of credit is not compatible with borrowers cognitive approaches to loan decisions. In developing
countries with weak educational systems, where many borrowers do not understand percentages, this
misconception is likely to be even stronger. If loan information is incompatible with borrowers
mental processes, it may contribute to over-indebtedness.
The final trade-off concerning lending policies is related to collection practices. Microfinance
institutions in India and elsewhere increasingly face accusations of employing collection practices
that increase the burden of indebtedness for borrowers by humiliating and intimidating them or
depriving them of their assets. Borrowers are not necessarily aware of their rights and, in India,
many borrowers accept that MFIs force borrowers to discuss their delinquency in public, extend
group meetings at the cost of business time or punishment by husbands, or seize assets in spite of
uncollateralised loan contracts (Tiwari, Khandelwal and Ramji, 2008). At the same time, if
- 24 -
collections are too lax, repayment difficulties may only materialise when over-indebtedness has
already become unavoidable (Vogelgesang, 2003).
This analysis of the lenders contributions to over-indebtedness prompts a strong message to those
seeking to address over-indebtedness risks: reducing access is not the only answer. The term overindebtedness bears the connotation of too much debt and conveys the idea that the only solution to
too much debt is less debt. This approach is only suitable for addressing cases of excessive growth,
aggressive marketing and lax credit distribution policies. Where over-indebtedness results, for
example, from unsuitable product features or is aggravated by inappropriate collection practices,
borrowers do not need less credit but better credit. The microfinance industry will have to continue
developing its methodology and increasingly shift its focus from pure outreach to delivering quality
services. This entails a broader product portfolio that features more flexible lending products and
broader access to savings and insurance products.
Borrower behaviour: There are two parties to every credit decision: a lender and a borrower. Both
are obliged to make responsible choices. Both can render a credit agreement harmful. A customer
protection perspective should resist the temptation of finding fault only with lenders and adverse
circumstances. It should also consider the role that borrowers themselves play in destructive credit. It
should recognise that, to a certain extent, protecting borrowers from over-indebtedness may mean
protecting them from themselves.
a) The psychological and behavioural economics literatures have revealed numerous cognitive and
psychological biases that can cause borrowers to over-burden themselves with debt. Contrary to the
postulates of traditional economic theory, the rationality of human decision makers is bounded by
imperfect information and limited cognitive abilities such that errors in judgement occur. For
example, individuals with limited information tend to rely on proxies for their decision making.
Inexperienced consumers tend to view their credit limit as a signal of future earnings and
affordability (Notani, 1997; Soman and Cheema, 2002). Being offered more credit may encourage
individuals to borrow beyond what they can afford. People do not always understand financial
choices well. Their cognitive resources mediate the impact financial services have on their wellbeing (Nio-Zarazua and Copestake, 2009). Lusardi and Tufano (2009) discover strikingly low
levels of debt literacy across the USA. Those who are less debt literate are more likely to be overindebted. Additionally, decision makers in Western cultures tend to suffer from an overconfidence
bias and from habit persistence, which makes them reduce consumption too slowly in response to
income fluctuations (Brown, 1952). They may overconsume and underestimate the risk of
borrowing. From the perspective of the poor, Gurin (2000) reveals the cognitive effects of
- 25 -
permanently living in a precarious situation: the constant focus on managing daily emergencies
changes people's relationship to time so that the short term assumes disproportionate importance.
Individuals may lose the ability to plan for the longer term.
According to the theory of procrastination by Akerlof (1991) and the hyperbolic discount function
(Laibson, 1997), human beings display time-inconsistent behaviour. Near-term events are subject to
higher discount rates than distant events. The losses from saving money one day later and consuming
today seem negligible. However, individuals fail to foresee that the dilemma will be the same in all
the following instances. They eventually consume beyond their means and are left without any
savings. For borrowers, the effect may be the same. A small purchase on credit today does not cause
problems, but the chronic accumulation of credit leads to over-indebtedness. Gul and Pesendorfer
(2004) and Fudenberg and Levine (2006) provide similar explanations with their theory of
temptation and the dual self model, respectively.
These general human characteristics are likely to apply to microborrowers as well. As a result,
microborrowers who usually have low educational levels and little experience with formal lending
institutions, struggle to understand credit offers and make sound borrowing decisions. If these
challenges are combined with the attractiveness of the Western lifestyle and microfinance
development aid rhetoric, MFI customers may be unable to restrict their borrowing to sustainable
levels. Ashraf et al. (2006) and Bauer et al. (2009) provide empirical support for time inconsistent
behaviour among the poor. Being present-biased, the poor use loans as commitment devices to
replace savings. Their behavioural biases are the mains reason they get into debt.
Banerjee and Mullainathan (2009) and Strotz (1956) show that the poor may be even more
vulnerable to temptation than the rich because poor people are unlikely to improve their financial
situations even if they behave rationally. For example, their potential daily savings are very small
and the likelihood high that the savings get consumed before having accumulated enough to make an
investment. In this situation, even starting to save may not seem worthwhile (Banerjee and Duflo,
2007), an effect later labelled "temptation tax" (Banerjee and Mullainathan, 2009). Also, for the rich,
temptation spending may remain at unproblematic levels because of declining temptations, but that
same level may be critical for the poor (Banerjee and Mullainathan, 2009). Bertrand et al. (2004) add
that if the poor are prone to the same biases as everybody else, in their vulnerable situations these
biases have more dire consequences. In summary the above findings from behavioural economics
imply that microfinance customers are at risk of over-indebtedness because their rationality is
limited by a number of biases and weaknesses. They may not always make smart choices about debt.
- 26 -
Another relevant factor in the psychology literature is the concept of attitude. A borrowers attitudes
towards the future (Brown et al., 2005), debt (Livingstone and Lunt, 1992; Lea, Webley and Levine,
1993), money and money management (Webley and Nyhus, 2001) and his/her locus of control
(Livingstone and Lunt, 1992; Webley and Nyhus, 2001) all impact the risk of over-indebtedness.
Microborrowers and their attitudes may differ from the findings of British studies, but the
mechanisms are likely to be similar. For microfinance investment loans, this may include attitudes
towards risk taking in business decisions. If a certain attitude implies risks of over-indebtedness,
MFIs might want to be careful in lending to these customers or introduce countermeasures, such as
awareness campaigns and training programs.
b) Sociological factors can also drive borrowers towards over-indebtedness. The pressures of
consumer society and materialism may lead consumers to overspend and borrow beyond their limits.
In France (probably like any other materialistic society), instead of satisfying basic needs,
consumption is required to build ones identity (Viaud and Roland-Lvy, 2000). If sociologists see a
causal relationship between a culture of consumption and the level of consumer debt, lenders should
be aware that borrowing decisions may result from societal pressures. This phenomenon is likely to
be similar among the poor, at least in cultures with consumer societies.
A closely related influence factor is inequality and social comparison. US research shows that this
factor can drive lower income groups to borrow irresponsibly to keep up with the consumption
levels of their peers (Duesenberry, 1949; Christen and Morgan, 2005; Luttmer, 2005). Future
microfinance specific research should confirm this effect in different cultural settings.
As a third point, economic socialisation influences peoples readiness to take on debt. In Britain,
societal support for debt determines to what extent the average borrower perceives debt as a burden
or as an easy solution (Lea, Webley and Levine, 1993). According to a US study, the attitudes and
experiences of parents with debt and money are relevant (Stone and Maury, 2006), and few
microborrowers have learned handling formal credit from their parents. Furthermore, social
obligations to support relatives and neighbours may drive people into indebtedness. These
obligations are likely to be strong in microfinance environments.
c) Finally, empirical studies analyse socio-demographic and economic characteristics for their
associations with repayment problems and over-indebtedness. Some relationships may not be causal
in nature, others probably are. The most common socio-demographic factors in consumer finance
and some microfinance studies include young age, more and younger children, low levels of
education and literacy and low or unstable labour market status (Livingstone and Lunt, 1992; Lea,
Webley and Levine, 1993; Lea et al., 1995; Vogelgesang, 2003; Godquin, 2004). In line with the
- 27 -
findings on education, studies in Burkina Faso and Bolivia show that a lack of borrower training and
experience with past loans is related to a lower payment performance (Paxton et al., 2000; Schreiner,
2004). Conversely, repayment performance in group lending may decrease over loan cycles if repeat
loans no longer meet the needs of every group member to the same extent (i.e., the matching
problem) (Paxton, Graham and Cameron, 2000; Godquin, 2004).
Single adult households and those with recent changes in family composition (e.g., divorce) face
over-indebtedness risks (Lea, Webley and Levine, 1993; Vogelgesang, 2003). Similarly, ill health,
gender and ethnicity are related to indebtedness (Lea, Webley and Levine, 1993; Godquin, 2004;
Disney, Bridges and Gathergood, 2008). Many of these characteristics are prominent among
microfinance customers and might also be related to indebtedness in the developing country context.
Even if they should not lead to the exclusion of the target group, they should be taken into account in
avoiding over-indebtedness.
The most common economic driver of indebtedness is low income (Livingstone and Lunt, 1992; Lea,
Webley and Walker, 1995). In a developing country setting, Collins (2008) finds a correlation
between indebtedness and income in urban but not rural areas. A study from Burkina Faso finds that
borrowers in rural areas may be more prone to experiencing repayment problems, potentially
because of higher poverty levels (Paxton, Graham and Cameron, 2000). Other research points
towards the influences of income instability (Webley and Nyhus, 2001), low wealth (Sharma and
Zeller, 1997; Godquin, 2004; Disney, Bridges and Gathergood, 2008) and low returns on the
borrowers investment (Gonzalez, 2008). The role of returns probably explains Schreiner s finding
of a difference in risk between various economic sectors and the borrowers business activities
(2004). While MFIs are aware of lending to customers with low, unstable incomes, and low wealth
levels, they may overestimate their customers returns on investment and fail to consider the fact that
a large share of their loans is not actually put to productive use.
The impact of borrower characteristics on over-indebtedness does not only point towards selecting
the right borrowers to reduce over-indebtedness. They also suggest that, for example, financial
literacy training, awareness campaigns, and the right to withdraw from spontaneous credit decisions
might help reduce over-indebtedness. Additionally, they show that MFIs should match their
communication with the borrowers educational levels and that advertisements should not exploit the
borrowers psychological biases.
To sum up, Figure 3 provides an overview of the causes of over-indebtedness. External influences,
such as adverse shocks to income or expenses, can render a debt load unmanageable. The
institutional and legal environment can enhance or reduce the risks of over-indebtedness. In
- 28 -
External factors
Adverse shocks
Institutional
environment (e.g.
macroeconomic or
legal)
Over-indebtedness as a
consequence of
interacting factors
2
Lender behaviour
Marketing and
growth focus
Inflexible products
Unfair lending procedures / collections
Borrower behaviour
Cognitive and
psychological biases
Sociological influences
Socio-demographic /
economic attributes
accounted for the psychological limitations and biases of borrowers in their communication and
lending decisions, even imprudent borrowers would hardly be at risk.
In reality, both parties are bound to make mistakes because of their complex situations and
asymmetric information. Adverse shocks may turn even the best borrowing and lending decisions
into over-indebtedness triggers. Therefore, measures against over-indebtedness should address the
full range of drivers of over-indebtedness. The relative importance of the respective influence factors
remains to be determined.
Based on this more detailed understanding of the causes of over-indebtedness, the solutions extend
far beyond the standard risk management reactions to over-indebtedness trends. The risk
management-oriented reactions of reducing access to loans, decreasing loan sizes, and intensifying
due diligence are appropriate in situations where lender-side causes are predominant, for example
because MFIs are pushing loans to customers too aggressively, are over-prioritizing portfolio growth
and are not conducting sound evaluations of repayment capacity. However, this paper has revealed a
much broader range of potential over-indebtedness causes that suggests a wider range of measures to
be taken.
MFIs should make loan schedules more flexible if repayment struggles arise predominantly from
inappropriate products such as loans with rigid instalment schedules that do not match the
borrowers cash flows. Particularly in markets with low financial literacy levels, social pressures and
a credit culture that is conducive to over-indebtedness, MFIs should ensure transparent
communication that is suitable to the mental processes of borrowers and work towards
improvements in financial literacy among their borrowers. Literacy trainings should be tailored
towards the mental needs of borrowers and address psychological and behavioural biases directly by
pointing them out to borrowers and suggesting strategies for borrowers to deal with them. Lenders
can also counter over-indebtedness trends by offering and promoting savings products to create a
safety buffer for borrowers in difficulty. Deposit products with commitment features may reduce the
use of loans as commitment devices for present-biased borrowers.13
The mere awareness on the part of MFI managers and loan officers that over-indebtedness begins
long before default, and that they should consider the borrowers sacrifices, can already go a long
13 Not in relation to over-indebtedness but as measures to enhance debt capacity, some items such as rescheduling, flexibilising
instalment schedules or adapting them to cash flows, and mobilizing savings have been mentioned in von Pischke (1991). Taking the
risk of adversities into account constitutes an essential feature of his concept of debt capacity. He further pointed to more general
measures that increase the cash flows of the poor, such as improving infrastructure, investing in education, or influencing market
prices, indicating that debt capacity depends on social and institutional infrastructure and is created by people through markets.
- 30 -
way. It should trigger changes in the institutional culture, in the prioritization of impact targets
versus portfolio quality goals, in the incentives for loan officers and in the MFIs lending policies.
The same is true for recognising which type of lender behaviour puts clients at risk, for example
aggressive marketing, not allowing for breaks between loans cycles, and insisting on a zero-tolerance
policy. Understanding the underlying causality is the first step for MFIs to avoid the behaviour in
question. Nevertheless, MFIs will not be able to reduce over-indebtedness to zero, unless they stop
lending and deprive all of their customers from the benefits of access to credit. For the remaining
microborrowers that still cannot be protected from over-indebtedness, curative and rehabilitative
customer protection measures (e.g., debt relief) are required that are largely outside of the lenders
responsibility. Financial market regulators, governments as those responsible for social security
networks, and microfinance donors and investors should revisit what their role can be in reducing
over-indebtedness given this papers analysis of drivers behind the over-indebtedness phenomenon.
- 31 -
4. Conclusion
For several reasons, over-indebtedness poses a serious risk to the microfinance industry. First, it
contradicts the sector's social mission. Over-indebtedness can exacerbate the poverty of
microfinance customers, threaten their social positions and lead to psychological disorders and
health problems. Second, over-indebtedness can threaten the sustainability of MFIs by triggering
defaults. Third, over-indebtedness may have spillover effects that would affect even healthy
institutions and their customers. It risks damaging the general reputation of the microfinance
industry. Given the trend to interpret the impact of microfinance as a reduction in the vulnerability of
poor households, it is interesting to note that for certain customers the evidence for overindebtedness suggests an increase in household vulnerability due to microborrowing. Based on an
improved understanding of the causes of over-indebtedness, the industry must implement customer
protection measures to reduce the risk of over-indebtedness for MFI customers while simultaneously
providing relief to those in trouble.
This paper develops an innovative definition of over-indebtedness based on the concept of sacrifice.
For purposes of customer protection, we consider microborrowers over-indebted if they are
experiencing unacceptable sacrifices with more than just transitory effects. The definition considers
their subjective knowledge about their future prospects and the implications of the different types of
debt. Our definition represents a customer-protection-based alternative to the usual definitions of
over-indebtedness which, based on risk management, focus on default (the late stages of overindebtedness), or on somewhat arbitrary debt-to-income ratios.
Furthermore, this paper provides an unprecedented overview of the causes of over-indebtedness
based on previous microfinance research and the interdisciplinary consumer finance literature. It
highlights the interacting factors and responsibilities behind the phenomenon of over-indebtedness.
The causal framework shows that lenders exacerbate the risks of over-indebtedness via their focus
on marketing and growth, unsuitable product characteristics and inappropriate lending procedures.
Borrowers contribute to the problem through cognitive biases, psychological misrepresentations, and
social pressures. In addition, external influences, such as adverse shocks to borrowers incomes and
expenses, can drive borrowers into over-indebtedness, especially if they are facilitated by the
institutional and legal environment. The paper challenges a number of conventional beliefs, such as
the inappropriateness of consumer loans for microfinance customers, the requirements of tight
repayment schedules in the microfinance methodology, and the universal benefits of competition for
customers.
- 32 -
By analysing the causes of over-indebtedness we provide the basis for designing appropriate
customer protection mechanisms to address the phenomenon at its roots. Only with an understanding
of the different factors that create over-indebtedness can regulators, MFIs, and other parties craft
effective over-indebtedness protection measures for the microfinance market. This framework
reveals the breadth of the potential solutions to the challenge of over-indebtedness and shows that
reducing over-indebtedness does not only imply a reduction of access to credit. There are many
possible solutions such as improvements to product design and lending policies, borrower training,
or appropriate marketing and communications. Often, borrowers do not need less credit but better
credit.
Further research is required in this young field, to confirm to what extent the drivers of overindebtedness among the consumers of developed countries apply to microfinance and to determine
which of these drivers are the most important. Empirical research should measure the extent of overindebtedness in specific geographies and test the causes of debt problems in these markets.
Additionally, qualitative research needs to provide insights into the experiences of over-indebted
customers and the sacrifices that they make. On the basis of these findings, the microfinance industry
will have to develop customer protection measures.
By refocusing on the interests of clients and making customer protection a top priority, microfinance
has made important progress. Academic research needs to support this step by pointing out the
implications of shifting from a repayment performance focus, i.e., an institution-centric risk
management perspective, to a customer focus. This includes an appropriate definition of overindebtedness and a more comprehensive view on the origins of the over-indebtedness phenomenon.
While an over-indebtedness definition based on subjective perceptions implies automatic limitations
with regards to universality, it can reveal a perspective on microlending that the industry has long
ignored and allows for a much richer understanding of the causes of over-indebtedness than a more
limited definition would suggest.
- 33 -
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- 39 -
Economic
Sociological
Precision
Definition
Indicator
Proxy
Individual
Household
Network of kin
Composition
Scale
Quantitative
Qualitative
Perspective
Objective
Subjective
Data source
External
Self-reported
Time horizon
Current
Structural
Permanent
Debt condition
Bankruptcy
Default
Arrears
Innocent
Unintended
Deliberate1
Level of sacrifice
3 Severity
Legal
Reference unit
2 Method
Categories
Scientific lens
1 Purpose
Dimension of choice
To minimum
More than
existence level expected
- 40 -
Other
Aggregate
Imbalance
Chapter 2
From a supply gap to a demand gap?
The risk and consequences of over-indebting the underbanked
Jessica Schicks*
Centre for European Research in Microfinance (CERMi)
Solvay Brussels School of Economics and Management (SBS-EM)
Universit Libre de Bruxelles (ULB)
In the past, the microfinance industry focused mainly on growth and outreach. Financial
exclusion implied a large supply gap. Recent over-indebtedness in several countries has
shown that this gap can turn into oversupply. The industry urgently requires research on the
magnitude and consequences of this shift. This chapter reveals the broad spectrum of
consequences that over-indebtedness can have for borrowers and other stakeholders, mainly
MFIs. It emphasises that the consequences of over-indebtedness reach far beyond the risk
management concerns that primarily affect MFIs and investors. The chapter also reviews the
existing empirical research on microfinance over-indebtedness and examines the extent of
over-indebtedness in microfinance markets today. It highlights the evidence of overindebtedness in crisis markets and non-crisis markets, especially when markets mature. Only
if the extent of the problem is known and if its effects are properly understood, can the
microfinance industry develop appropriate measures to combat over-indebtedness and adapt
to the challenge of oversupply.
*The author would like to extend her warmest gratitude to Richard Rosenberg for his
generous support, his work summarising the existing over-indebtedness research, and his
many valuable ideas that inspired her thinking on over-indebtedness. She is grateful for
comments from Marc Labie and from the referees. Additionally, she would like to thank the
Marie Christine Adam Foundation and the German National Merit Foundation for their
financial support.
- 41 -
1. Introduction
The microfinance sector is used to extensive debates about its mission.1 However, in one
regard, the goal has always been clear: microfinance, whether or not it was impact focused
and poverty focused, has always been about extending small-scale financial services to the
underbanked. The aim has been to reach those who are not normally served by the formal
financial system.
This goal had implications for the competitive situation in microfinance markets, especially in
the industrys early years. Microfinance institutions (MFIs) were working in an environment
characterized by a permanent supply gap2. Despite the impressive growth that the industry
achieved over the past decades, enormous figures frequently reminded the microfinance
community of the remaining supply gap in the industry: estimates of the underserved centred
around two or three billion individuals worldwide (Chaia et al., 2009; Karlan and Morduch,
2010).
As a result, the efforts of researchers and practitioners alike focused above all on growth and
outreach. The numbers of clients served often represented the main proxy for an institutions
impact. Efforts concentrated on expanding MFIs into larger institutions that would continue to
serve the poor sustainably in the long term. Under the paradigm of growth as priority number
one, the industry commercialised, arguing that only self-financed institutions will persist and
that only tapping private capital will allow the microfinance industry to reach the billions of
underserved people who still lack access to finance.
Since its beginning, the flagship product of microfinance was microcredit. The industry
developed based on the assumption that the poor can work themselves out of poverty if given
access to the capital that they require to expand their income-generating activities into more
profitable businesses. It assumed that, the poor, if they had any access to credit at all, were
borrowing from usurious moneylenders. Replacing those high cost loans with cheaper funds
from MFIs would make businesses more profitable and would make them grow more rapidly,
generating a better living for the owners families and potentially creating employment
opportunities and contributing to the development of the local economy. The strong demand
1 For background information on these debates see for example Copestake (2007); Labie (2007); Armendriz and Szafarz
(2011).
2 See Armendriz and Labie (2011) for an encompassing volume of microfinance papers that centre on the question of
supply and demand mismatch.
- 42 -
for credit among the poor seemed to confirm the benefits of microfinance and to validate the
design of loans according to the microcredit methodology.
Over the past two years, this picture has changed fundamentally. Some of the above
assumptions have come under increasing criticism, for example the positive impact of
microcredit on poverty (Banerjee et al., 2009; Karlan and Zinman, 2009, 2010; Odell, 2010),
the impact chain through enterprise development (Collins et al., 2009), and the substitution
effect of microfinance replacing informal loans offered at worse conditions (Gurin et al.,
2009; Morvant-Roux, 2009). Behavioural economics highlighted that continued demand for a
product does not that prove it is beneficial. Typical human challenges such as temptation and
the inconsistent evaluation of benefits over time (hyperbolic discounting) can lead to
unreasonable spending, under-saving and over-borrowing (Ashraf et al., 2006; Banerjee and
Duflo, 2007; Banerjee and Mullainathan, 2009; Schicks, in press). The risk of overindebtedness gave rise to an argument against the right to credit that was suggested by
promoters of the microfinance industry (Hudon, 2009).
The most blatant signal that the strong focus of the microfinance industry on expansion might
be flawed, at least in some areas of the world, emerged from a number of countries that
experienced serious crises of over-indebtedness. Like one of the worlds most mature
microfinance markets, Bolivia, in the late 1990s, certain regions of India, Nicaragua, Bosnia,
Morocco, and Pakistan recently experienced severe crises that included problems with overindebtedness. Although each country has its own story and although to varying degrees they
all suffered from the global financial crisis or from political backlashes against high-interest
lending, these crises have one characteristic in common: many borrowers were no longer able
to repay their loans because they had accumulated too much debt. The supply gap had turned
into oversupply.
This does not mean that the previous assumptions governing the development of microfinance
are completely wrong. Nor does it mean that there is no longer a need for microfinance to
grow and expand its outreach. However, it does mean that we need to develop a more
balanced perspective, paying attention to the nuances of the impact of microfinance and
taking the needs of clients in their various contexts more seriously. Instead of putting
institutional growth first, microfinance needs to put the needs of clients first. Institutional
objectives are a means to that end.
Microfinance has started long ago to grow beyond the one-size-fits-all approach of its original
group-lending methodology. Now is the time to take the next step in diversifying approaches
- 43 -
to microfinance, tailoring credit offers to the needs of customers, tailoring the operations of
MFIs and investor expectations to different market environments and speeding the
development of non-credit products. The industry must recognise that not everybody is a
potential borrower and that even microfinance markets can become saturated.
Given that the question of over-indebtedness is relatively new to microfinance and contradicts
earlier thinking about outreach and the impact of credit, there is an urgent need for more
research into the extent, causes and consequences of over-indebtedness. Every actor in the
microfinance industry needs to remain aware in his or her daily work that the positive impact
of credit is not automatic and that lending to the poor can cause harm. If we want to realise
the full potential of microfinance and leverage the power of credit for the poor, we need to
learn how to extend the right products to the right people. This will require careful
experimentation with product features and continually improved assessments of the
creditworthiness of loan applicants. It will require educating clients as well as investors, loan
officers, and the managers of MFIs.
Microfinance scholars can learn from developed country consumer finance research on overindebtedness but will have to test the transferability of these findings to different cultural and
economic contexts and consider the specifics of over-indebtedness in its target group. This
chapter first reveals the broad spectrum of consequences of over-indebtedness for borrowers
and other stakeholders, mainly MFIs. It emphasises that the consequences of overindebtedness reach far beyond the typical risk management concerns that MFI managers and
investors tend to emphasise.
The chapter then reviews the empirical findings on over-indebtedness in the microfinance
industry to date. It shows that there is reason for concern regarding microfinance overindebtedness but that we cannot determine whether such problems are likely to arise in many
microfinance markets or only in a few exceptional cases. Neither can we tell if microfinance
over-indebtedness is a growing concern or reached its peak with the financial crisis, or,
alternatively, will periodically rise and fall as markets enter different phases of development.
Finally, it is unclear to what extent customer experiences of over-indebtedness always
precipitate portfolio problems for MFIs; over-indebtedness at the customer level maybe a
much more wide-spread and permanent challenge than larger delinquency crises.
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3 See Schicks (in press) for a detailed discussion of this definition and how to put it into practice as a measurement based on
survey data.
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Material consequences
The most obvious cost of being over-indebted is the need to repay a large amount of debt.
When heavily indebted borrowers still manage to make the payments, they already suffer
from the cost of repayment. Because they have greater debt expenses relative to their income,
over-indebted borrowers live on a lower consumption level than their peers (Betti et al., 2007)
and have lower buffers against shocks (Burton, 2008). According to Brett (2006), in addition
to sacrificing income for instalments, microborrowers in Bolivia rely on cash support from
their families and social networks, take on additional debt, sell assets, reduce the quantity and
quality of their food, and take on additional paid labour to be able to repay their debt on time.
4 The section therefore reports theoretical and empirical findings from developed and developing countries in parallel.
Further research should analyse to what extent non-microfinance findings apply to microfinance settings.
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Hardly any of Bretts subjects were able to cover instalments from the returns on their
investment projects. Gonzalez (2008) identifies similar repayment sacrifices in Bolivia, as
well as reductions in human capital investments, indicating that the immediate consequences
of over-indebtedness can lead to lower education levels, a lower income generating capacity
and lower household welfare in the long term. Schicks (2012) provides a detailed account of
the sacrifices of over-indebted microborrowers in Ghana, revealing precisely which sacrifices
are most common, how often they tend to be made, and which sacrifices borrowers perceive
as most severe.5 The sacrifices identified in microfinance markets are quite similar to those
isolated in Canner and Luckett (1991) and Drentea and Lavrakas (2000) in developed
countries.
When, in spite of sacrifices, over-indebted borrowers are no longer able to repay their loans
on time and delay, skip or stop repayments, this might result in some material relief.
However, these actions trigger new consequences: the costs of delinquency and default
(Stearns, 1991; DeVaney and Lytton, 1995). The direct material costs of delinquency include
late fees and higher or longer interest payments on the loan amount. The most significant cost
of default is the seizure of collateral or other assets. Asset seizures in microfinance are
performed either by loan officers or by solidarity groups and can include the seizure of
productive assets or essential items such as land, roofing or cooking pots (Hulme, 2007). Such
an event usually represents a serious loss to the household and in some cases reduces the
borrowers future capacity to generate income, especially when an essential business asset
such as a new sewing machine is seized. In addition, depending on the context, legal fees and
insolvency fees may accrue. Another factor that is more difficult to quantify but highly
relevant for some borrowers is the loss of the client relationship with the MFI. In industrial
countries with credit bureaus, losing ones creditworthiness can even precipitate complete
exclusion from credit, paid labour and other contracts such as apartment rentals, car purchases
or mobile phone plans (Lyons and Fisher, 2006).
Given the cost of delinquency and default, many borrowers try to avoid this stage by any
means. Some employ strategies of multiple borrowing to gain additional time. However, the
material consequences of over-indebtedness can worsen if over-indebted borrowers sink
further into debt by using new loans to help them repay old ones. The costs of delinquency
5 Some of the sacrifices presented in Schicks (2012) refer to the non-material consequences of debt that are discussed later in
this chapter, but many are the result of material pressures such as those discussed by Brett (2006) and Gonzalez (2008).
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and default will probably only be postponed to a later stage when they will be even more
severe and debt problems will have become too serious to be solved using simple measures.
Finally, over-indebtedness can have indirect material consequences via non-material channels.
As a result of the psychological difficulties generated by their financial stress, borrowers may
experience a loss of income due to reduced workplace performance (Bagwell, 2001) and
higher workplace absenteeism (Jacobson et al., 1996; Kim et al., 2006). If microborrowers
suffer from their repayment pressure to the extent that they can no longer fulfil their daily
responsibilities, it may destroy their livelihood. Moreover, over-indebtedness can lead to a
loss of business opportunities if business partners withdraw from over-indebted individuals
when their reputation deteriorates (Besley and Coate, 1995; Smets and Bhre, 2004).
Overall, the material consequences of over-indebtedness include a wide range of additional
costs and deprivations for individuals who are already struggling with financial difficulties. In
the worst cases, over-indebtedness actually leads to further impoverishment or, as Gurin et
al. (2011) call it, pauperization through debt.
Social consequences
Societal perceptions regarding indebtedness vary from one culture to the next and over time.
According to research in France by Viaud and Roland-Lvy (2000), depending on the type,
debt is sometimes perceived as necessary but is often considered negative and dangerous.
Being in debt can have harmful effects on ones reputation and can be a source of social
differentiation and shame for borrowers. Roesch and Hlis (2007) find that in Southern
India, even in a microfinance environment in which credit is very common, people consider
debt to be negative and try hard to avoid it. Similarly, Gurin et al. (2011, p. 15) explain that
in Tamil Nadu the term "to be involved in debt" (kadangaran/kadangar) has pejorative moral
connotations, implying surrender, dependence and even servility. Whereas the image of
indebtedness in industrial societies has become much more positive, Dichter (2007) claims
that most microfinance markets today are similar to Western societies in the 19th century: the
mere fact of being in debt is charged with negative symbolism and creates an emotional
burden for debtors and a social stigma against them.
In certain cultures, the social stigma associated with debt may be even stronger for women.
According to the fieldwork of Gurin et al. (2011) in India, a single woman who borrows
from a man outside her family is normally forced to offer sexual favours in return. This being
widely known in society, female debt automatically carries the same stigma as prostitution.
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If debt as such carries a social cost, there are further social consequences of struggling with
loan repayment. They range from the burden of asking others for help (Canner and Luckett,
1991) and the pain of peer pressure in solidarity groups, to marital tensions and violence
towards women borrowers within households (Rahman, 1999). It is important to take such
intra-household dynamics into account in analysing credit decisions and their consequences
(Kirchler et al., 2008).
The strongest social mechanisms emerge in cases of delinquency and default. Historical
analysis shows that Western nations had a long history of turning defaulters into servants of
their creditors or imprisoning them (Muldrew, 2000; Burton, 2008). Today, there are reports
of coercive collection practices and even imprisonment in microfinance markets
(Montgomery, 1996; Hulme, 2007). MFIs deliberately employ social pressure as an
enforcement mechanism.6 This social pressure in group lending creates a social cost for
borrowers (Besley and Coate, 1995). Simple measures such as detaining borrowers at group
meetings to force a delinquent member to repay can have severe consequences for the
delinquent (Rahman, 1999). They lose business time, get into trouble with their spouses, or
are forced to leave their children unattended for too long. Another strong mechanism in group
lending is peer pressure. Peer pressure tends to begin with gossiping about delinquent group
members, insulting and humiliating and sometimes threatening them. Eventually peer
pressure may progress as far as physical violence and lead to the destruction of the defaulters
belongings (Montgomery, 1996; Smets and Bhre, 2004; Hulme, 2007).
Even outside solidarity groups, repayment is a question of respect and non-repayment a
source of shame and coercion (Gurin, 2006). The stigma of default can lower self-confidence
and affect ones social network and safety net (Smets and Bhre, 2004; Gurin et al., 2011).
These changes, in turn, may not only affect the delinquent borrower but may also erode the
social trust and mutual support that exists in the community, disturbing informal credit
relationships and social networks (Montgomery, 1996; Smets and Bhre, 2004; Banerjee and
Mullainathan, 2009; Morvant-Roux, 2009).
As suggested by Sen (1999), if capability deprivation is a form of poverty, it is not only the
material costs of over-indebtedness that lead to the further impoverishment of borrowers.
Instead, social consequences such as loss of respect, independence and freedom of choice, are
also mechanisms of impoverishment.
6 See Stearns (1991) for the explicit advice suggesting that MFIs use shame as an enforcement mechanism and make the
names of delinquent borrowers public.
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Psychological consequences
To the list of financial and social consequences of over-indebtedness among poor borrowers,
psychologists have added the subtle but very real dimension of psychological struggles
resulting from over-indebtedness. The mere fact of being in debt can already have
psychological costs for the borrower. These consequences tend to worsen when loans become
problem debt. According to empirical research by Brown (1952), who employs data from
Canada, household debt is correlated with the lower psychological well-being of the head of
household, the effect increasing for unsecured debt and for larger amounts of debt. A British
study by Bridges and Disney (2005) finds that debt is related to psychological stress and can
even cause of depression. Similarly, in the USA and Britain, debt is positively associated with
behaviours that indicate low self-control, including smoking, drinking and obesity (Drentea
and Lavrakas, 2000; Webley and Nyhus, 2001). In all three examples, the cause and effect
chains are ambiguous and are likely to be bidirectional; debt may reduce well-being, causing
depression and undermining self-control, which may feed back into higher indebtedness. In
microfinance markets, similar psychological effects may occur.
These psychological mechanisms are expected to be the underlying reasons for the abovementioned effect of debt and financial stress on workplace performance (Bagwell, 2001) and
absenteeism (Jacobson et al., 1996; Kim, Sorhaindo and Garman, 2006). Negative effects on
physical health can also accrue, probably resulting from a combination of psychological stress
with the reduction in self-control and fewer available funds for medical expenses (Drentea
and Lavrakas, 2000). In extreme cases, both in developed countries and in microfinance
settings in developing countries, these consequences of over-indebtedness have pushed
defaulters into crime or suicide (Sarthou-Lajus, 1997; Fouillet, 2006; Dichter, 2007; Dossey,
2007; Hulme, 2007; Burton, 2008).
There are a number of reasons why being debt is so detrimental to psychological well-being.
According to Sarthou-Lajus (1997), debt relationships are asymmetrical and create
perceptions of dependence and a lack of self-sufficiency in the borrower. Not being able to
repay may mean not being able to reconcile ones personal identity and may instil a feeling of
alienation and guilt in debtors. Dichter (2007) cites Nietsche in confirming that debtors
internalise a sense of guilt imposed by the debt, may feel unequal or unworthy, and may
even lose their sense of identity. However, the effect of debt varies from one borrower to the
next. Some manage to rationalise and mitigate their sense of shame, whereas others suffer
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from guilt and shame to the extent that it deteriorates their physical and mental health
(Gloukoviezoff, 2008).
Debt and repayment problems alone have serious negative consequences, but the effects are
exacerbated by collection practices. These practices can significantly increase the pressure
and shame that a borrower experiences. The abusive language that lenders sometimes use
with delinquent borrowers can have psychological effects. In Bangladesh and India, lenders
have even been reported to harass and threaten delinquent borrowers and to pressure them to
sell their clothes or even their children (Karnani, 2009). Similarly, solidarity groups can turn
against delinquent borrowers, especially in cases where MFIs apply collective sanctions to all
group members. This has the potential to create severe tensions in groups that exacerbate the
psychological effects of delinquency for the borrowers in trouble, and can lead to group
erosion, reductions in well-being, and further exclusion of the poorest (Marr, in press).
In summary, over-indebtedness can impact many spheres of life and may result in increased
poverty, social exclusion, psychological issues and physical illness among over-indebted
microborrowers. Some of these findings have been transferred to microfinance from a
developed market consumer finance context. Others are specific to particular microfinance
environments. Empirical research should confirm these effects in microfinance markets more
generally. For better comparability, such research should optimally be based on a universally
accepted definition of over-indebtedness or at least on a list of generally accepted indicators.
In the meantime, microfinance practitioners require heightened awareness that debt carries
risks and may have severe negative consequences for borrowers. This insight is not specific to
microfinance, nor does it negate the potential positive impact of microlending on borrowers
who are not over-indebted. However, cultivating an awareness of the downsides of debt may
help lenders to develop a more nuanced and careful approach in determining to whom they
extend what amount of credit and how they do so.
second-order effects, but its focus is on the key parties in lending contracts: borrowers and
lenders.
permanently reduce the income earning portfolio (Stearns, 1991). The negative effects of
over-indebtedness are partially offset by late fees and extended interest payments on given
loan amounts. Therefore, one might argue that MFIs may accept over-indebtedness as long as
the cost is mainly born by the clients and doesnt result in poor repayment performance. MFIs
may even choose to accept some delinquency in exchange for late fees or reduced monitoring
and selection costs. However, in most business models used by MFIs, these gains are not
sufficient to compensate for serious repayment problems in a portfolio. Risk management
remains essential for the success of MFIs, and over-indebtedness can ultimately threaten an
MFIs existence.
In addition to the direct financial effects of over-indebtedness on MFIs, over-indebtedness
represents a reputation risk in several respects.7 First, the reputation of the institutions with
customers is at risk. A critical level of defaults will erode repayment discipline among other
borrowers and may trigger strategic defaults. In the Bolivian crisis, debtors even formed
associations whose aim was to release borrowers from their repayment obligation (Gonzalez,
2008). More recent examples from Nicaragua and India indicate the occurrence of similar
phenomena there. Furthermore, there is a risk of adverse selection: good borrowers may leave
an institution with a tainted reputation, while risky borrowers stay. Depositors may withdraw
their savings when rumours of high default levels spread.
Second, over-indebtedness puts the public reputation of an MFI at risk, particularly because of
its social mission and the negative social consequences of over-indebtedness. The general
public might support defaulters, negative media coverage can threaten MFIs, and ultimately,
governments may close branches or institutions, require debt forgiveness, or impose more
restrictive regulations. The current events in Andra Pradesh in India provide a prominent
example. Reputation effects may also alienate donors and investors. All of these reputation
effects can also have repercussions for other MFIs in the market that do not have significant
problems with over-indebtedness. They could ultimately affect the microfinance industry as
such.
Over-indebtedness can also have internal reputation effects. According to Dichter (2007),
collecting bad debt may challenge the organizational identity of an MFI. When collecting bad
7 Measuring reputation risk is difficult for MFIs (and for companies or public institutions in general). However, by regularly
tracking customer satisfaction, encouraging client feedback for example with complaint mechanisms, engaging proactively
and constructively with regulators, competitors and industry associations, and monitoring the media, MFIs should be able to
roughly assess their reputation risk with regards to over-indebtedness.
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debt represents a significant share of the MFIs activities, it risks making a bad impression on
good borrowers and lowering staff morale. Especially in institutions with intrinsically
motivated staff who have chosen their work place based on its mission, daily interactions with
over-indebted clients may lower staff motivation and encourage attrition. Even among loan
officers who consider identification with a social mission a lower priority and see themselves
foremost as professional bankers , collecting bad debts can be difficult and tedious and offers
few rewards. Thus, the risk of low motivation and high staff turn-over remains.
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8 Also see Schicks and Rosenberg (2011) who review the empirical findings on over-indebtedness from a slightly different
angle.
9 According to this papers customer-protection oriented definition of over-indebtedness, delinquency and default are not
automatically equal to over-indebtedness, However, this literature review considers delinquency crises signs of overindebtedness as long as the existing research does not attribute the repayment problems to wilful default but rather to an
inability of borrowers to pay. On a detailed level, empirical findings may differ according to the definitions used, but for the
purposes of this review, research that is based on different definitions of over-indebtedness provides a sufficient indication of
the general prevalence of over-indebtedness in microfinance markets.
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implied a higher risk of over-indebtedness for their borrowers (Rhyne, 2001; Gonzlez-Vega
and Villafani-Ibarnegaray, 2011). Initially, both lenders and the regulator struggled with their
reactions to the new competitive situation. It became common for microborrowers to borrow
from multiple lenders in parallel, often exceeding their repayment capacity. Working with
data from Caja Los Andes, Vogelgesang (2003) finds significant delinquency in 2000, with
27 per cent of repayments being made too late. Arguing from the motivation of developing
stronger repayment incentives, Vogelgesang raised many of todays most recent
recommendations nearly ten years ago: she explains that the microfinance industry should
adapt to increasingly saturated markets by means of well thought-out regulations, functioning
credit bureaus, and risk-adjusted growth strategies and lending policies among MFIs. As
much as the crisis resulted from the complex interplay of a number of influence factors,
implicitly this early analysis suggests that as microfinance markets mature, over-indebtedness
and defaults are likely to occur more widely unless the industry adopts appropriate
preventative measures. It also shows that saturation is a relative phenomenon. On the national
level, there remained ample opportunity for microfinance in Bolivia, and the industry has
continued to grow and develop successfully since the 1999 crisis (Gonzlez-Vega and
Villafani-Ibarnegaray, 2011). However, the segments that were mainly targeted by MFIs and
consumer lenders at the time were already overbanked.
In addition to illustrating that microfinance markets can saturate and may do so faster than
expected, the Bolivian crisis revealed another fundamental message about over-indebtedness:
more clients may be over-indebted than are paying late. Applying a very broad definition of
over-indebtedness to Bolivian household survey data from 1997 to 2000, Gonzalez (2008)
identifies 85 per cent of all microborrowers in his sample as over-indebted. These include
borrowers who are strategically unwilling to repay and those who incur just one costly action
to repay which they had not anticipated at the time of taking the loan (e.g., working more than
under their ordinary schedule). While not everyone may agree that some extra effort or even
wilful default are signs of over-indebtedness (Gonzalez does not distinguish between
reasonable efforts and intolerable efforts by debtors), the most important contribution of the
study is that it recognises costly borrower actions: the strong repayment performance of
microfinance borrowers is often a result of hardship, as borrowers sometimes go to great
lengths to meet their repayment deadlines.
- 57 -
- 58 -
The greatest over-indebtedness crisis for the microfinance industry to date, especially given
its political consequences, took place in Andhra Pradesh in India. While these very recent
events have not yet been researched, Krishnaswamy and Ponce (2010) provide an analysis of
the mass defaults in the neighbouring state of Karnataka that preceded the larger crisis in
Andhra Pradesh. A preliminary report from the study offers strong evidence of the spillover
risks of microfinance over-indebtedness. It shows that significant repayment stress among a
share of MFI customers precipitated the mass defaults. 21 per cent of borrowers in default
towns reported their repayments as a burden compared to only 3 per cent in non-default
towns. For specific sacrifices such as skipping meals, the percentages are even higher and
display the same divide between crisis and non-crisis towns. However, not all of the
defaulters were over-indebted. More than 90 per cent of defaulters stated that they refused to
pay even though they would have had the means to do so. Instead, the over-indebtedness of
some triggered a ban on MFI repayments by religious organisations and thus the default of a
much larger group of borrowers. Once the defaults started to spread, second-level effects
made even more borrowers default because peers in their group or centre had defaulted as
well. Overall, the practitioner-oriented study by Krishnaswamy and Ponce (2010) attributes
this crisis to a mix of institutional factors such as weakened processes of lending institutions
(e.g., reductions on personal visits of borrowers and in monitoring of loan use), more
vulnerable borrowers, and the religious influence factors of a Muslim ban on repayment.
Although the exact ratio of over-indebted defaulters to opportunistic defaulters remains
unclear, Krishnaswamy and Ponce (2010) reinforce the existing evidence that there are critical
levels of over-indebtedness in certain microfinance markets. Their findings underline the
difference between over-indebtedness from a customer protection perspective and actual
repayment behaviour: not only can there be more borrowers struggling with their debt than
are actually defaulting, but there can also be more defaults than over-indebtedness.
In Bosnia and Herzegovina, another crisis country, a study from 2009 uses MFI and credit
bureau data for 1000 microborrowers and a smaller sample of personal interviews (Maurer
and Pytkowska, 2011). The study defines over-indebtedness as a net debt-service ratio10
above 100 per cent and finds that 17 per cent of microborrowers are over-indebted. Another
11 per cent are at risk of over-indebtedness with a net debt-to-income ratio of 75-100 per cent.
Over-indebtedness especially affects clients with lower incomes and those with several loans
10 Monthly debt instalments divided by monthly household income net of other expenses. This definition basically declares a
non-saver as over-indebted and does not determine if the current level of expenses is exaggerated, reasonable or precarious.
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outstanding. Nearly all borrowers have multiple loans simultaneously; almost half of
borrowers have five or more loans. 27 per cent of all microborrowers are already delinquent.
Delinquency only partially overlaps with over-indebtedness defined as a net debt-to-income
ratio above 100 per cent.
A third study is based on 2010/11 data on 1,200 microborrowers from four MFIs and three
banks in Kosovo (Pytkowska and Spannuth, 2012). A smaller sample of 778 clients was
personally interviewed. The situation is less alarming than in Bosnia but still concerning, 25
per cent of clients having more than one loan, with five as the maximum. 8.4 per cent of loans
are being paid more than 30 days late. Multiple borrowers are in arrears more frequently. Half
of the borrowers feel that loan repayments are a major burden. According to the definition of
over-indebtedness as a 100 per cent net debt-service ratio, 25 per cent of borrowers are
seriously over-indebted or at risk. Again, multiple borrowers are over-indebted more often.11
Using
impoverishment through debt as their definition of over-indebtedness, they find that all of
these households are over-indebted. For 19 per cent of them (4 per cent of the total sample),
this over-indebtedness is probably only transitory; for another 38 per cent (8 per cent of total
sample) there seemed no hope to escape debt in the near future, and the remaining 43 per cent
(9 per cent of total sample) had reached a stage of extreme dependence on others and were
unable to keep their repayments up.
A study by Grammling in Ghana in 2009 also finds signs of over-indebtedness in a non-crisis
market in Africa. The study employs various research methodologies that differ in their
11 Some of the studies reviewed in this section are oriented towards practitioners. Not all studies report statistical
significance.
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rigorousness to several samples of borrowers12 and indicates that at least half of microfinance
borrowers have more than one loan outstanding. Subjective perceptions of borrowers indicate
that respondents in local markets believe 46 per cent of borrowers in their area to face serious
repayment problems (19 per cent when interviewed in branches). Regarding their own
situation, 60 per cent of respondents say that their expenses temporarily exceeded their
incomes and 15 per cent admit a permanent income gap. The study considers borrowers to be
over-indebted if they are de-capitalising and if their business assets no longer exceed their
liabilities. The results indicate that 12 per cent of borrowers are over-indebted and that
another 16 per cent are at risk. Over-indebted borrowers according to this definition are more
likely to have multiple loans in parallel and are more likely to be delinquent. Overall, 14 per
cent of borrowers were delinquent.
While the results of the Ghana study provoke concerns about an approaching overindebtedness crisis, our recent work in Ghana indicates that the situation may have partially
improved (Schicks, 2012). The rates of multiple borrowing and delinquency in the 2010
sample among the countrys top MFIs are acceptable. At the same time, the personal
repayment situation of many borrowers remains challenging, and over-indebtedness according
to the sacrifice-based definition of this paper remains at 30%. Sound repayment records do
therefore not guarantee the absence of over-indebtedness.
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phenomenon in all lending markets. As the above studies on the downsides of social capital in
Asia or on microborrowers returns in Latin America suggest, microfinance markets might
exhibit the downsides of debt burdens even if a large supply gap persists.
The empirical research on microfinance over-indebtedness to date remains too limited to
determine how widespread the phenomenon is in microfinance markets in general. The
sample of studies reviewed in this chapter is skewed because most of them were conducted
because of ex-ante concerns about over-indebtedness in their respective markets. Further
research needs to analyse the extent of over-indebtedness in microfinance markets more
generally. Also, further research should seek to understand the dynamics that led to each of
the crises that the microfinance industry has experienced so far. Understanding the
management dynamics, competitive environments and complex dynamics of financial distress
that lead to crises in the past will help researchers to assess whether the 2008/09 financial
crisis represented the peak of over-indebtedness, whether over-indebtedness will increase as
the industry matures, or whether it peaks at a certain stage in a markets life cycle but
decreases as MFIs adapt to competition. Alternatively, instead of each market going through
the same cycle at a different time, the industry may collectively adapt to avoid future crises
and to improve the debt experiences of microborrowers in general.
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4. Conclusion
Globally, the microfinance industry still faces a large supply gap. However, in an increasing
number of sub-markets, situations of oversupply emerge or a mix of simultaneous oversupply
for certain customers and undersupply for others can develop. These cases of oversupply can
be detrimental to microfinance customers and lending institutions alike.
This chapter sheds light on the over-indebtedness risks inherent in microfinance lending.
Risks can be measured in terms of magnitude and likelihood. The first part of the chapter
therefore analyses the magnitude of the over-indebtedness problem. It reveals the broad
spectrum of potential consequences of over-indebtedness for borrowers and lending
institutions.
The chapter suggests that borrowers are likely to suffer from over-indebtedness on a material
level, experiencing further impoverishment in extreme cases. They may also experience social
consequences such as social stigma, peer pressure, domination in the household, shame and
coercion and the loss of their social networks. Based on Sens concept of development as
freedom (1999), this loss of respect and support, which leads to a reduction in the borrowers
personal freedom of choice and ability to determine his life, could also be interpreted as a
form of impoverishment. Finally, borrowers can experience psychological effects of overindebtedness, which range from alienation and guilt to psychological stress. These effects
may cause depression or deteriorate physical health. The consequences of over-indebtedness
thus extend far beyond the challenges to portfolio quality that are important from the
suppliers perspective of risk management. However, insofar as the findings are specific to
non-microfinance research settings, future research should confirm their transferability to
other cultures and to the microfinance context.
In a second step, this section identifies the consequences of over-indebtedness for lending
institutions. In addition to the obvious costs of loan loss provisions and write-offs, overindebtedness can result in increased operating costs, reductions in market size, loss of
customer satisfaction, postponed and lost income, and internal and external reputation effects.
There can also be spillover effects on other MFIs or even other stakeholders, possibly
endangering an entire market.
The second part of the chapter focuses on the likelihood of over-indebtedness in microfinance
markets and reviews what we know about the extent of over-indebtedness to date. It points
out that over-indebtedness may occur in maturing markets, at least on a sub-national level and
for a period of adaptation to the changes in the competitive environment. Bolivia and several
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regional markets in India seem to be such examples where, among other influence factors, the
saturation that came with the approaching maturity of certain market segments contributed to
the emergence of over-indebtedness among microborrowers. This section also shows that
crises of over-indebtedness may arise in connection with other economic crises in a country.
For example, this was probably the case in Bosnia, even if the global financial crisis is
unlikely to have been the only driver of this over-indebtedness wave. Finally, a certain level
of over-indebtedness may be prevalent in any debt market. For example, studies on non-crisis
markets in Tamil Nadu in India and in Ghana and research on the mechanisms of social
collateral in Bangladesh and Sri Lanka both indicate that some borrowers suffer from their
debt, even if there is no crisis in the market.
More research must be conducted if we are to understand how many microfinance markets are
currently affected by various levels of over-indebtedness and what the likely future trends are.
We need to understand if over-indebtedness is generally increasing, or has already peaked due
to the global financial crisis and the current stage of development of the industry, or whether
it will continue to increase and decrease in different regions in line with the development of
these microfinance markets. This analysis requires a systematic understanding of the causes of
over-indebtedness and the magnitude of the various factors that influence it, from market
structure to institutional environments and to economic cycles.13 Moreover, it is necessary to
disentangle the concepts of over-indebtedness and delinquency crises. The two can go hand in
hand but are not necessarily equivalent, as the empirical review in this paper shows. Customer
experiences with over-indebtedness may not always be related to portfolio problems for MFIs
if the borrowers who are struggling with too much debt are still repaying. Some customers
may also not repay even though they are not over-indebted - for example during crises and in
the case of spillover delinquency from clients who are over-indebted to those who are not.
In spite of the many unanswered questions and the urgent need for research on overindebtedness in microfinance, existing research clearly indicates that the actors in the
microfinance industry need to take the possibility of oversupply and the downsides of debt for
borrowers into account. Such awareness is likely to improve the products offered to
microfinance customers and may help to regulate the equilibrium of under- and oversupply.
13 See Schicks (in press) for a conceptual framework of the causes of over-indebtedness. Future research will need to
confirm to what extent the factors identified in consumer finance markets can be transferred to microfinance markets and
what the relative importance of the different influence factors is.
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Such awareness will also lead to the necessary experimentation with product features14 and to
the development of codes of conduct and customer protection mechanisms. An assessment of
the risk of over-indebtedness could become part of the evaluation of repayment capacity at the
borrower level, as well as of the governance of MFIs and the due diligence of investors on an
institutional and a sector level. The microfinance industry will continue to develop and, with
sufficient attention to the customer perspective and to over-indebtedness, will increasingly
extend the right products to the right people.
14 Hamp and Laureti (2011) analyse the possibility of enhancing product flexibility to better meet the needs of clients. They
show that flexibility can be combined with the necessary repayment incentives but in turn may increase cost.
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Chapter 3
The sacrifices of microborrowers in Ghana
A customer-protection perspective on measuring over-indebtedness
Jessica Schicks*
Centre for European Research in Microfinance (CERMi)
Solvay Brussels School of Economics and Management
Centre Emile Bernheim, Universit Libre de Bruxelles
This paper measures the over-indebtedness of microborrowers in Ghana. It defines overindebtedness 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 overindebted. 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 customerprotection 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 overindebtedness 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.
* The author is grateful to the Marie-Christine-Adam Foundation for its financial support. She would
like to thank the Independent Evaluation Department of KfW Entwicklungsbank and the ACCION
Center for Financial Inclusions Smart Campaign for their contribution to study design and for
financing the empirical research project. She is indebted to the Ghanaian microfinance institutions
that made this data collection possible by sharing both their data and access to their clients. Valuable
comments were provided by Prof. Oscar Bernal, Prof. Marek Hudon, Prof. Marc Labie, Prof. Silvia
Prina, Prof Khalid Sekkat, Prof. Francois Rycx and Prof. Ariane Szafarz. Further thanks go to the
seminar and conference participants at the 2nd European Research Conference in Microfinance, the
Academy of Management Annual Meeting, the Global Microcredit Summit, UPC Kinshasa, the
University of Namur and ULB. Finally two anonymous referees have provided helpful comments.
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1. Introduction
Microfinance the provision of financial services to the poor has been celebrated for its
potential to reduce poverty while simultaneously being financially sustainable or even
profitable. However, a number of crises in the industry have recently threatened both financial
sustainability and the industrys social reputation.
There are concerns about microfinance institutions drifting away from their original social
mission (Labie, 2007; Mersland, Strm, 2010; Armendriz, Szafarz, 2011). Increasingly
rigorous impact studies are questioning the original impact and poverty alleviation claims of
microfinance (Banerjee et al., 2009; Karlan, Zinman, 2010). Some microfinance markets have
clearly overheated (Chen, Rasmussen, 2010), with Andra Pradesh in India representing the
most blatant example. After a decade of focusing on commercialization, the microfinance
industry is currently undergoing a turn-around: client-focused products and services have
moved back into the spotlight and customer protection has become the industrys primary
concern. Given the risks to the social impact of microfinance as well as to institutional
sustainability, protecting customers against over-indebtedness has become the top priority.
However, there is no data on the extent of over-indebtedness. Although some national or subnational markets in India, Bosnia, Pakistan, Nicaragua and Morocco (and earlier, Bolivia)
have clearly suffered from client over-indebtedness, there remains immense uncertainty
regarding the extent of over-indebtedness in global microfinance. Moreover, there is no
accepted indicator to measure over-indebtedness. While previous over-indebtedness indicators
come mainly from the risk management perspective of avoiding delinquency, for purposes of
customer protection the industry needs to develop indicators that recognize debt problems
before customers become delinquent, but rather when they struggle with their debt to an
unacceptable extent.
Therefore, this paper deploys a definition of over-indebtedness that is appropriate for
customer protection purposes: A microfinance customer is over-indebted if he/she is
continuously struggling to meet repayment deadlines and has to make unduly high sacrifices
related to his/her loan obligations that have more than transitory effects.1 This is the first
academic study to measure over-indebtedness from the customer protection perspective, i.e. a
client welfare perspective rather than an economic perspective. It pin-points the debt struggles
of microborrowers in an urban African setting, and it reveals that even in markets with good
1 See Schicks (in press)for the details of this definition and for how to measure it in practice. Also see figure 1 in section 2.
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repayment performance, microborrowers might suffer from excessive struggles to repay their
debt.
Additionally, this study evaluates the relationship between existing risk management
indicators of over-indebtedness and over-indebtedness based on customer sacrifices. It
evaluates the measurements of over-indebtedness that are commonly used in the geographical
and historical context of consumer finance in developed countries (Betti et al., 2007;
Vandone, 2009), examining the relationship of delinquency, debt amounts and the debt-toincome ratio (i.e. monthly repayment obligations over monthly income) to excessive
sacrifices. It also considers indicators specifically suggested for microfinance environments
(Krishnaswamy, 2007; Roesch, Hlis, 2007; Gurin et al., 2009; Morvant-Roux, 2009),
exploring the correlation between cross-borrowing and undue sacrifices.
The research is based on an extensive customer survey of 531 microborrowers in the
Ghanaian microfinance market of Accra. The respondents represent a random sample of
microdebtors from five of Ghanas most important microfinance institutions (MFIs). The
survey includes demographic and loan data, as well as detailed information on the experience
of borrowers with their loans. In addition, the participating MFIs have contributed loan
information from their MIS. 10 qualitative interviews with over-indebted borrowers
contribute background information on borrowers perceptions and local circumstances that
helped calibrate the researchers approach to analysis.
This is the first academicstudy that quantifies over-indebtedness in Ghana. It reveals that 30%
of the sampled microborrowers in Ghana experience unacceptable sacrifices related to their
debt. The paper develops a model of over-indebtedness that correctly predicts 72.6% of the
cases.2 On the respondent level, the best risk management indicators of extreme borrower
sacrifices are delinquency and the debt-to-income ratio. On an aggregate level, a debt-toincome ratio of 50% is the best indicator predicting the level of over-indebtedness in the
sample. However, as expected, the predictive power of even the best indicators remains
limited. Because there are many borrowers that make unacceptable sacrifices to avoid
delinquency, debt problems do not always manifest in arrears. A delinquency indicator alone
2 In this paper, the term prediction refers to the ability of easily available indicators to foretell, i.e., predict, how much
over-indebtedness one would find in a sample if the survey data was available that is required to measure over-indebtedness
precisely. The paper takes the perspective of MFIs and regulators that have access to data as commonly provided by the
lenders MIS. Prediction does not refer to an inter-temporal prediction of trends but to the prediction of the results a more
precise measurement would deliver.
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2. Predicting over-indebtedness
This paper responds to the need to measure over-indebtedness from a customer protection
perspective. It acknowledges that client protection must understand over-indebtedness in
terms of harm to borrowers. We cannot reduce over-indebtedness to issues of repayment
performance and thus harm to lending institutions. There is a need for an interdisciplinary
rather than purely economic approach.
However, measuring borrower sacrifices requires survey work. If the customer protection and
thus client welfare perspective and the risk management and thus economic perspective
correspond sufficiently, then risk management indicators that are easier to track for MFIs and
policy makers can act as predictors of the sacrifice-based over-indebtedness concept. If the
two perspectives are substantially different, this entails policy implications for regulators as
well as investors and MFIs that want to avoid harm to clients but have so far looked at overindebtedness through the lens of risk management indicators. In the latter case, investors and
MFIs have not been measuring what they are trying to manage.
Although over-indebtedness is context specific, as borrower sacrifices are a form of debt
problems we expect the common indicators of debt problems in the literature to at least
partially predict over-indebtedness in terms of borrower sacrifices. The most basic indicator
of debt problems in the literature is the amount of debt a borrower holds. Sharma, Zeller
(1997) or Godquin (2004) in Bangladesh and Vogelgesang (2003) in Bolivia all find larger
loans per microborrower positively related to repayment irregularities. Betti et al. (2007) list
the stock of debt per capita as one of the main indicators of consumer over-indebtedness in
developed countries. Moreover, a study by Brown et al. (2005) indicates that in Britain higher
amounts of debt relate negatively to an individuals level of psychological well-being. This
finding could also apply to microfinance environments, and psychological well-being is most
likely related to borrower sacrifices. Hypothesis 1 therefore postulates a relationship between
absolute debt amounts and over-indebtedness. As the total burden of the loan is more likely to
have caused sacrifices than the remaining loan balance at the time of the interview (which
might have taken place at the end of the repayment schedule), we measure debt amounts in
terms of the original loan size at disbursement.3 We include informal repayment obligations.
H1: Larger absolute debt amounts are positively related to over-indebtedness.
3 Disbursement information is also more correct and complete as many borrowers do not know the current amount of their
outstanding debt.
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Depending on their financial and household situation, borrowers vary significantly in their
capacity to handle debt. The indicators of absolute debt amounts do not take these differences
into account. It is therefore common in the consumer finance literature to use the ratio of a
borrowers debt burden relative to his or her financial capacity as an indicator of debt and
repayment problems. The most common measure is the debt-to-income ration, i.e.
In microfinance, where credit bureaus are rare and MFIs often do not know if their loan
applicants already have other outstanding loans, scholars assume that over-indebtedness is
related to the number of loans a borrower holds (Matin, 1997; Paxton et al., 2000; Chaudhury,
Matin, 2002; Vogelgesang, 2003; McIntosh, Wydick, 2005). The phenomenon of one
borrower holding several debt contracts at the same time is called multiple borrowing.
Over-indebtedness is especially likely to be linked to cases where borrowers exploit
information asymmetries to borrow from several lenders in parallel, rather than to cases of
one MFI extending e.g. an investment loan and a working capital loan to the same person.
While scholars do not always distinguish between the two, the phenomenon of one person
accumulating debt from several institutions at the same time is more precisely termed crossborrowing.
H3: Cross-borrowing is positively related to over-indebtedness.
4 Another measure of relative debt burden would be the debt-to-asset ratio. However, this measure is less relevant in a lowasset environment such as microfinance. Also, assets are mostly illiquid and do not facilitate repayment. We have tested the
indicator in our main model and while it does not change the other findings the debt-to-asset ratio itself is not significant.
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Finally, delinquency is a common indicator of debt problems, the fact of repaying a loan later
than it is due or in the worst case not repaying all or part of it at all (Vogelgesang, 2003;
Godquin, 2004; Kappel et al., 2010). Delinquency or default represent the usual risk
management definition of over-indebtedness, and a standard criterion of over-indebtedness in
regulatory frameworks. Given that the sacrifices borrowers make due to difficulties in
meeting their repayment obligations are not always sufficient to ensure repayment, the
sacrifices are likely related to actual delinquency evident in the portfolio quality of MFIs.
Delinquency represents a late stage manifestation of debt problems.
H4: Delinquency is positively related to over-indebtedness.
Each of the above indicators has its challenges. Absolute amounts do not consider the
variations in borrowers repayment capacity. The ratios of debt burden to income hardly take
into account the wide range of individual circumstances that determine the share of income a
borrower can free up for repayment purposes. Cross-borrowing may not necessarily be a sign
of over-indebtedness but also result e.g., from the usual liquidity management practices of the
poor or from product limitations and credit rationing at MFIs (Krishnaswamy, 2007;
Gonzalez, 2008; Gurin et al., 2011). The relationship of cross-borrowing to debt problems
might therefore only be significant at high (and thus unhealthy) levels of cross-borrowing.
Delinquency can result from fraudulent behavior rather than from over-indebtedness. At the
same time, over-indebted borrowers might incur significant suffering in repaying their loans
and, as a result of these struggles, might manage to avoid delinquency. Section 4 reveals that
many more customers suffer in making their loan repayments than actually pay late.
So far, the above indicators have mostly been used and tested from a risk management
perspective. They have not yet been tested as predictors of over-indebtedness in the form of
borrower sacrifices. As a result, this paper expects the quality of risk management indicators
in approximating over-indebtedness to be limited. In fact, the literature that views debt
problems through the lens of repayment performance is likely to have created an over-reliance
on the indicators tested in this paper. These indicators might very well explain part of the
phenomenon of borrower struggles, but they have probably underrepresented the dimension
of customer protection in the favor of risk management.
H5: The risk-management indicators of over-indebtedness tested in H1 to H4 have a low
predictive power of over-indebtedness defined through a customer protection lens of
borrower sacrifices.
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The following sections will use our unique data set from Ghana to empirically test the above
hypotheses. They will reveal to what extent the existing risk management indicators are
sufficient to represent the customer protection perspective of avoiding unacceptable levels of
sacrifice among microborrowers.
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5 www.mixmarket.org. This website provides self-reports of limited liability but, given the lack of more reliable data sources,
is sufficient for the purposes of this sector overview. Part of the decline in recent years might be due to a reduction of MFIs
reporting their data to the MIX Market.
6 Rough estimates based on MIX market and CIA World Fact Book data. They do not take into account the coverage of a
population by the formal financial sector, nor adjust for the borrower overlap between reporting institutions.
7 Data from Ghana and Nigeria are from 2010. For Botswana, Kenya and Uganda data is from 2009, and for Namibia from
2007.
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the market.8 They are following careful and restrictive lending practices, routinely reducing
loan sizes compared to applications. Moreover, they mostly stick to the old paradigm of
(officially) lending for productive use only. As a result, our sample can be considered roughly
representative of a normal microfinance market that is experiencing competition but is not in
crisis at the moment.
In cooperation with the Smart Campaign hosted by ACCION International, a global effort to
unite microfinance leaders around a common set of client protection principles, and with the
Independent Evaluation Department of KfW Entwicklungsbank, the German development
bank, we have conducted an in-depth survey among 531 microdebtors. Borrowers were
sampled from five of Ghanas leading microfinance institutions: ProCredit Ghana,
Opportunity International Ghana, Sinapi Aba Trust, EB-ACCION and Advans Ghana. Among
all the MFIs reporting to the MIX Market in 2010, these MFIs account for 83% of
microborrowers in Ghana (43% in 2009) and for 95% of Ghanas gross microloan portfolio
(43% in 2009). The respondents represent a random sample from the institutions
microborrowers in Accra, the heart of Ghanas microfinance industry.9 To balance their
expected lower response rate and to ensure sufficient data points and variation of customers in
serious problems with their loans, we oversampled delinquent customers.10 We used sample
weights to correct for this bias and for a variation in response rates between lending
institutions, delinquency status, and lending methodology. There were no corrections required
for disparities in gender. Table 1 provides an overview of the sample characteristics.11 To
encourage honest replies, interviews were conducted anonymously at a site of the
respondents convenience, independent of the MFIs.
8 Given the high quality of the lending institutions that contributed to our sample, we consider the amount of overindebtedness identified by this study as a lower estimate. Customers of weaker MFIs are likely to be selected less carefully
and to experience more multiple borrowing, delinquency and sacrifices.
9 To apply a common threshold for micro- and SME-borrowers across all MFIs, we consider as microborrowers all
customers with active personal loans below 5000 Ghana Cedis (GH; 1 GH=0.7 USD). For most MFIs in the sample, all of
their borrowers fall into this category. In the sample, 87% of the disbursed loan amounts are less than 2000 GH.
10 With some MFIs, over-sampling for groups implied over-sampling delinquent groups rather than individuals.
11 As the research methodology relies on self-reports, the statistical data regarding the borrowers economic situation is
subject to limitations. Besides questions of honesty, the respondents often experience difficulty estimating the monetary
value of their assets and their average incomes, given the volatility of such incomes. However, on average there is no reason
to assume a general upward or downward bias of the estimates and we consider the data sufficiently reliable for our level of
analysis. We have analyzed the key variables such as debt-to-income ratio, total assets and debt outstanding for outliers and
there are no outliers to be excluded.
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12 Once in past year, 1-3 times in past year, >3 times but not often, or Frequently in past year. For a respondent
cutting down on their food at several points for a week at a time, instead of every individual day, each week would count as
one occurrence.
13 Easily acceptable, Only just acceptable, Not really acceptable, or Not acceptable. In this paper we summarize the
first two categories under acceptable and the latter two under unacceptable or not acceptable.
14 The measurement only counts unacceptable sacrifices and thus does not include assets sales or loan swaps that borrowers
simply employ as liquidity management tools. Nevertheless, the calibration of this measurement might have to be different in
a different cultural context.
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- 82 -
15 In addition, triangulating the survey data on delinquency and multiple borrowing with the objective information from the
participating MFIs management information systems (MIS) indicates that borrowers self-reports were mostly honest.
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crisis markets. From a customer protection perspective, over-indebtedness also exists in noncrisis environments such as Ghana.
These findings relate to but do not measure the impact of microcredit. The borrowers report
only sacrifices that they perceive as related to their repayment obligations. However, this does
not automatically imply causality. It is normal for cash demands to represent a difficulty for
the poor, yet loan impact may still be positive.16
<Insert Figure 2 around here>
Analyzing the sacrifices of microborrowers in more detail, we find that, collectively and on
average, microborrowers act according to the assumptions of rational behavior: most
frequently, they make those sacrifices that they experience as the least costly. Figure 2
displays this almost linear relationship between the prevalence of the various sacrifices among
microborrowers and the perceived acceptability of sacrifices. On the X-axis sacrifices appear
ranked by their prevalence among all respondents in the sample. The most prevalent sacrifices
are those that only a few of those borrowers who experience the respective sacrifices perceive
as unacceptable. The more sacrifices seem unacceptable to the average borrower, the less
common they are; this is most likely because borrowers first prefer to employ easier coping
strategies first and avoid the hardest sacrifices by all means.
Table 3 presents the sacrifices of microborrowers in more detail. The sacrifices are again
ranked by their prevalence in the total sample. This reveals the distinction of four categories
of sacrifices grouped according to their prevalence and acceptability. Borrowers most
frequently work more than usual (61% of total sample), postpone important expenses (45%)
and, if available, deplete their savings (34%). Only a little more than a third of the borrowers
who make these sacrifices consider them unacceptable. These are probably the more severe
cases of these sacrifices, such as working at times of serious illness or in dangerous
environments or where fundamental expenses for housing and daily survival cannot be met.
Apart from these exceptions the borrowers are very willing to sacrifice for example some free
time or some consumption for the purpose of repaying their loans. Thus, these minor
sacrifices, when acceptable, represent adequate coping strategies and do not constitute signs
of over-indebtedness. The sacrifice-based definition of over-indebtedness only takes
unacceptable and an more than transitory sacrifices into account.
16 For details on the relationship between over-indebtedness and negative loan impact see Schicks (in press).
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With the exception of the depletion of savings (29%), sacrifices in this first category usually
become frequent experiences to those that go through them once. They represent the typical
coping strategies that borrowers employ on a regular basis (71% for working more and 60%
for postponing expenses). The frequency of depleting savings is probably simply limited by
the lack of savings once depleted.
<Insert Table 3 around here>
The second category of sacrifices consists of those sacrifices that each affect between 10 and
20% of borrowers and that are unacceptable to most respondents. Microborrowers reduce
their food (18%), rely on friends or family to help them out (13%) and suffer from
psychological stress (10%). Between 70 and 80% of borrowers who experience these
sacrifices rate them as unacceptable. Nevertheless, once this stage of debt problems is
attained, food reductions (62%) and psychological stress (52%) tend to become repeated
experiences. The frequency of relying on external support (21%) is most likely limited by the
supports availability. Gurin et al. (2011) note the high cost of family support in India, where
kin debts form part of the most severe debts. The low acceptability of the sacrifice of relying
on support by friends and family in Ghana confirms the findings of Gurin et al. in the
Ghanaian cultural context.
A third category of sacrifices is much less prevalent, but is unacceptable to almost all
borrowers (80%-90%) if it occurs. These sacrifices are reductions in education, e.g., removing
children from school (5% of borrowers), trying to keep up repayments on one loan by taking
on a new debt obligation (4%), and selling or pawning assets (4%). Once this stage of
sacrifice is reached, for some but not for the majority of borrowers, loan recycling or assets
sales become repeated experiences (49% and 38% respectively). Probably, single experiences
of these sacrifices already facilitate several periods of repayment at once. The cuts to
education rarely occur more than three times (13%).
Finally, the most severe experiences from the perspective of borrowers are experiences of
threats or harassment (3% of borrowers), of shame or insult (3%) and of asset seizures (1%).
These sacrifices are unacceptable to all borrowers who have experienced them. This
subjective evaluation of the severity of sacrifices indicates that a borrowers reputation and
personal honor might be more important than monetary privation and material sacrifices. The
numbers of observations for these items are too low to make qualified statements about their
repetition, but they tend to occur less frequently than most other sacrifices. A repeated seizure
happened in only a single case.
- 85 -
The data also allows us to analyze how the borrowing experiences of women differ from the
sacrifices of men (table 4), and how group lending customers differ from borrowers in the
individual lending methodology (table 5). The sample size and the high number of sacrifices
do not always allow for statistically significant findings. However, based on a chi-square
contingency analysis of gender differences, Cramers-V (Backhaus et al., 2011) as a measure
of association between sacrifices and gender is statistically significant with regards to loan
recycling (8% of male borrowers experiences this sacrifice versus 3% of female borrowers),
the selling or pawning assets (7% versus 3%), and the depletion of savings (39% versus 31%).
Men resort to these solutions more often than women, which might be due to better
economic/borrowing opportunities and to mens greater control of assets. Additionally, fewer
women report experiences of threats and harassment (7% male versus 2% female). However,
this difference in reporting might simply derive from womens different perception of their
rights towards loan officers. In all cases, Cramers-V is approximately 0.1, which indicates a
relevant but rather low influence of gender on the prevalence of these sacrifices.
<Insert Table 4 around here>
Research on the effects and incentives of peer pressure suggests that group customers make
high sacrifices to avoid being responsible for the delinquency of their group. In our sample,
compared to individual borrowers, group customers are significantly more prone to depleting
their savings (41% versus 28%), relying on the support of friends and family (18% versus
7%), and suffering psychological stress (11% versus 7%). They also sell or pawn their assets
more often (7% versus 3%). Cramers-V is low to moderate and the strongest influence of the
lending methodology exists with regards to support by family and friends (-0.17). While the
enhanced prevalence of psychological stress rather points to the downsides of the group
lending methodology of enhancing pressure on borrowers (rather as an incentive mechanism
than as an advantage to customers), the higher reliance of group borrowers on support by
friends and family might result inter alia from the better availability of support within the
groups. To the extent that borrowers assess this support as acceptable it might thus partially
be a positive effect of group lending.
<Insert Table 5 around here>
In sum, this section has revealed insights into the borrowing experiences of microfinance
borrowers in urban Ghana. It identifies which sacrifices are most prevalent among
microborrowers, which are most severe from the subjective perspective of the debtors and
how frequently the average borrower experiences the various sacrifices. The majority of
- 86 -
microborrowers work harder than usual to repay their loans. Many postpone important
expenses. They usually consider these efforts absolutely acceptable. However, there are also
borrowers who experience more severe sacrifices, from going hungry over taking their
children out of school to selling their assets. The most painful and least frequent experiences
are those of threats or harassment, shame or insults, and asset seizures. A few sacrifices differ
in prevalence by gender and by lending methodology. Women reduce their food more often,
while men more often result to external mechanisms such as asset sales and repeat borrowing.
Group customers deplete their savings more often, suffer from psychological stress and rely
on the help of friends or family.
The section finds that, from a customer protection perspective, 30% of borrowers in our urban
Ghanaian sample are over-indebted. They struggle to repay their loans on time, and they make
sacrifices that they experience as unacceptable, and that can be considered of a more than
transitory nature. The sample consists of borrowers from five of Ghanas largest and most
professional MFIs. The over-indebtedness in our sample is therefore likely to represent a
lower bound estimate for the total microfinance market of Accra.
- 87 -
- 88 -
(1)
- 89 -
power of the models remains low with Nagelkerkes R at approximately 10%. The sensitivity
analysis below sheds more light on the schism between a highly significant correlation of
predictors to over-indebtedness but low predictive power.
Robustness checks and further analyses
Additionally, we analyze the differences between male and female borrowers on the one hand
and individual and group borrowers on the other. Table 7 indicates that both the gender and
the lending methodology display differences. While high-level results remain the same,
delinquency is a better predictor for female borrowers than for men, and the debt-to-income
ratio is a better predictor for male borrowers. Also, for male borrowers the amount of debt
disbursed becomes significant. According to the data in section 4, men resort to external
sacrifices that require control over assets more often and may thus have more options to avoid
delinquency. In line with these findings, the link to economic indicators such as debt amounts
and income may be more direct for men. Column 2 indicates similar differences between
group and individual borrowers. Again, the findings of our main model remain robust.
However, the debt-to-income ratio and total amount of debt are predictors only for group
customers and delinquency is a significant predictor only for individual borrowers. The link
between delinquency and over-indebtedness in groups might be weakened by the
intermediation of group members. In cases of group solidarity or forced joint liability, the
contributions of other group members might avoid formal arrears when a borrower is in
trouble but the pressure on the borrower to reimburse his peers remains and can trigger
additional sacrifices. Future research should further examine the differences identified in this
section.
<insert table 7 about here>
As there are no standardized measurements for delinquency, we test the robustness of our
findings to several alternative measurements for delinquency (see table 8). The most obvious
delinquency measurement and the one we use in our main model, is that a borrower is
currently in arrears: At the time of the survey he/she is at least one day late with at least one
installment on an outstanding debt. We measure this indicator as a binary variable. However,
the sacrifices a borrower reports might have been related to an instant of delinquency in the
recent past. Therefore we also test a measure of delinquency over time rather than a spot
indicator at the time of the interviews: We introduce an alternative binary variable if the
- 90 -
respondent has been delinquent at any point over the course of their current loans. Finally, we
test intensity measures of delinquency, i.e., being in arrears for a longer time or having been
delinquent more frequently. As the latest stage and most severe indicator, we test default,
approximated by experiences of assets seizures or forgiven loans.18
<insert table 8 about here>
Table 9 displays the effects of varying the measure of delinquency. In all models, the debt-toincome ratio and delinquency remain highly significant predictors of over-indebtedness.
Cross-borrowing remains without effect. The total amount of debt remains insignificant with
the exception of the model that uses default as the most severe delinquency measurement.
Moreover, in column 2 of table 9 we cluster standard errors by lending institutions. Clustering
standard errors has no impact on our findings and all results remain robust as discussed above.
<insert table 9 about here>
Finally, to test the sensitivity of the above analysis to the dependent variable overindebtedness, we run an ordinary least square regression of our predictors on a threshold-free
score of sacrifices as a robustness check (2).
Si = 0 + 1 DAi + 2 DIRi + 3 CBi + 4 IRi + 5 Zi + 6 Xi + ui
(2)
where Si is a discrete score of sacrifices from zero to 71, the score increasing with each
additional sacrifice, with more frequent repetition of sacrifices, and with the subjective
severity of sacrifices. The score of sacrifices makes it trivial to interpret coefficients because
an increase of the score by one is a meaningless measurement to the reader. However, it
avoids any potential arbitrariness of the over-indebtedness threshold and therefore provides a
useful robustness check.
<insert table 10 about here>
Table 10 confirms that the debt-to-income ratio and delinquency are consistently highly
significant across all models. Additionally, the total amount of debt disbursed to a borrower is
now significant even in the full model although at a low level of confidence, and not in the
parsimonious model. Interestingly, its coefficient is negative, which might indicate sound
18 Information for delinquency >30 days is not available but would be situated between the 1 week late and default indicator.
- 91 -
lending decisions at MFIs: larger absolute amounts are lent to those customers who have a
higher capacity to repay and who will struggle less with installments. There is a need for
further research to analyze the differences in the logit and OLS models with regards to debt
amounts. Cross-borrowing remains insignificant and the predictive power of the model
remains low.
Sensitivity analysis
Given that delinquency and the debt-to-income ratio have proven the best predictors of overindebtedness among the tested indicators, even if their predictive power remains limited, we
analyze the use of these indicators in practice. The next paragraphs analyze the number of
cases each of these predictors individually can predict correctly. As all measurements of
delinquency in table 9 provided similar results, we test the sensitivity of results to the
alternative indicators. Because delinquency in the sample is rather low, the various indicators
of delinquency recognize only a small share of over-indebtedness even if almost all
delinquents and defaulters are rightly classified as over-indebted. Table 11 demonstrates that
none of the measurements recognizes more than 21% over-indebtedness in the sample; in fact
most indicators recognize significantly less than 10%. Most measurements recognize only 1
to 5% of the over-indebted respondents correctly (maximum 9%). The correct prediction of
approximately 70% of cases in the full sample is thus due to the large group of borrowers who
are not over-indebted and to the high probability that a delinquent borrower is over-indebted.
The majority of the over-indebted in contrast are not delinquent and the indicator does not
recognize them.
<insert table 11 about here>
For the debt-to-income ratio, the threshold is more flexible. Table 12 indicates that a 10%
threshold of the debt-to-income ratio recognizes a third of the over-indebted. However,
because it does so by classifying a total of 89% of all borrowers as over-indebted, the
threshold is not useful. The higher the threshold gets, the lower the share of the over-indebted
that is correctly identified. At a threshold of 60%, only 7% of borrowers are still correctly
classified as over-indebted, compared to approximately 30% that should be in this category.
The best indicator to predict the overall level of over-indebtedness in the sample is a debt-toincome ratio of 50%. Considering every borrower with a higher than 50% debt-to-income
ratio to be over-indebted approximates the level of over-indebtedness in the sample rather
- 92 -
well at 28%. Nevertheless, in recognizing only 11% of those borrowers that are over-indebted
correctly, this indicator does not work well to categorize individuals. Given the low
effectiveness on the individual level, this threshold might not hold in other markets or future
situations, even on the over-all sample level. More research is required to determine if a 50%
debt-to-income ratio holds as a policy recommendation for regulators to determine the
average level of over-indebtedness in a market.
<insert table 12 about here>
The empirical results in this section indicate that the debt-to-income ratio and delinquency are
highly significant predictors of over-indebtedness from the customer protection point of view.
In contrast, a borrowers number of loans outstanding are not significant. Neither is the
amount of debt disbursed to a borrower a consistently significant predictor of overindebtedness. Based on the debt-to-income ratio, delinquency, and several controls on the
borrower and institutional level we can correctly predict the over-indebtedness status of
72.6% of respondents. However, good prediction relies mainly on the large group of
borrowers that are not over-indebted. It is improved by the small group of over-indebted
borrowers who are already delinquent. Beyond that, on an individual level, neither the debtto-income ratio nor delinquency are good measurements to identify who the over-indebted
borrowers in the sample are. On an aggregate level, a debt-to-income ratio of 50% recognizes
the correct level of over-indebtedness in the population. This indicator requires further
research. Further research is also required into the gender differences and the differences
between group and individual borrowers.
- 93 -
6. Conclusion
Over-indebtedness is one of the major risks for the microfinance industry but there is hardly
any research on its extent in microfinance markets, nor are there accepted indicators for
measuring it. This paper has measured the over-indebtedness of microborrowers in urban
Ghana, defining over-indebtedness from a perspective of customer protection, i.e., as an
unacceptable level of sacrifices that borrowers experience related to their debt. It revealed
that, in Accra, 30% of the borrowers of Ghanas top five microlenders are over-indebted, i.e.,
they suffer from their debt at a level that they consider unacceptable and that has more than
just transitory effects. The study provided unprecedented insights into the sacrifices of these
borrowers. It highlighted the most common and the most frequent sacrifices and it identified
which sacrifices are the most difficult for borrowers to bear.
Additionally, the paper tested four potential predictors of this perspective on overindebtedness, borrowing from the microfinance and high-income country consumer finance
literature on debt problems. We consistently found that the debt-to-income ratio (the monthly
repayment burden over income) and delinquency are highly significant predictors of sacrificebased over-indebtedness (H2 and H4 confirmed). The amount of disbursed debt is not
consistently significant, and in our robustness check debt disbursed has a negative coefficient,
possibly as a sign of the MFIs sound lending decisions (H1 not confirmed). Cross-borrowing
is not related to our measure of over-indebtedness (no confirmation for H3). Note that
multiple and cross-borrowing are not significant predictors of delinquency either. It is
possible that the relationship only comes into effect at extreme levels of multiple borrowing
as in Maurer, Pytkowska (2011).
Our model correctly predicts 72.6% of cases. Nevertheless, we find hypothesis 5 confirmed
that even those predictors that are highly significant at a one percent level recognize only a
low share of over-indebtedness through the customer protection lens. A debt-to-income ratio
of 50% is the best predictor of the aggregate level of over-indebtedness in a market. However,
on an individual respondent level, it recognizes only 11% of the borrowers that are overindebted correctly. Similarly, while almost all borrowers that are delinquent are equally
suffering from severe sacrifices, the reverse does not hold true: there are many struggling
borrowers who have not (yet) reached the stage of delinquency. Due to extensive sacrifice,
many might never get to that stage. As late stage of over-indebtedness, delinquency is
strongly related but not very useful for prognosis. This analysis refutes the common argument
- 94 -
that good repayment statistics prove the benefits of microloans to poor borrowers and that
they defy allegations of over-indebtedness in the sense of severe borrower sacrifices.
Over-indebtedness harms microborrowers before it affects the portfolio quality of lending
institutions. The current focus of over-indebtedness research on risk management indicators is
therefore inappropriate for customer protection purposes. The client welfare perspective and
the economic perspective of over-indebtedness are closely related but clearly separate. The
microfinance methodology, praised for reducing the risk of lending to the poor and thus
making them bankable, has not made risk disappear; it has shifted it from the portfolios of
institutions to their vulnerable customers. To act on its claims of protecting clients, the
microfinance industry needs to directly take the client welfare perspective, the customers
point of view into account.
These findings result in policy recommendations for all actors involved in client protectionrelated activities, from MFIs to investors to regulators.19 The most basic and most important
recommendation refers to the actors frame of attention: risk management and portfolio
quality measures do not represent an appropriate frame of attention for customer protection
purposes. In the future, actors with a customer protection responsibility should measure overindebtedness in terms of borrower experiences, even if that will require survey work. Future
research should continue to identify predictors of the customer protection perspective on overindebtedness that are less costly to measure. According to the Attention Based View (Ocasio,
1997), managements mere awareness of this schism is likely to have a significant impact on
the everyday lives of customers on the ground. Examples of possible actions include a
reduction in inappropriate marketing activities with regards to debt, and a relaxation of the
zero-tolerance policy, thus increasing the flexibility in restructuring loans for borrowers
undergoing honest temporary difficulties. Similarly, awareness of over-indebtedness risks
might entail more careful lending decisions in cases where a borrower is likely to repay the
lender (and thus contribute to his profit) but can most likely do so only at an unacceptable
personal cost.
To balance the pressures for high disbursements and harsh collections, MFIs may introduce a
customer satisfaction element to loan officer incentives. Loan officers should be incentivized
not to hide borrowers problems, but to reveal them before they reach the stage of
19 As many of the recommendations refer to the behaviour of MFIs and thus to the supply side, a thourough analysis of
supply-side factors should accompany our analysis on the demand side to develop the measures in more detail and assess
their feasibility.
- 95 -
delinquency. For details on the requirements of such incentives in terms of monitoring and
hiring policies, see Agier, Szafarz (2011), who recommend similar incentives to counter
borrower discrimination by loan officers. Consistent with the South African National Credit
Act, by which lenders cannot collect on loans if they have not conducted an affordability
assessment and their loan falls in the category of reckless lending, MFIs could introduce expost bonus reductions for troubled loans: penalties would apply to loans for which the loan
officer could have anticipated that repayment would become too difficult for the borrower.
Even though such individual measures may be useful, the Attention Based View suggests that
complex phenomena such as client protection are best addressed by focusing attention on the
phenomenon at hand. For example, MFIs could try to promote a strong organizational culture,
which in our case would consist of a welfare orientation above economic efficiency and
profits.
Similarly, regulators and investors should understand the need for customer protection that
goes beyond ensuring stable financial institutions. A mix of regulation and self-regulatory
codes of conduct is likely to be most effective. Donors should put as much focus on
promoting the measurement of impact, of the client welfare perspective, as they have put on
economic self-sustainability and reliable economic performance measurements in the past.
This study makes clear that in measuring the client welfare perspective, the focus should not
only be on positive impact. Instead impact measurement should explicitly consider the
potential downsides of debt.
Government and regulators could also play an important role in developing systems of debt
relief and personal insolvency. Such safety nets reduce borrower sacrifices. Moreover, even if
the potential for abuse render subjective borrower sacrifices futile as a legal overindebtedness definition, our study also has implications for the indicators regulators use to
measure over-indebtedness. Regulators need indicators that are easier to track and more
objective than a measurement based on borrower sacrifices. They should represent borrower
sacrifices as closely as possible. Delinquency and the debt-to-income ratio are the best
indicators we identified. At the same time they do not represent the customer-protection
perspective very well: Our sensitivity analysis of these predictors indicates that they correctly
predict only a small share of over-indebted borrowers. The debt-to-income ratio of 50%
predicts the aggregate level of over-indebtedness in the market, but this threshold might vary
in other markets and does not work reliably on an individual borrower level. Potentially a
debt-to-income ratio can be used to monitor trends on the aggregate market level and a rising
ratio could represent an early warning signal for markets where a closer analysis of over- 96 -
- 97 -
References
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Evidence From Brazil'. Universit Libre de Bruxelles CEB Working Paper No. 11/016,
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Armendriz, B. and A. Szafarz (2011) 'On Mission Drift In Microfinance Institutions' In B.
Armendriz & M. Labie (Eds.), The Handbook of Microfinance (pp. 341366). London,
Singapore: World Scientific Publishing.
Backhaus, K., B. Erichson, W. Plinke and R. Weiber (2011) 'Multivariate Analysemethoden,
Eine anwendungsorientierte Einfhrung (13th ed.), Berlin: Springer.
Banerjee, A. V., E. Duflo, R. Glennerster and C. Kinnan (2009) 'The miracle of microfinance?
Evidence from a randomized evaluation'. MIT Poverty Action Lab, Cambridge, MA.
Betti, G., N. Dourmashkin, M.C. Rossi and Y.P. Yin (2007) 'Consumer over-indebtedness in
the EU: measurement and characteristics'. Journal of Economic Studies, 34(2), 136156.
Brett, J. A. (2006) '"We Sacrifice and Eat Less": The Structural Complexities of Microfinance
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Bridges, S. and R. Disney (2004) 'Use of Credit and Arrears on Debt among Low-Income
Families in the United Kingdom'. Fiscal Studies, 25(1), 125.
Brown, S., K. Taylor and S. Wheatley Price (2005) 'Debt and distress: Evaluating the
psychological cost of credit'. Journal of Economic Psychology, 26(5), 642663.
Chaudhury, I. A. and I. Matin (2002) 'Dimensions and dynamics of microfinance membership
overlap: A micro study from Bangladesh'. Small Enterprise Development, 13(2), 4655.
Chen, G. and S.R.X. Rasmussen (2010) 'Growth and Vulnerability in Microfinance'. CGAP
Focus Note No. 61, Washington DC.
Collins, D. (2008) 'Debt and household finance: Evidence from the Financial Diaries'.
Development Southern Africa, 25(4), 469479.
Del-Ro, A. and G. Young (2005) 'The impact of unsecured debt on financial distress among
British households'. Bank of England Working Paper No. 262, London.
Finmark Trust (2010) 'FinScope Ghana 2010: Making financial markets work for the poor.
Launch Presentation, Accra.
- 98 -
- 99 -
- 100 -
- 101 -
Percent
80%
60%
40%
20%
0%
1
10
- 102 -
11
12
13
Units
Percent female
Years
Number of persons
Ghana Cedis
Ghana Cedis
Months
Percent group
Ghana Cedis
Percent
Number of MFIs
Percent delinquent
Weeks
Percent delinquent
Number of payments
Percent defaulted
Observations
531
520
531
530
524
527
531
529
509
531
518
518
522
522
529
Global Mean
Standard Deviation
72.2
0.449
40.1
8.596
4.7
2.148
645.1
575.481
14,997.1
21,908.090
8.0
4.118
47.6
0.500
1,408.7
1,286.748
41.6
37.075
1.1
0.282
7.0
0.256
0.2
1.243
21.3
0.410
0.4
0.928
0.9
0.096
Mean
Over-indebted Not Over-Indebted
71.0
72.7
40.3
40.0
4.9
4.7
544.8
687.8
11375.8
16500.2
8.1
8.0
51.0
46.1
1339.7
1437.8
48.0
38.8
1.1
1.1
13.8
4.2
0.6
0.1
31.4
17.2
0.6
0.3
2.7
0.2
* T-test for equal means between over-indebted and not over-indebted group
** Contingency analysis in Stata is unweighted. We have checked weighted Chi-Square results with SPSS which implies no substantial changes to results
- 103 -
T-test*
-0.34
-1.21
2.75***
2.87***
-0.12
0.88
-2.32**
-0.98
-2.83***
-3.34***
-
Chi-Square**
Cramer's V
0.04
-0.05
0.16***
0.16***
0.15***
Numbers of borrowers
Percent of borrowers
Not struggling
137
26%
Over-indebted
158
30%
Total
531
100%
Sacrifices
Work more than usual
Postpone important expenses
Deplete savings
Reduce food quantity/quality
Use family/friends support
Suffer psychological stress
Reduce education
Sell or pawn assets
Borrow anew to repay
Feel threatened/harassed
Suffer from shame or insults
Other
Seizure of assets
Numbers of borrowers
325
240
179
96
67
51
26
21
20
15
14
6
4
Percentage of borrowers in
sample
61%
45%
34%
18%
13%
10%
5%
4%
4%
3%
3%
1%
1%
Percentage of borrowers
among those making this
sacrifice that find it
unacceptable
32%
33%
38%
73%
72%
80%
80%
90%
85%
100%
100%
89%
100%
- 104 -
Percentage of borrowers
among those making this
sacrifice, that experience it
more than 3 times
71%
60%
29%
62%
21%
52%
13%
38%
49%
44%
24%
51%
24%
% of Male
57.4
41.3
38.7
13.6
9.7
10.3
3.9
6.5
7.7
7.1
3.9
1.3
1.3
% of Female
60.1
45.5
31.1
18.4
12.5
8.2
4.8
2.7
2.9
1.9
2.7
1.1
0.8
Cramer's-V*
-0.02
-0.04
0.07*
-0.06
-0.04
0.03
-0.02
0.09**
0.11**
0.13***
0.03
0.01
0.02
* Unweighted contingency analysis. We have checked weighted Chi-Square results with SPSS.
The only relevant difference is that the difference for reducing food quantity/quality becomes
significant at a 10% level. In turn, the difference in depleting savings is not significant.
% of Indiviual
58.3
42.6
27.9
16.4
7.1
7.1
3.5
6.5
4.8
3.9
2.6
1.0
1.3
% of Group
60.7
46.6
41.1
17.8
18.3
11.4
5.9
2.7
3.7
2.7
3.7
1.4
0.5
Cramer's-V*
-0.02
-0.04
-0.14***
-0.02
-0.17***
-0.08*
-0.06
0.09**
0.03
0.03
-0.03
-0.02
0.04
* Unweighted contingency analysis. We have checked weighted Chi-Square results with SPSS.
The only relevant difference is that the difference for selling/pawning assets is not significant.
- 105 -
1
0.979**
(0.010)
1.009***
(0.003)
1.552
2
0.980
(0.015)
1.011***
(0.004)
1.294
(0.514)
3.646***
(0.595)
3.453***
(1.213)
(1.439)
Controls
Gender_rank
1.042
(0.273)
0.999
(0.014)
1.109*
(0.061)
0.997
(0.057)
0.988**
(0.006)
1.033
(0.026)
0.820
(0.204)
Age
Household_size
Avg_monthly_income_ran
Total_assets_in_thds
Average_maturity_weighted
Group_or_individual_customer_ran
1.097*
(0.054)
0.986**
(0.006)
Lender
controls
0,070
498
0,105
462
0,085
494
0,113
460
0,100
489
71,5%
71,9%
72,1%
72,6%
71,3%
_IMain_lend_6
3.599***
(1.289)
Borrower
controls
_IMain_lend_5
Nagelkerke's R
Observations (N)
1.087
(0.284)
0.998
(0.014)
1.098*
(0.060)
0.992
(0.060)
0.988**
(0.006)
1.036
(0.027)
0.712
(0.229)
0.844
(0.335)
1.018
(0.468)
1.537
(0.612)
0.942
(0.348)
0.157**
(0.140)
Added
5
0.988
(0.010)
1.010***
(0.003)
0.150**
(0.118)
_IMain_lend_3
Controls
4
0.977
(0.015)
1.011**
(0.004)
1.406
(0.565)
3.819***
(1.500)
0.975
(0.285)
1.075
(0.402)
1.753*
(0.596)
0.861
(0.291)
0.179***
(0.083)
_IMain_lend_2
_cons
3
0.974**
(0.010)
1.009***
(0.003)
1.877
(0.777)
3.583***
(1.231)
0.224***
(0.091)
Excluded
- 106 -
1.015
(0.301)
1.088
(0.419)
1.481
(0.520)
0.862
(0.296)
0.214***
(0.077)
Added
if relevant
1
Female
0.985
(0.020)
1.007
(0.005)
1.376
(0.661)
5.218***
(3.089)
Male
0.932**
(0.031)
1.035***
(0.011)
2.213
(3.391)
2.755
(1.772)
Controls
Gender_rank
Age
Household_size
Avg_monthly_income_ran
Total_assets_in_thds
Average_maturity_weighted
Group_or_individual_customer_ran
_IMain_lend_2
_IMain_lend_3
_IMain_lend_5
_IMain_lend_6
_cons
Controls
Nagelkerke's R
Observations (N)
0.993
(0.017)
1.092
(0.074)
0.998
(0.074)
0.984**
(0.008)
0.985
(0.052)
1.070
(0.417)
1.168
(0.594)
1.423
(0.837)
1.893
(0.952)
1.211
(0.569)
0.218
(0.232)
Added
1.019
(0.032)
1.054
(0.106)
1.087
(0.119)
1.004
(0.012)
1.094**
(0.045)
0.218**
(0.156)
0.210*
(0.174)
0.257
(0.285)
0.794
(0.621)
0.378
(0.254)
0.076
(0.169)
Added
0.108
324
0.280
136
- 107 -
2
Group
Individual
0.936*
0.994
(0.033)
(0.015)
1.004
1.022***
(0.008)
(0.005)
1.821
1.149
(1.107)
(0.714)
2.643
4.033***
(1.652)
(2.155)
1.440
(0.601)
0.997
(0.024)
0.981
(0.092)
1.072
(0.106)
0.984
(0.011)
1.106**
(0.050)
0.755
(0.267)
0.995
(0.019)
1.252***
(0.098)
0.952
(0.074)
0.988*
(0.007)
0.982
(0.036)
3.147
(3.397)
3.960
(4.374)
4.552
(6.147)
3.870
(4.480)
0.029**
(0.044)
Added
0.395
(0.269)
1.325
(1.104)
1.124
(0.488)
0.763
(0.327)
0.212
(0.278)
Added
0.177
191
0.139
269
Time horizon
At time of survey
Over loan term
At time of survey
Over loan term
Over last year
Definition
Units
Respondent is at least 1 day late on any outstanding loan
Dummy
Respondent was at least 1 day late on any outstanding loan
Dummy
Number of weeks respondent was late on currently outstanding loans Weeks
Number of times the respondent was late on currently outstanding loans Number of payments
Respondent has experienced an assets seizure or was forgiven a loan
Number of defaults
- 108 -
1
0.977
(0.015)
1.011**
(0.004)
1.406
(0.565)
3.819***
(1.500)
2
0.977
(0.015)
1.011**
(0.005)
1.406
(0.614)
3.819***
(1.604)
Delinquency_status_weeks
3
0.977
(0.015)
1.011**
(0.004)
1.361
(0.537)
4
0.976
(0.015)
1.012***
(0.004)
1.471
(0.592)
5
0.977
(0.015)
1.012***
(0.004)
1.363
(0.594)
1.309***
(0.120)
Delinquency_status_whole_loan_te
2.153***
(0.561)
Aggregate_number_of_late_payment
1.446***
(0.180)
Default_over_year_rough_proxy
Controls
Gender_rank
Age
Household_size
Avg_monthly_income_ran
Total_assets_in_thds
Average_maturity_weighted
Group_or_individual_customer_ran
_IMain_lend_2
_IMain_lend_3
_IMain_lend_5
_IMain_lend_6
_cons
Controls
Nagelkerke's R
Observations (N)
6
0.968**
(0.016)
1.012***
(0.004)
1.345
(0.528)
23.193***
(19.890)
1.087
(0.284)
0.998
(0.014)
1.098*
(0.060)
0.992
(0.060)
0.988**
(0.006)
1.036
(0.027)
0.712
(0.229)
0.844
(0.335)
1.018
(0.468)
1.537
(0.612)
0.942
(0.348)
0.157**
(0.140)
Added
1.087
(0.253)
0.998
(0.008)
1.098***
(0.033)
0.992
(0.065)
0.988**
(0.006)
1.036
(0.030)
0.712
(0.178)
0.844
(0.216)
1.018
(0.306)
1.537**
(0.288)
0.942
(0.152)
0.157**
(0.116)
Added
1.160
(0.301)
1.001
(0.015)
1.095
(0.060)
0.992
(0.059)
0.988**
(0.006)
1.033
(0.028)
0.695
(0.225)
0.812
(0.322)
0.934
(0.432)
1.449
(0.582)
0.879
(0.325)
0.162**
(0.147)
Added
1.279
(0.326)
1.002
(0.015)
1.096
(0.062)
0.999
(0.059)
0.988**
(0.006)
1.029
(0.025)
0.672
(0.208)
0.795
(0.302)
0.883
(0.388)
1.490
(0.585)
0.911
(0.329)
0.122**
(0.109)
Added
1.241
(0.320)
1.002
(0.015)
1.097
(0.062)
1.005
(0.059)
0.988**
(0.006)
1.028
(0.025)
0.687
(0.218)
0.789
(0.308)
0.928
(0.407)
1.474
(0.576)
0.943
(0.338)
0.130**
(0.118)
Added
1.340
(0.339)
1.003
(0.015)
1.087
(0.060)
1.000
(0.060)
0.987**
(0.006)
1.044*
(0.026)
0.745
(0.238)
0.943
(0.368)
1.022
(0.458)
1.563
(0.625)
0.900
(0.327)
0.142**
(0.127)
Added
0.113
460
0.113
460
0.108
460
0.106
462
0.113
462
0.106
467
Odds Ratios. Robust standard errors in parenthesis. In regression 2, standard errors are clustered by lending institutions.
* ** and *** denote significance at the 10% 5% and 1% level.
- 109 -
1
2
3
4
5
-0.00388**
-0.00366* -0.00478***
-0.00408*
-0.002
(-0.00154) (-0.00215) (-0.00165) (-0.00218) (-0.00157)
0.00179*** 0.00216*** 0.00178*** 0.00210*** 0.00195***
(-0.000567) (-0.000789) (-0.000577) (-0.000797) (-0.000559)
0.095
0.052
0.132
0.068
(-0.0834)
(-0.0907)
(-0.0838)
(-0.0851)
0.287***
0.295***
0.292***
0.303***
0.291***
(-0.0826)
(-0.0907)
(-0.0808)
(-0.0902)
(-0.0848)
Total_amount_of_debt_di_in_hds
Debttoincome_ratio_flow
Number_of_MFIs_crossborrowing
Delinquency_status_rank
Controls
Gender_rank
0.007
(-0.0498)
0.000
(-0.00274)
0.0206*
(-0.0109)
0.001
(-0.00951)
-0.00194**
(-0.000785)
0.006
(-0.00527)
-0.039
(-0.0495)
Age
Household_size
Avg_monthly_income_ran
Total_assets_in_thds
Average_maturity_weighted
Group_or_individual_customer_ran
_IMain_lend_2
0.082
(-0.154)
-0.006
(-0.0565)
0.014
(-0.073)
0.115
(-0.0716)
-0.030
(-0.0635)
0.118
(-0.0963)
Borrower
controls
Lender
controls
0.080
0.050
462
0.060
0.050
494
_IMain_lend_3
_IMain_lend_5
_IMain_lend_6
_cons
0.160*
(-0.0879)
Excluded
Controls
0.050
0.040
498
R
Adjusted R
Observations (N)
Robust Standard Errors in parenthesis.
* ** and *** denote significance at the 10% 5% and 1% level.
- 110 -
0.016
(-0.0503)
0.000
(-0.00276)
0.0186*
0.0205**
(-0.0111)
(-0.0101)
0.000
(-0.0101)
-0.00191** -0.00224***
(-0.000801) (-0.000742)
0.007
(-0.00576)
-0.067
(-0.063)
-0.030
(-0.0767)
0.000
(-0.0904)
0.084
(-0.0804)
-0.011
(-0.0704)
0.088
0.160***
(-0.177)
(-0.0567)
Added
Added
if relevant
0.080
0.050
460
0.070
0.060
492
72%
71%
68%
71%
71%
Correctly classified IF
over-indebted
4%
2%
9%
2%
1%
% over-indebtedness in
sample
7%
4%
21%
4%
1%
50%
60%
Correct over-indebtedness
status
36%
47%
52%
57%
63%
65%
Correctly classified IF
over-indebted
28%
24%
17%
13%
11%
7%
% over-indebtedness in
sample
89%
71%
52%
39%
28%
19%
- 111 -
Respondents ranked the acceptability and frequency of each sacrifice on a scale from 1 to 4.
Acceptability: Easily acceptable, Only just acceptable, Not really acceptable, Not acceptable at
all.
Frequency: Once in past year, 1-3 times in past year, > 3 times but not often, Frequently in past
year
- 112 -
dy/dx
Std.Err.
z
-0.005
0.003
0.002
0.001
0.068
0.081
0.313
0.094
0.017
0.053
0.000
0.003
0.019
0.011
-0.002
0.012
-0.003
0.001
0.007
0.005
-0.068
0.065
-0.034
0.077
0.004
0.093
0.091
0.089
-0.012
0.073
P>|z|
-1.490
2.590
0.850
3.320
0.320
-0.100
1.700
-0.140
-2.140
1.350
-1.050
-0.430
0.040
1.030
-0.160
- 113 -
95% C.I.
0.136
0.010
0.397
0.001
0.751
0.917
0.090
0.887
0.033
0.177
0.293
0.664
0.968
0.305
0.870
-0.011
0.001
-0.090
0.128
-0.087
-0.006
-0.003
-0.025
-0.005
-0.003
-0.196
-0.185
-0.178
-0.083
-0.155
0.001
0.004
0.226
0.498
0.121
0.005
0.040
0.022
0.000
0.017
0.059
0.118
0.185
0.266
0.131
X
14.265
42.761
1.069
0.065
0.282
40.209
4.750
3.688
15.025
8.042
0.516
0.306
0.161
0.179
0.146
Chapter 4
Over-indebtedness in Microfinance
An Empirical Analysis of Related Factors on the Borrower Level
Jessica Schicks*
Centre for European Research in Microfinance (CERMi)
Solvay Brussels School of Economics and Management
Centre Emile Bernheim, Universit Libre de Bruxelles
* The author would like to thank the Independent Evaluation Department of KfW Entwicklungsbank
and the ACCION Center for Financial Inclusions Smart Campaign for their contribution to study
design and for financing the empirical research project. She is indebted to the Ghanaian
microfinance institutions who have shared their data and access to their clients to make this database
possible. Prof. Marek Hudon, Prof. Ariane Szafarz, and Prof. Oscar Bernal, as well as seminar
participants at the University of Lubumbashi, Congo, have provided valuable comments.
- 114 -
1. Introduction
The literature on consumer finance in developed countries literature has extensively analysed
why borrowers enter into burdensome levels of debt and for what borrowers the risk of
personal over-indebtedness is particularly high (Lea et al., 1995; Webley and Nyhus, 2001;
Bridges and Disney, 2004; Lusardi and Tufano, 2009). The microfinance industry, which
provides financial services to poor populations in developing countries, has only recently
become aware of the risk of over-indebtedness. There is a limited amount of research on
delinquency and default in microfinance (Vogelgesang, 2003; Schreiner, 2004; Godquin,
2004), but hardly any research on over-indebtedness. With increasing concerns about negative
effects of microfinance on customers, at a time where trust in the positive impact of
microfinance is weakening (Duvendack et al., 2011; Karlan and Goldberg, 2011), overindebtedness is one of the most pressing challenges facing the microfinance industry. It
endangers at the same time the sustainability of microfinance institutions (MFIs) and their
social impact. The lack of research on over-indebtedness in microfinance thus presents a
substantial research gap.
Developing measures to avoid over-indebtedness requires a sound understanding of what
drives it. To tailor effective solutions to the challenge, we need to understand the situations
where over-indebtedness is most likely to exist and which borrowers are most at risk. To our
knowledge, there are no academic studies that analyse which factors are related to overindebtedness in microfinance. It has not been tested which of the factors identified in
consumer finance research could equally apply to the microfinance low-income country
context.
This paper analyses factors related to over-indebtedness in microfinance. Taking a customer
protection perspective to enhance our understanding of the phenomenon, this paper
contributes to the development of customer protection measures to combat over-indebtedness.
We work with a unique primary dataset from a survey among 531 microborrowers in Accra,
Ghana. We use logistic regression analysis to identify how poverty, adverse shocks, loan
returns and financial literacy relate to over-indebtedness. We detail the relationship of these
factors to the individual sacrifices that borrowers experience. By means of ordered logit
regressions, we shed light on the role that these factors play concerning how acceptable
sacrifices are to borrowers and how frequently borrowers repeat specific sacrifices.
- 115 -
For the geographical and historical context of this study, we find that poorer borrowers, in
terms of income and assets, are more likely to be over-indebted, as are borrowers who
experience adverse economic shocks, who use their loans, at least in part, for non-productive
purposes, and whose investments into microenterprises produce low returns. According to
their own perceptions, for nearly sixty percent of borrowers, their returns are not sufficient to
repay their loans. A lack of debt-specific financial literacy also comes with a higher likelihood
of being over-indebted, but surprisingly, the opposite is true for general financial literacy. The
same factors that relate to over-indebtedness also relate to which sacrifices borrowers employ
as coping strategies for their debt, to how acceptable sacrifices are to borrowers, and to how
frequently borrowers repeat sacrifices.
The correlations of borrower-level factors with over-indebtedness confirm prior expectations
based on theory and on empirical research in non-microfinance environments, for what might
be the causes of over-indebtedness. These related factors are therefore likely to be causes of
over-indebtedness. Because measures against over-indebtedness should address the borrowers
that are most at risk and would optimally address the causes of the over-indebtedness
phenomenon, our findings have important implications for the development of measures
against over-indebtedness. They indicate that the spectrum of measures of over-indebtedness
may be broader than expected.
The next section reviews the literature for factors related to over-indebtedness. In the absence
of longitudinal studies, these factors represent the best candidates for potential causes of overindebtedness. Section 3 describes our dataset and our econometric approach. Section 4
contains a presentation and discussion of our empirical findings. Concluding remarks and
recommendations are provided in section 5.
- 116 -
- 117 -
The empirical research analysed in this section works with a range of measurements of overindebtedness, problem debt, repayment problems, or high indebtedness. While the
measurement is prone to influence empirical findings, factors that are related to any of these
phenomena are also likely candidates for factors related to over-indebtedness according to the
above sacrifice-based definition. This section therefore reviews factors that the literature
identifies to be related to debt problems, independently of the exact measure of debt problems
used in each study. The studies we review also vary according to their geography and cultural
context, the type of debt products they include, and the type of borrowers they analyse. This
paper is the first to test the transferability of their findings to a microfinance setting.
Socio-demographic factors
A borrowers risk of personal over-indebtedness varies with his/her socio-demographic
background. For example, the borrowers age is a frequently studied characteristic in
consumer finance research is age. Although evidence is mixed, in the UK and the US,
younger people seem to have a higher risk of indebtedness (Livingstone and Lunt, 1992; Lea
et al., 1993; Drentea and Lavrakas, 2000; Bridges and Disney, 2004). This is consistent with a
life-cycle approach to borrowing that assumes consumption smoothing over an individuals
life time with debts acquired at a young age based on expected future income (Friedman,
1957; Modigliani, 1980). Vogelgesang (2003) confirm this finding in a microfinance-specific
study in Bolivia. In two studies by Canner and Luckett (1991) and Tokunaga (1993) with
subjects from the US, the age effect is not significant.
Another influence factor is the borrowers household situation. Livingstone and Lunt (1992)
find that in the UK, having more children reduces risk, assuming that children create
discipline in their parents. The common view is, however, that having many children and
younger children is positively associated with debt risks (Canner and Luckett, 1991; Lea,
Webley and Levine, 1993; Lea, Webley and Walker, 1995). This may be because children
augment the fixed expenses of a household, while at the same time reducing its income
generating capacity. Except for Tokunaga (1993), most studies find increased overindebtedness among single adult households, particularly after a divorce (Canner and Luckett,
1991; Lea, Webley and Levine, 1993; Webley and Nyhus, 2001; Bridges and Disney, 2004;
Del-Ro and Young, 2005). The problem might be the household dependence on a single
income, combined with lingering habits and expenses that, in divorce cases, were appropriate
for a different economic situation. This finding holds in the microfinance study conducted in
- 118 -
Bolivia by Vogelgesang (2003). Webley and Nyhus (2001) get closest to actually establishing
a causal relationship because their study uses a longitudinal approach based on panel data.
Several UK studies find higher debt risk for renters as opposed to home owners (Lea, Webley
and Walker, 1995; Bridges and Disney, 2004; Disney et al., 2008), an effect that is not
significant in the US-based multivariate analysis by Canner and Luckett (1991). According to
Del-Ro and Young (2005), Drentea and Lavrakas (2000), and Disney et al. (2008), ill health
is related to debt problems; however cause and effect are ambiguous. Finally, gender (Lea,
Webley and Levine, 1993) and ethnicity (Del-Ro and Young, 2005) have been correlated to
indebtedness.
Concerning education, Bridges and Disney (2004), Canner and Luckett (1991) and Tokunaga
(1993) find a higher risk of debt when a borrowers level of education is low. According to
Livingstone and Lunt (1992) the effect of education is not significant in the UK. Gonzalez
(2008) confirms the relationship of low education to over-indebtedness in microfinance in
Bolivia. More educated households might have a better economic standing in general but may
also be better able to make more advantageous financial decisions. The risk of overindebtedness could result from behavioural biases that make borrowers take on more debt
than is reasonable. Humans do not make fully rational decisions, sometimes due to a lack of
information, or due to a lack of cognitive abilities. They may be subject to temptations and
over-value present benefits. Laibson (1997) explains this with the theory of hyperbolic
discounting, where decision makers apply time-inconsistent discount rates. For example, in
taking a loan, a borrower may give too much weight to the pleasure of receiving immediate
cash and too little weight to the future burden of repayment. To a certain extent, a higher
educational level may help borrowers deal with these biases.
Economic factors
The academic debate on economic factors influencing over-indebtedness focuses, most
importantly, on income. Having a low income is a major cause of indebtedness in many
consumer finance studies in the US and UK. Lea et al. (1993) and Lea et al. (1995) categorise
British respondents into individuals without debt mild, with mild debt, and with serious debt.
They find that individuals on lower incomes are more likely to have any debt at all and that
borrowers in more serious debt situations have significantly lower incomes than mild debtors.
A study specifically among low-income households in the UK finds that income is one of the
- 119 -
main causes of arrears and that sustained low income is a key factor for debt problems to
become permanent (Bridges and Disney, 2004). Another UK study identifies low income as a
major factor related to various measurements of over-indebtedness, the main measurement
being one of individual instances of arrears on loans (Disney, Bridges and Gathergood, 2008).
Income is not significant in the US studies by Canner and Luckett (1991) and Tokunaga
(1993). Livingstone and Lunt (1992) find that the absolute amount of borrowing among US
households increases with income, but confirm that serious debt situations and repayment
difficulties mainly exist among low-income borrowers. Earning a low income probably
reduces a borrowers repayment capacity, due to a low absolute amount of cash inflow at a
borrowers disposition, and due to a larger share of total income being bound for essential
living expenses. In microfinance, Paxton et al. (2000) find a higher risk for repayment
problems among rural borrowers in Burkina Faso that could be related to their lower incomes.
In contrast, in South Africa, Collins (2008) finds that indebtedness is negatively related to
income only in urban areas.
Alternatively, income uncertainty can be a driver of debt problems (Webley and Nyhus,
2001). If income is instable but the instalment schedule for a loan is fixed, borrowers may not
have the means to serve their debt in low-income periods, even if their average annual income
might be sufficient to deal with a given debt load.
Moreover, the literature points to an association between wealth levels and debt. With an
ordered logit regression based on the British Household Panel Survey, Del-Ro and Young
(2005) find that a households financial wealth is one of the key explanatory variables of selfreported financial distress. Savings are negatively associated with over-indebtedness or
arrears and the possession of savings makes it much more likely for over-indebted borrowers
to get out of their difficulties (Disney, Bridges and Gathergood, 2008). Sharma and Zeller
(1997) confirm the relationship of wealth to debt among microfinance borrowers. Based on a
survey among three group lending programmes in Bangladesh, they find that land ownership
as a proxy for wealth on a group level is significantly and positively related to repayment
performance: the lower the groups wealth the higher the probability of repayment problems.
Analysing data from a quasi-experimental survey, equally from Bangladesh, Godquin (2004)
show that the total productive assets of a household are positively related to repayment
performance. They include self-employment in agriculture and the number of landed relatives
as further proxies of wealth, reinforcing the finding that wealth prevents repayment problems.
Wealthier borrowers are more likely to have assets to liquidate that they can spare without
- 120 -
incurring significant sacrifice as a result. In line with the findings of Disney et al. (2008), the
positive effect of wealth on a borrowers repayment capacity is likely to be most important for
liquid assets, such as cash savings that could be used to reimburse a loan in periods with
insufficient income. Less liquid assets may still enhance repayment capacity if a borrower
sells or pawns them. In addition to the risk buffering effects of wealth, it may be that
wealthier borrowers in the microfinance context have access to investment projects with a
better risk-return profile (Godquin, 2004).
In terms of labour market status, being unemployed or in an instable or part-time position is
related to higher debt in the UK (Lea, Webley and Walker, 1995). This effect is probably
related to that of a borrowers income and income volatility.
Aside from the economic background characteristics of a borrower, adverse shocks to the
income or expenses of borrowers reduce their capacity to repay debt and can trigger a
situation of over-indebtedness. Among UK consumers, Disney et al. (2008) identify loss of
employment and marital breakup as key examples of adverse shocks to the income and
expenses of borrowers that have a high risk of leading to over-indebtedness in terms of
several arrears-based and self-reported measures. Stone and Maury (2006) analyse consumer
indebtedness among enlisted US Airforce members, even if those may be little representative
for microfinance borrowers. They find that life altering events such as childbirth or relocation
were significantly related to consumer indebtedness, but also instances of not being able to
pay medical expenses in the family. Bouquet et al. (2007) find that the main reasons for credit
problems mentioned by microborrowers in Madagascar are sudden increases in expenses or
loss of income. Gonzalez (2008) provides an extensive discussion of the influence of adverse
shocks on repayment capacity in microfinance and tests this factor empirically, using data
from a household survey in Bolivia that was conducted in 1997 to 2000, around the times of
the Bolivian microfinance crisis. The research identifies adverse shocks as one of the few
factors that explain the difference between borrowers who are not over-indebted and those
who are over-indebted while willing to repay (over-indebtedness defined as unexpected
outcomes of loan contracts, mainly in the form of repayment irregularities). However, in other
regressions, explaining costly actions taken by borrowers, adverse shocks were not
significant. In this paper, we define shocks as irregular events such as sudden expenses for
emergencies, expected but irregular lump sum expenses (e.g., wedding ceremonies), or
sudden impermanent drops in income (e.g., due to illness). While borrowers may be able to
adapt to longer-term reductions in income by reducing their consumption or shifting their
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income generating capacity, they may not have the means or financial buffer to deal with
sudden income reductions that occur unexpectedly. Human beings tend to display habit
persistence that prevents them from immediately adjusting their consumption in response to
income cuts (Brown, 1952). This effect is similar to but distinct from that of generally volatile
incomes. Similarly, adverse shocks to a borrowers expenses, such as large lump sums
required either for expected events (e.g., school fees, marriages), or unexpected shocks (e.g.,
medical expenses, funerals), may consume most of a borrowers income in a given period and
may not leave sufficient cash flow for debt repayment. In the self reports of Madagascan
microborrowers about the causality behind debt problems, sudden drops in expected income
appear nearly twice as much (35%) as rises in expenses (18%) (Bouquet et al., 2007).
There are two main factors that emerge from this analysis: material poverty and adverse
economic shocks. The findings discussed above suggest that over-indebtedness is related to
material poverty in the form of low incomes and low asset ownership. They also indicate a
higher risk of over-indebtedness following unexpected reductions in income or sudden lump
sum expenses. We test two hypotheses relating to economic factors to confirm that both a
borrowers general economic situation and sudden events that negatively affect their income
and expenses are independently related to over-indebtedness. We test the influence of material
poverty separately for income and for asset ownership.
H1: Poorer borrowers are more likely to be over-indebted.
H1a: A borrowers income is negatively related to his/her likelihood of overindebtedness.
H1b: A borrowers ownership of assets is negatively related to his/her likelihood of
over-indebtedness.
We test the influence of the following adverse economic events: unexpected shocks to
expenses, lump sums such as school fees that are expected but nevertheless difficult to
manage, and shocks to income.
H2: Borrowers who experience adverse economic shocks are more likely to be overindebted.
H2a: Unexpected shocks to a borrowers expenses are positively related to his/her
likelihood of over-indebtedness.
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H2b: Expected lump sum expenses are positively related to a borrowers likelihood of
over-indebtedness.
H2c: Unexpected shocks to a borrowers income are positively related to his/her
likelihood of over-indebtedness.
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Furthermore, the ROI on the total loan amount goes down if a borrower decides to use the
loan (at least partially), for non-productive purposes. On the one hand, scholars increasingly
argue for the benefits of microlending for consumption purposes and income smoothing
(Collins et al., 2009). A loan that does not generate financial returns may, nevertheless, be
very beneficial to a borrower, for example, in avoiding periods of hunger by financing food in
a low-income period, or in avoiding a deterioration in health by financing medical expenses.
While the above mentioned randomized control trial by Karlan and Zinman (2009) does not
confirm high returns on microloans, it argues instead that microcredit has positive impact
through risk management and household-level investments. On the other hand, nonproductive loan use is considered a risk factor for repayment (Vogelgesang, 2003). A
practitioner-oriented analysis of MIX Market data indicates that MFI portfolios that contain
higher shares of consumption loans display a lower portfolio quality (Gonzalez, 2009).
Buying goods for immediate consumption does not create returns and thus does not help to
repay a loan on time and without excessive sacrifice. In certain cases, it is difficult to
distinguish which loan use is productive and which one is not (Collins, 2008). A loan for
medical expenses may avoid the loss of ones income generating capacity and may therefore
have an indirect positive financial return. Nevertheless, the loan inflicts the cost of interest
and fees on the borrower and does not create any extra repayment capacity compared to the
base scenario that prevails without illness/medical expenses and without the loan.
Finally, loan use is not the only loan-specific factor related to over-indebtedness. The
characteristics of a loan, such as the amount of interest charged, the instalment schedule, and
the lending policies of MFIs, also influence a borrowers ability to repay their debt. In this
papers sample population in Ghana, these factors vary mainly on the institutional level, i.e.,
between MFIs, rather than from one borrower to the other. Where they vary within MFIs, it is
mainly between group borrowers and individual borrowers. As a result, this paper does not go
into the detail of loan and lender influences on the risk of over-indebtedness. Instead, along
with the most common borrower level controls for loan characteristics, the empirical analysis
will control for general loan characteristics on the MFI level and for the lending methodology
(i.e., group or individual).
We test the hypothesis that microborrowers over-indebtedness is related to the return on
investment on their loans. We test if there is an independent influence of the borrowers
decision about loan use (i.e., at least partially for consumption or exclusively for productive
purposes) and of the returns on investing the loan into a productive activity.
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H3: Borrowers with low returns on their loan are more likely to be over-indebted.
H3a: Using a loan for non-business purposes is positively related to a borrowers
likelihood of over-indebtedness.
H3b: Returns on investment in a borrowers productive activity are negatively related
to the borrowers likelihood of over-indebtedness.
Financial literacy
More specifically than education, a borrowers financial literacy, his/her understanding of
financial products, may be related to over-indebtedness. Empirical research indicates that the
cognitive abilities of an average individual are low compared to the complexity of financial
decisions. Tiwari et al. (2008) find that microfinance clients in India think about their loans in
terms of how much they owe on a weekly basis but know very little about their interest rate or
total interest expenses. This is in line with the theory of mental accounting (Thaler, 1985),
which shows that individuals think about their financial decisions in terms of budgets for
various mental expense categories but not in terms of interest rates and the time value of
money. Similarly, Atkinson et al. (2006) provide empirical support from the UK for people
making poorly informed financial choices, by for example not reading the terms and
conditions of contracts and by not comparing providers. Lusardi and Tufano (2009) discover
strikingly low levels of debt literacy across the U.S. population, for example serious difficulty
in grasping percentages. Those who are less debt literate bear a disproportionally large share
of avoidable costs (e.g., late fees). They are also more likely to be over-indebted. Schreiner
(2004) conducts a microfinance specific analysis of loan data to develop a scorecard for
predicting loans with more than 15 days arrears in an MFI portfolio in Bolivia. He finds that
the number of previous loans a borrower has had decreases the risk of arrears on a loan and
considers this indicator a proxy for the borrowers experience with loans and thus for their
loan literacy. On the other hand, the number of months since the first disbursement that can
also be an indicator of loan literacy is positively related to arrears. In a study by Paxton et al.
(2000) in Burkina Faso, experience with past loans has a negative relationship to repayment
performance, probably because other factors outweigh the effect of increasing literacy.
However, groups that received good loan literacy training and had good leadership had a
higher repayment performance, confirming the positive effect of financial literacy in avoiding
repayment problems.
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This paper therefore tests the hypothesis that financial literacy is negatively related to
microborrowers over-indebtedness risk. The more borrowers understand loans, the better
borrowing decisions they can make and the less likely they are to take on debt beyond their
means.
H4: Borrowers with a higher level of financial literacy are less likely to be overindebted.
H4a: A borrowers numeracy is negatively related to his/her risk of over-indebtedness.
H4b: A borrowers general financial literacy is negatively related to his/her risk of overindebtedness.
H4c: A borrowers debt literacy is negatively related to his/her risk of overindebtedness.
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2 To apply a common threshold for micro- and SME-borrowers across all MFIs, we designate all customers with active
personal loans below 5000 Ghana Cedis (GH; 1 GH=0.7 USD) as microborrowers. For most MFIs in the sample, all of
their borrowers fall into this category. A total of 87% of disbursed loan amounts in the sample are below 2000 GH.
3 www.mixmarket.org. The site provides self-reports of limited liability and is likely to overstate the role of our partner MFIs
in the local market as not all of the smaller MFIs may be reporting to the MIX.
4 With some MFIs, for groups over-sampling implied over-sampling delinquent groups rather than individuals.
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indicating that the respondent did not permanently increase his/her earnings due to the
investment; the second indicating that earnings increased but not enough or not stable enough
to cover the instalments on the loan; and the third indicating that, on a regular basis, the
borrower earned significantly more income due to the investment or productive activity
financed with the loan. A fourth category captures the few loans (3% of our sample) that have
no productive component at all. Although a subjective measurement of returns is much less
precise than a quantitative percentage, the relatively broad categories and their verbal
description are tuned to avoiding endogeneity, i.e. a respondent will not indicate lower returns
because of being over-indebted. A borrower can report positive returns even if he is overindebted, if, for example, his repayment difficulties are related to adverse shocks rather than
to low returns (23% of the over-indebted in table 2 categorise ROI as a permanent and
significant increase in income). Or a borrower who repaid his loan without problems can
report having experienced no (12% of borrowers who are not over-indebted) or too little
increases in income (36% of borrowers who are not over-indebted). These borrowers may
have had sufficient other resources at their disposal to not need the loan returns for
investment. Our measurement of returns therefore focuses on the impact of returns on overindebtedness.
Moreover,
respondents
reported
their
socio-demographic,
economic and
business
characteristics, and took a test of financial literacy. Appendix 1 contains the financial literacy
questions based on Lusardi and Mitchell (2007) and Lusardi and Tufano (2009). In
consultation with local MFI staff and after a pilot of the questionnaire, the questions were
adapted to the local environment and to the aptitude of Ghanaian low-income borrowers. For
our measurement of over-indebtedness, respondents listed all sacrifices that they experienced
related to their loans over the course of one year (see Appendix 2 for the list of sacrifices).
They indicated how many times they experienced each of the sacrifices (Once in past year,
1-3 times in past year, >3 times but not often, or Frequently in past year)5 and weighted
their sacrifices according to their subjective judgment of how acceptable the experience was
to them (Easily acceptable, Only just acceptable, Not really acceptable, or Not
acceptable). The first two categories summarise as acceptable, and the latter as
unacceptable or not acceptable.
5 For a respondent cutting down on their food at several points for a week at a time, instead of every individual day, each
week would count as one occurrence.
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Based on this data on sacrifices, we can apply the sacrifice-based over-indebtedness definition
and determine which borrowers are over-indebted in our sample. Respondents are overindebted if they indicate that they struggle to repay their loans on time, make unacceptable
sacrifices related to their loans, and that their experiences of unacceptable sacrifices are more
than just transitory. To determine if sacrifices are a sign of more than transitory debt
problems, we only consider borrowers who experience a minimum of three repeated,
unacceptable sacrifices as over-indebted. Only the structural one-off sacrifices, asset seizures,
unacceptable loan recycling, and selling or pawning assets to be able to repay a loan, do not
need to be repeat experiences.6
As a robustness check, we introduce a threshold free measurement of a borrowers level of
sacrifice. We construct a score that increases from zero to 72 for each sacrifice that a
borrower makes. Sacrifices weigh more the less they are acceptable (one to four points) and
the more frequently they occur (one to four points). This score does not allow us to determine
which factors are related to over-indebtedness, as it does not distinguish between low,
acceptable levels of sacrifice, and sacrifices at the level of over-indebtedness. However, if
empirical results for factors related to over-indebtedness and to the general score of sacrifices
are similar, this proves that our findings are not sensitive to the exact threshold of our binary
over-indebtedness measurement.
<insert table 1 about here>
Tables 1 and 2 provide an overview of the sample characteristics.7 On average, the borrowers
in our sample are representative of typical microborrowers. They are mostly female (72%)
who are poor but economically active and not living in extreme poverty. They are
predominantly self-employed (98%) and are mainly traders (81%). The sample is almost
evenly split between the group lending methodology (48%) and the individual lending
methodology (52%), with some MFIs following only one or the other model, and some
offering both types of lending products. According to borrowers reports, almost all loans are,
at least in part, used for productive purposes (97%), although many of them have not gone
exclusively into a microenterprise but have also been used for consumption purposes (30%).
6 The measurement is not sensitive to these exceptions. They affect only very few cases.
7 As the research methodology relies on self-reports, statistical data regarding the borrowers economic situation are subject
to limitations. Aside from questions of honesty, respondents often experience difficulty estimating the monetary value of
their assets and, given their volatility, their average incomes. However, on average there is no reason to assume a general
upward or downward bias of the estimates and we consider the data sufficiently reliable for our level of analysis.
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The majority of borrowers (59%) report only low investment returns on their loan use and
state that their returns were insufficient to repay their loans.
<insert table 2 about here>
The descriptive statistics in table 1 and 2 provide a first indication of which factors are related
to over-indebtedness. Using t-tests for the difference in means between the over-indebted
group and the borrowers who are not over-indebted, we find significant differences in terms
of a borrowers income and assets, as well as adverse shocks to income. Similarly, all three
dimensions of financial literacy have significantly different means among the over-indebted.
In contrast to income shocks, the amount of adverse shocks a borrower has experienced to
his/her expenses is not significantly different between groups. Using a chi-squared test on our
categorical variables, we find a significant correlation between the returns on investment that
a borrower reports and his over-indebtedness status. There is no significant relationship
between over-indebtedness status and loan use. However, neither t-tests nor the chi-squared
contingency analysis can control for the influence of other variables on over-indebtedness.
We therefore regress our indicators of financial literacy, poverty, adverse economic shocks
and loan returns on our binary over-indebtedness measurement in a multinomial logistical
regression. As identified in section 2, we control for the socio-demographic and economic
characteristics of borrowers and the business- and loan-related factors that may be related to
over-indebtedness.
(1) Oi = 0 + 1 Ii + 2 Ai + 3 SUEi + 4 SEEi + 5 SIi + 6 CUi + 7 ROIi + 8 LNi + 9 LGi
+ 10 LDi + 11 Xi + 12 Yi + 13 Zi + ui
For each respondent, i, Oi is a dummy variable that takes the value one for a borrower who is
over-indebted and zero otherwise. I represents income, and A total assets. Regarding adverse
shocks, we distinguish unexpected expense shocks (SUEi), expected large lump sum shocks
(SEEi) and adverse shocks to income (SIi). For returns, CUi stands for at least a portion of the
loan being used for consumption and ROIi for the return on investment. LNi is the result of
the literacy test specific to numeracy, LGi is the result for general financial literacy related to
savings accounts and inflation, and LDi denotes the result of the debt-specific literacy test. Xi
is a vector of controls for socio-demographic characteristics that include the following
categories: gender, age, ethnic background, marital status, the number of children, household
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8 In the regression analysis, for reasons of limited observations in certain uncommon categories of socio-demographic
variables, we summarize the categories Gurma/Other for Ethnic_background, No formal education/PreSchool for
Level_of_education, Minor/Strong health problems for Health_problems, Own house/Other for Housing_type,
Permanent/Temporary employment/Student for Employment_status, and Production of goods/Other for Main_occupation.
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to which loan use is monitored are likely to be higher in the group lending model (Ghatak and
Guinnane, 1999). Model (3) therefore expands on model 2 by adding interaction terms for
gender with loan use and for lending methodology with loan use.9 Model (4) drops all
controls that were not significant in the previous models, eliminating the noise that potential
non-significant variables may have created. This parsimonious model represents our main
model and is the basis for all consecutive analyses. Model (5) shows the effects of running
our regression on the main hypotheses only, excluding control variables.
As a robustness check, we repeat the same regressions (1) to (5) with a different dependent
variable that does not depend on our over-indebtedness definition and on the specific
threshold applied in our measurement of over-indebtedness. We regress the factors that are
likely to be related to over-indebtedness on the 72-point sacrifice score, as described earlier in
this section. The results are unlikely to be exactly the same, given that different factors may
be related to minor sacrifices than to severe ones. Also, factors that explain if a borrower is
over-indebted may not explain small variations in the intensity of his struggles. Nevertheless,
we expect the robustness check to deliver roughly similar results to those obtained from the
main regression. It thus confirms that our findings are not specific to the details of the overindebtedness measurement but are capable of explaining borrower sacrifices in general.
To understand the relationship of poverty, adverse shocks, loan returns and financial literacy
to sacrifices in more detail, we run additional regressions that consider the sacrifices
underlying over-indebtedness separately. We run our main parsimonious model (4) for the
prevalence of each sacrifice in the borrower sample, independently of the severity of
sacrifices and of a borrowers over-indebtedness status. We then run the same model for the
four most common sacrifices as an ordered logistic regression on the 4-point scale of sacrifice
acceptability. Due to the limited numbers of observations for less common sacrifices (the
ordered logit model with all variables requires approximately 100 observations per sacrifice),
this analysis is possible only for the following sacrifices: cutting down on food, working
harder, postponing important expenses, and depleting ones savings. We repeat the same
9 We also tested the following interaction terms: whether loan use differs between the customers of different MFIs, whether
gender or group lending had any impact on returns on investment, whether there was an interaction of either gender or the
lending methodology with a borrowers debt literacy, and whether gender and methodology interacted with each other. None
of these interaction terms were significant. We tested if the debt-to-income ratio had an independent relationship to overindebtedness in addition to absolute income and absolute debt amounts, but it was not significant.
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analysis for the 4-point scale that measures how frequently a borrower repeats the same
sacrifice.
This analysis allows us to understand the mechanisms through which poverty, adverse shocks,
loan returns and financial literacy relate to over-indebtedness; how factors relate to the
severity of sacrifices; which factors increase the repetition of sacrifices; and which factors are
related to specific sacrifices rather than to others. It provides relevant insights for developing
policy implications for microfinance and identifying the best responses to address the risk of
over-indebtedness in microfinance.
- 133 -
- 134 -
Similar to expense shocks, a marginal increase in income shocks increases the risk of overindebtedness by 0.1%.
These regressions also relate returns of investment (H3) to over-indebtedness. They confirm
that both loan use (H3a) and the returns on an investment made with the loan (H3b) are
related to over-indebtedness, with significance levels at 1%.10 The results are slightly less
consistent for loan use, but the main model shows that for women (when gender is at its
reference value of 0 and there is no effect of the interaction term), the likelihood of being
over-indebted increases by 12.2% for those who used a loan, at least in part, for a nonproductive purpose. This effect is independent of our measurement of investment returns,
potentially because the classification of returns into four categories does not cover the full
amount of variation of returns and because having to use debt for non-productive purposes
might indicate a lower ex-ante capacity to cover debt instalments that cannot be covered by
investment returns from other sources. It could also relate to the reverse effect of overindebtedness increasing the risk that an individual needs to use part of their loan for nonproductive purposes. Moreover, there is a significant interaction effect between loan use and
gender. Regarding returns on investments, loan returns that are not sufficient to cover
instalments come with a 15.4%
productive loan uses that produce permanent earnings increases at a level sufficient to repay
the loan. If there are only impermanent increases in earnings from the productive loan use,
this factor increases to 36.5%, and when no returns are possible (i.e., no investment, not even
in part) it increases to 42.9%.11
For our forth hypothesis, the regressions confirm H4c that borrowers with higher debtspecific financial literacy are less likely to be over-indebted. Marginal effects indicate that an
infinitesimally small increase of a borrowers score in our debt literacy test corresponds to a
0.2% lower likelihood of over-indebtedness. The result is significant at a 1%-level.
Contradicting our prior expectations, the opposite is true for general financial literacy (H4b):
while the effect is small, an increase in general financial literacy corresponds to a higher risk
of over-indebtedness. Mere numeracy (H4a), the ability to perform simple mathematical
10 There is no significant multicollinearity between partial non-productive loan use and ROI.
11 The strength of these results may partly be due to the fact that we have measured ROI in four rough categories as reported
by borrowers. However, section 3 has shown that borrowers are able to distinguish between repayment difficulties and
returns and that both high returns with over-indebtedness (e.g., due to shocks) and low returns without over-indebtedness
(e.g. due to other resources) occur in our sample.
- 135 -
- 136 -
Robustness check
We test the robustness of our findings by replacing the over-indebtedness measure with a
general threshold-free score of borrower sacrifices; table 5, column (4) displays the main
model. The same results are obtained for income, but not for assets and unexpected expense
shocks that were already weaker findings for to over-indebtedness. Out findings also hold
true for the following factors: expected expense shocks and income shocks, loan use and the
interaction of gender with loan use, ROI, debt literacy, and the lack of a relationship to
numeracy. The opposite effect of general financial literacy is confirmed, although weakly.
Given that not all variation in borrower sacrifices is necessarily determined by the same
factors as over-indebtedness, the robustness check provides confirmation for our main
findings. They are not dependent on our specific measurement of over-indebtedness.12
<insert table 5 about here>
Further analyses
To deepen our understanding of how financial literacy, poverty, adverse shocks and loan
returns are related to over-indebtedness, we run separate regressions of our main model (4) on
each sacrifice to determine which of these factors are related to the incidence of each specific
sacrifice.13 This analysis is independent of the acceptability of a sacrifice; thus, not every
sacrifice contributed to a borrower being over-indebted. The analysis allows for a refined
approach to developing solutions to over-indebtedness. Table 6 indicates that income is
related to all sacrifices except to increases in work efforts and shame. Potentially, the poorest
borrowers might already exert their maximum possible work effort and are very accustomed
to financial problems, making sacrifices less of a source of shame. In line with its over-all
relationship to over-indebtedness, the relationship of income to the various sacrifices is
typically negative. Asset ownership is related to exactly those sacrifices where income does
12 The findings are however specific to the customer protection perspective of defining over-indebtedness through the lens of
sacrifices. If over-indebtedness was measured as delinquency, assets, income, expense shocks and loan use would not be
significantly related. Nevertheless, income shocks, returns on investment, and financial literacy are also highly significant
factors related to delinquency (see Appendix 4). While delinquency can contribute to a borrowers sacrifices, from the
customer protection point of view it is a (reinforcing) consequence of over-indebtedness rather than an original influence
factor. We therefore do not include this highly endogenous factor in our regressions on over-indebtedness. We did, however,
test that doing so would not change our findings.
13 Marginal effects available upon request.
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not play a role. It prevents extra work and the depletion of savings and has a very small but
positive impact on shame. When adverse shocks hit a borrower, the typical responses to
unexpected expense shocks appear to delay postponing other expenses, including food costs.
Large, expected expenses, in contrast, allow for longer-term coping strategies, such as lining
up extra work, using savings and selling assets. They come with a higher likelihood for shame
for the borrowers, maybe because they are more foreseeable and solicit less pity from others.
When borrowers experience sudden reductions in income, they primarily react by taking on
new debt, or by selling or pawning assets, and they tend to suffer from psychological stress.
Using ones loan, at least in part, for non-productive purposes is very significantly related to
experiences of shame. This may be due to the borrowers bad conscience if he was supposed
to fully invest the loan. At a 10% significance level, non-productive loan use is also positively
related to psychological stress and, interestingly, to reductions in the education of the
borrowers children. Independent of loan use, the different levels of ROI are jointly related to
all sacrifices, except for taking on new debt and experiencing threats. The reason for the
former might be that new debt is more difficult to obtain with a business that is not running
well. The relationship is consistently positive. Finally, good numeracy reduces the risk of
food reductions but increases the risk of reducing ones savings or of relying on external help.
Similarly, good general financial literacy is positively related to savings depletion, taking new
debt, shame and threats. This provides further detail to our counterintuitive finding that
general financial literacy is positively related to over-indebtedness. Literacy could not only
influence the quality of borrowing decisions but could also be related to a borrowers decision
to make certain sacrifices. For example, borrowers with higher levels of general literacy may
have built more savings that they can deplete. Debt-specific financial literacy is related
mainly to reducing food, working harder, and suffering from shame and stress.
<insert table 6 about here>
This analysis of how the factors related to over-indebtedness relate to each of the sacrifices is
an early step in identifying how microborrowers cope with debt. More research must be
performed but we can already conclude that borrowers with different economic backgrounds,
loan uses and levels of financial literacy respond to repayment difficulties in different ways.
This impacts the effect of potential measures against over-indebtedness. For example,
insurance against unexpected expense shocks such as medical expenses could help borrowers
to maintain their general consumption patterns and reduce reductions in food. Different
measures would be required to address other sacrifices.
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Regarding the acceptability of sacrifices, table 7 shows that for the most common sacrifices,
the factors related to over-indebtedness are not only related through a higher or lower
likelihood of certain sacrifices occurring, but that they are also related to how acceptable
different sacrifices are to the borrowers.14 For example borrowers in more difficult economic
situations might experience the same sacrifices more severely because they have no further
buffer for e.g., reductions in consumption, or they may experience more severe forms of these
sacrifices. At the same time they could experience some sacrifices as less severe because they
are more used to financial difficulties. The data indicate that a lack of income and assets is
positively related to the unacceptability of having to work harder, i.e., it reduces acceptability.
Expense shocks do not seem to change the acceptability of any of these common sacrifices.
Using a portion of a loan for a non-productive purpose equally reduces the acceptability of
having to work harder to repay it, perhaps because productive loan use links directly to the
expectation to also invest more time in the enterprise. A lack of returns on the investment
reduces the acceptability of both extra work and postponed expenses in the household and
business. Not having invested the loan at all however comes with a higher acceptability of
postponing important expenses, potentially because there were no return expectations linked
to the loan and the borrower was willing to postpone other expenses ex ante. In terms of
financial literacy, general financial literacy seems related to a higher acceptability to postpone
expenses and a lower acceptability to deplete ones savings. Increased debt literacy comes
with a higher acceptability for extra work to repay the loan. Future research with larger
sample sizes would need to increase the precision of these estimates and extend this analysis
to encompass the less common sacrifices.
<insert table 7 about here>
Table 8 analyses how frequently borrowers repeat sacrifices. For those borrowers who have
cut down on food consumption, increased work efforts, or depleted their savings to pay a loan
instalment, poorer borrowers are likely to repeat these sacrifices more frequently than richer
borrowers. In terms of reductions in food and savings, the same is true for borrowers who
have experienced unexpected expense or income shocks. Loan use does not impact the
frequency of the most common sacrifices. A lack of ROI is negatively related to the frequency
of working harder and postponing expenses, i.e., these sacrifices are repeated less frequently.
For financial literacy the picture is twofold: a higher score on the numeracy test comes with
14 Of course cut-off values for the latent variable of acceptability vary significantly between the models.
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less repetition of sacrifices three and five. A higher score on general financial literacy seems
to correspond to more frequent sacrificing of food and savings, and debt-specific literacy to
more frequent food cuts and taking on extra work. The best way to understand these findings
would be with qualitative research that can disentangle the reasons behind these effects. For
example, literacy can be positively related to the frequency of some sacrifices because
borrowers who understand loans better are better able to anticipate repayment challenges and
thus identify the necessary coping strategies. At the same time, it can be negatively related to
the frequency of other sacrifices because more literate borrowers may get into less severe
repayment problems and thus be able to avoid the more severe sacrifice experiences.
<insert table 8 about here>
The analysis of how factors related to over-indebtedness relate to the frequency and
acceptability of individual sacrifices is in its nascency, but it sheds some initial light on the
complexity of factors related to over-indebtedness through the lens of customer protection.
Depending on the situation of the individual borrower and on the trigger for the debt
problems, borrowers may experience the same sacrifices as more or less severe or experience
a more or less severe form of them. A borrowers poverty, adverse shocks, loan returns and
financial literacy are also related to the question of how frequently borrowers experience
specific sacrifices. This provides an indication of more prolonged problems with overindebtedness. While it is too early to deduce clear policy recommendations, our analysis
indicates that there may be a means of reducing the customer experience of over-indebtedness
by addressing specific levers that reduce the duration of the sacrifices or that help borrowers
make their situation more acceptable.
- 140 -
working harder, creating and using savings, and selling household or business assets when
faced with lump sum expenses that are expected.
Moreover, this paper provides the first insights into the relationship of economic background,
adverse shocks, loan returns and financial literacy to how acceptable the most common
sacrifices are to borrowers and how frequently these sacrifices are repeated. For example, low
investment returns on a loan are related to a lower acceptability of extra work and of
postponing expenses, but having used a loan exclusively for non-productive purposes comes
with a higher readiness to work harder to repay it. Regarding the repetition of specific
sacrifices, borrowers who are faced with unexpected expenses or with income shocks, for
example, sacrifice food and savings more frequently, while other sacrifices remain unaffected.
Bearing potential limitations to the universality of the findings in mind, our findings have
important policy implications. The microfinance industry must identify ways to reduce overindebtedness among its customers. From a customer protection point of view, it is important
to not just reduce default but to reduce the suffering of customers from over-indebtedness,
i.e., their sacrifices. Knowing that borrowers are more likely to be over-indebted when they
live on lower incomes and own fewer assets, MFIs might be able to reduce over-indebtedness
by reducing credit to poorer borrowers, lending smaller amounts, or choosing to not lend to
the poorest borrowers.15 However, it is important to strike a good balance between the
inclusion of the poor and avoiding over-indebtedness. Our findings should not lead to a return
to financial exclusion but excluding people who would experience harm from debt may be in
their interest.16
Similarly, if adverse shocks to income and expenses represent a main cause of overindebtedness among microborrowers, MFIs should take the likelihood of adverse shocks into
account when calculating repayment capacity. Adverse shocks are frequent among the target
customers of MFIs and can turn an apparently healthy debt balance into a case of suffering
and over-indebtedness. There is, again, reason for caution to avoid financial exclusion. At
15 The control variables in the Appendix paint a more precise picture of the general socio-demographic and economic
characteristics of the borrowers with the highest risk of over-indebtedness. They could contribute to some type of credit
scoring but the same limitations apply that apply to the poverty criterion.
16 Note that our measurement of over-indebtedness does not imply causality. Microdebt may be the cause of the sacrifices
but, even if respondents have listed the sacrifices that they experience as being related to their loan, the loans may also have
helped the borrowers deal with an otherwise even more unbearable situation. Or the loan may have been useful but an
adverse shock can have triggered over-indebtedness ex post.
- 142 -
times, loans can be the best available tool for borrowers to cope with adverse economic
shocks. Borrowers will be left with an unmanageable debt burden but may yet benefit, rather
than having to face, for example, high medical expenses without access to credit. MFIs should
therefore anticipate the occurrence of adverse shocks when determining creditworthiness and
deciding on loan amounts and instalment schedules. They may, however, provide emergency
loans, knowing that repayment might be difficult for the borrower. In certain cases, instead of
reducing access to loans, more flexible instalment schedules could be the best solution to
avoid over-indebtedness in borrowers who experience adverse shocks. This includes ex-ante
flexibility of repayment conditions as much as ex-post flexibility with renegotiations and
rescheduling (Hamp and Laureti, 2011). Promoting savings instead of credit or providing
insurance to borrowers could also go a long way toward preventing over-indebtedness.
There is an ongoing debate in microfinance concerning the industrys original requirement
that loans be used productively. For the context of this study, our paper confirms that nonproductive loan use increases the risk of over-indebtedness. However, these loans are, at
times, worthwhile. Repaying a loan for emergency medical expenses is almost automatically
more difficult than repaying a loan with good returns on investment. Nevertheless, the
emergency loan may be beneficial to the borrower. Similarly, lower ROI on invested loans is
related to higher over-indebtedness risks. Based on the perceptions of borrowers, our paper
indicates that ROI is often not sufficient for borrowers to repay their loans. It seems that the
returns on the investment of microborrowers do not match the cost of credit. The high interest
rates in microfinance have often been challenged for ethical reasons (Hudon, 2007), but at the
same time, they have been justified with high returns on borrowers investments. While
arguments concerning the high costs of providing microloans, the sustainability of MFIs and
risks of exclusion due to interest rate caps remain valid, our findings challenge the assumption
that high returns enable microborrowers to pay high interest rates. Nevertheless, the
microenterprise investment may pay off in the long run, even if returns are not sufficient over
the short instalment schedule of the typical microloan. Instead of reducing access to credit, the
response might again be to better tailor products to borrowers needs and to develop
instalment schedules appropriate to the cash flows of microenterprises.
Finally, our paper indicates that improving borrowers financial literacy can reduce their risk
of over-indebtedness. It shows, however, that financial literacy training needs to be specific to
debt literacy to have the desired effect. Trainings in computational skills and general financial
literacy would not be effective.
- 143 -
- 144 -
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- 146 -
- 147 -
- 148 -
Units
Ghana Cedis
Ghana Cedis (thds)
% of income
% of income
% of income
% of correct answers
% of correct answers
% of correct answers
Years
Number of persons
Number of persons
Ghana Cedis
Number of MFIs
Ghana Cedis
Months
Expected
relationship to over+
+
+
+
+
+
+
+/-
Standard
Over-indebted (n= 158)
N Global Mean Deviation (SD)
Mean
SD
530
645.14
575.48
544.81
456.40
524
15.00
21.91
11.38
14.97
531
12.22
31.00
13.81
24.78
531
20.84
37.34
22.42
37.19
530
11.76
28.35
17.01
35.94
530
80.06
24.86
76.04
27.86
527
57.31
36.92
51.64
37.79
527
28.31
29.39
20.17
24.63
520
40.09
8.60
40.31
8.73
531
2.48
1.57
2.54
1.65
531
4.75
2.15
4.94
2.41
525
406.80
765.55
286.89
638.45
531
1.07
0.28
1.09
0.29
529
1408.70
1286.75
1339.66
1007.79
527
8.04
4.12
8.07
4.48
T-test for equal means between over-indebted and not over-indebted group; *** p<0.01, ** p<0.05, * p<0.1
Income data was collected in categories of 200 Ghana Cedis. The approximate values refer to the middle of each category.
- 149 -
T-test
2.75***
2.87***
-0.84
-0.59
-2.27**
2.02**
2.05**
4.3***
-0.34
-0.59
-1.21
2.31**
-0.98
0.88
-0.12
N %
372
157
70.2
29.8
106
52
67.0
33.0
266
105
71.6
28.4
186
177
74
13
41.4
39.3
16.4
2.9
31
64
37
5
22.6
46.7
27.2
3.5
156
113
37
8
49.6
36.1
11.7
2.6
383
148
72.2
27.8
112
46
71.0
29.1
271
102
72.7
27.3
346
21
73
66
2
23
65.1
4.0
13.8
12.4
0.4
4.4
100
5
22
20
1
10
63.2
2.9
14.0
12.9
0.4
6.6
246
16
51
45
1
13
65.9
4.4
13.7
12.2
0.3
3.4
23
382
10
87
30
4.2
71.9
1.8
16.5
5.6
7
108
3
32
9
4.4
68.2
1.8
20.2
5.5
16
274
7
56
21
4.2
73.5
1.8
14.9
5.7
30
6
70
269
119
37
5.6
1.1
13.3
50.6
22.5
6.9
10
2
27
80
31
9
6.2
1.0
16.9
50.4
19.8
5.7
20
4
44
189
88
28
5.4
1.2
11.7
50.8
23.6
7.4
408
117
6
76.9
22.0
1.2
116
39
3
73.5
24.4
2.1
292
78
3
78.3
20.9
0.8
333
75
121
2
62.7
14.2
22.7
0.3
102
20
36
0
64.7
12.6
22.8
0.0
231
56
85
2
61.9
14.9
22.7
0.5
7
522
1
2
1.3
98.2
0.1
0.4
2
155
0
1
1.2
98.0
0.0
0.8
5
367
1
1
1.3
98.3
0.2
0.2
65
430
35
1
12.3
80.9
6.7
0.1
16
131
11
0
9.9
82.9
7.2
0.0
50
299
24
1
13.3
80.1
6.5
0.2
12
336
183
2.3
63.2
34.5
1
103
54
0.9
65.0
34.1
11
233
129
2.9
62.5
34.6
253
278
47.6
52.4
81
77
51.0
49.0
172
201
46.1
53.9
19
26
17
141
325
3.6
4.8
3.3
26.7
61.6
10
11
9
42
86
6.1
6.8
5.5
26.9
54.8
9
15
9
98
239
2.5
4.0
2.3
26.6
64.5
110
166
81
97
70
21.0
31.7
15.5
18.5
13.4
29
51
23
35
19
18.6
32.7
14.6
22.2
11.9
80
115
58
62
51
Chi-Square
Cramer's V
2.23
0.065
22.0
31.3
15.9
16.9
14.0
36.36***
0.284
0.8
0.039
3.11
0.077
1.8
0.058
4.31
0.090
2.65
0.071
2.14
0.064
1.85
0.059
1.99
0.061
1.48
0.053
1.44
-0.052
14.6***
0.166
2.1163
0.064
Chi-Square significance levels indicate statistical significance *** p<0.01, ** p<0.05, * p<0.1. Cramer's V indicates strength of association.
Contingency analysis in Stata is unweighted. Weighted Chi-Square results imply no substantial changes to results
- 150 -
(1)
0.843**
(0.057)
0.988
(0.008)
1.002
(0.003)
1.003
(0.004)
1.007
(0.004)
1.304
(0.440)
2.857***
(1.087)
6.150***
(2.761)
5.160*
(5.024)
0.995
(0.008)
1.005
(0.005)
0.987**
(0.006)
(2)
0.843***
(0.025)
0.988
(0.009)
1.002
(0.002)
1.003***
(0.001)
1.007***
(0.001)
1.304
(0.238)
2.857***
(0.911)
6.150***
(3.983)
5.160***
(2.921)
0.995
(0.008)
1.005***
(0.002)
0.987***
(0.005)
Controls
0.000***
(0.000)
Added
0.000***
(0.000)
Added
(3)
0.856***
(0.030)
0.986
(0.009)
1.002*
(0.001)
1.004***
(0.001)
1.007***
(0.001)
2.513***
(0.658)
2.824***
(0.912)
6.229***
(4.210)
5.410**
(4.103)
0.993
(0.008)
1.005**
(0.002)
0.987**
(0.006)
0.364***
(0.065)
0.457
(0.290)
0.000***
(0.000)
Added
Interaction terms
Excluded
Excluded
Added
Observations (N)
Pseudo R
Nagelkerke's R
401
0.2241
0.3370
401
0.2241
0.3370
401
0.2347
0.3509
Total_assets_in_thds
Unexpected_expense_shocks
Expected_expense_shocks
Unexpected_income_shocks
Loan_use:_At_least_one_non-productive_loan_use
Returns:_Increase_not_sufficient_to_repay_loan
Returns:_No_permanent_increase_in_earnings
Returns:_No_investment
Literacy:_Score_numeracy_test
Literacy:_Score_general_financial_literacy
Literacy:_Score_debt_literacy_test
Interaction_gender_with_loan_use
Interaction_methodology_with_loan_use
Constant
(4)
0.875***
(0.016)
0.987**
(0.007)
1.002*
(0.001)
1.005***
(0.002)
1.008***
(0.001)
2.089***
(0.287)
2.579***
(0.693)
6.073***
(3.798)
7.089***
(3.547)
0.997
(0.006)
1.005**
(0.002)
0.985***
(0.005)
0.314***
(0.090)
(5)
0.880***
(0.028)
0.992*
(0.004)
1.001
(0.002)
1.003**
(0.001)
1.006***
(0.001)
1.513**
(0.284)
2.924***
(0.755)
5.930***
(2.770)
5.049***
(1.314)
0.996
(0.007)
1.004**
(0.002)
0.985***
(0.003)
0.000***
(0.000)
Added if
relevant
Added if
relevant
414
0.2196
0.3311
0.380*
(0.190)
Excluded
Excluded
417
0.1332
0.2107
Odds Ratios. Robust Standard Errors in parenthesis. Standard Errors for models 2-4 clustered by Main_lender_among_my_MFIs
*, ** and *** denote significance at the 10% 5% and 1% level.
For each categorical variable we have dropped one reference category, i.e. the first category according to table 2.
- 151 -
dy/dxStd.Err.
-0.020 0.002
-0.002 0.001
0.000 0.000
0.001 0.000
0.001 0.000
0.122 0.027
0.154 0.040
0.365 0.136
0.429 0.112
0.000 0.001
0.001 0.000
-0.002 0.001
- 152 -
z
-8.670
-1.970
1.590
3.250
7.980
4.520
3.890
2.690
3.830
-0.410
2.220
-3.210
P>z
0.000
0.048
0.113
0.001
0.000
0.000
0.000
0.007
0.000
0.681
0.026
0.001
95% C.I.
-0.025 -0.016
-0.004 0.000
0.000 0.001
0.000 0.001
0.001 0.001
0.069 0.175
0.076 0.232
0.099 0.631
0.210 0.649
-0.002 0.001
0.000 0.001
-0.004 -0.001
X
3.540
14.845
13.299
21.565
12.941
0.318
0.394
0.161
0.026
79.781
56.908
28.724
Table 5: Robustness check - OLS regression of models 1-5 on a discrete score of sacrifices
Dependent variable: Sacrifice score (0-72)
Average_monthly_income
(1)
-0.0248**
-0.00985
-0.00158
-0.00111
0.000152
-0.00066
0.000553
-0.00073
0.00136*
-0.000797
0.0411
-0.056
0.149**
-0.0603
0.320***
-0.0791
0.176
-0.158
-0.000964
-0.00135
0.000981
-0.000908
-0.00226**
-0.000943
(2)
-0.0248***
-0.00455
-0.00158
-0.00098
0.000152
-0.000448
0.000553*
-0.000248
0.00136***
-0.000162
0.0411
-0.0364
0.149*
-0.054
0.320*
-0.118
0.176
-0.134
-0.000964
-0.00143
0.000981**
-0.000295
-0.00226**
-0.000726
Controls
-0.176
-0.314
Added
-0.176
-0.215
Added
(3)
-0.0224**
-0.00513
-0.00152
-0.000944
0.000166
-0.000413
0.000644*
-0.000241
0.00135***
-0.000155
0.144**
-0.0489
0.149**
-0.0536
0.321*
-0.119
0.189
-0.142
-0.00115
-0.00142
0.000912*
-0.00036
-0.00219*
-0.000827
-0.153**
-0.0509
-0.102
-0.0916
-0.148
-0.233
Added
Interaction terms
Excluded
Excluded
Added
Total_assets_in_thds
Unexpected_expense_shocks
Expected_expense_shocks
Unexpected_income_shocks
Loan_use:_At_least_one_non-productive_loan_use
Returns:_Increase_not_sufficient_to_repay_loan
Returns:_No_permanent_increase_in_earnings
Returns:_No_investment
Literacy:_Score_numeracy_test
Literacy:_Score_general_financial_literacy
Literacy:_Score_debt_literacy_test
Interaction_gender_with_loan_use
Interaction_methodology_with_loan_use
Constant
N
R-sq
adj. R-sq
401
0.2350
0.1356
401
0.2350
0.1356
(4)
-0.0204***
-0.00332
-0.00152
-0.000814
0.00023
-0.000335
0.000825**
-0.000287
0.00145***
-0.000108
0.121**
-0.0308
0.141**
-0.0423
0.322**
-0.104
0.267**
-0.0634
-0.000505
-0.00111
0.000823
-0.000389
-0.00254**
-0.000565
-0.180**
-0.0518
(5)
-0.0205**
-0.00514
-0.00101*
-0.000436
0.00000727
-0.000545
0.000564
-0.000331
0.00125***
-0.000169
0.0744
-0.0373
0.181***
-0.0391
0.347**
-0.0937
0.305***
-0.0626
-0.000806
-0.00131
0.000791*
-0.000359
-0.00263***
-0.000423
0.0606
-0.189
Added if
relevant
Added if
relevant
0.293**
-0.0966
Excluded
401
0.2439
0.1407
Robust Standard Errors in parenthesis. Standard Errors for models 2-4 clustered by Main_lender_among_my_MFIs
*, ** and *** denote significance at the 10% 5% and 1% level.
For each categorical variable we have dropped one reference category, i.e. the first category according to table 2.
- 153 -
Excluded
414
0.233
0.1597
417
0.1515
0.1263
(1)
Food
0.789***
(0.054)
0.989
(0.014)
0.989**
(0.006)
1.001
(0.003)
1.005
(0.003)
2.057
(0.925)
2.206
(1.296)
5.495***
(3.535)
0.227
(0.525)
0.992
(0.009)
0.996
(0.007)
0.987***
(0.003)
21.643*
(37.695)
Added
414
0.2314
0.3154
(2)
Education
0.864***
(0.029)
0.977
(0.027)
0.982
(0.019)
1.002
(0.005)
0.993
(0.010)
1.647*
(0.418)
14.184***
(10.296)
55.345***
(23.852)
1.038***
(0.009)
1.001
(0.004)
0.984
(0.014)
0.000***
(0.000)
Added
301
0.3764
0.4340
(3)
Work
0.977
(0.047)
0.979***
(0.005)
1.000
(0.006)
1.002***
(0.001)
1.000
(0.005)
0.984
(0.393)
1.237
(0.266)
1.731***
(0.190)
13.001**
(13.300)
1.002
(0.003)
1.004
(0.003)
0.991***
(0.001)
29.585***
(26.812)
Added
414
0.1742
0.2802
(4)
Expenses
0.789***
(0.054)
0.989
(0.014)
0.989**
(0.006)
1.001
(0.003)
1.005
(0.003)
2.057
(0.925)
0.626
(0.302)
0.967
(0.325)
0.195**
(0.123)
1.007
(0.008)
1.006
(0.005)
0.998
(0.002)
0.027**
(0.040)
Added
414
0.1645
0.2688
(5)
Savings
1.085*
(0.053)
0.974***
(0.009)
1.006
(0.004)
1.007**
(0.003)
1.000
(0.004)
1.208
(0.742)
1.451***
(0.093)
1.448***
(0.126)
0.561
(0.619)
1.019***
(0.006)
1.005*
(0.003)
0.998
(0.003)
1.245
(2.409)
Added
414
0.1320
0.2131
Odds Ratios. Robust Standard Errors in parenthesis. Standard Errors clustered by Main_lender_among_my_MFIs
*, ** and *** denote significance at the 10% 5% and 1% level.
For each categorical variable we have dropped one reference category, i.e. the first category according to table 2.
The last category of ROI had to be dropped in three models for reasons of multicollinearity.
Models numbered according to list of sacrifices in Appendix 2.
- 154 -
(6)
New debt
0.410***
(0.117)
1.021
(0.022)
0.995
(0.006)
1.006
(0.011)
1.011**
(0.005)
1.971
(1.784)
5.117
(9.318)
9.951
(16.103)
40.642
(136.967)
0.981
(0.021)
1.024**
(0.012)
0.983
(0.019)
0.000***
(0.000)
Added
390
0.4177
0.4590
(7)
Sell assets
0.343***
(0.133)
0.990
(0.022)
1.013
(0.010)
1.011**
(0.005)
0.978**
(0.010)
2.332
(1.704)
293.635**
(766.868)
202.491
(667.616)
283.411*
(889.877)
0.976
(0.026)
1.026
(0.019)
0.998
(0.010)
0.000***
(0.000)
Added
380
0.5649
0.6100
(9)
(10)
External help Shame
0.410***
1.176
(0.117)
(0.388)
1.021
1.045***
(0.022)
(0.004)
0.995
1.037
(0.006)
(0.052)
1.006
1.029***
(0.011)
(0.010)
1.011**
1.003
(0.005)
(0.016)
1.971
47.422***
(1.784)
(62.280)
2.794***
480.398**
(0.917)
(1429.347)
0.915
128.608*
(0.468)
(365.289)
2.308*
(1.061)
1.020**
0.997
(0.008)
(0.022)
1.007
0.983***
(0.007)
(0.004)
0.994
0.972**
(0.010)
(0.012)
0.000***
0.062
(0.000)
(0.663)
Added
Added
372
184
0.3021
0.5249
0.3828
0.5788
(11)
Threats
1.483**
(0.283)
1.008
(0.028)
0.972
(0.041)
0.984
(0.050)
1.007
(0.031)
2.872
(2.465)
1.730
(2.298)
4.602
(7.541)
0.963
(0.027)
1.045***
(0.015)
1.001
(0.031)
0.000***
(0.000)
Added
302
0.6182
0.6581
(12)
Stress
0.755**
(0.104)
0.988
(0.015)
0.994
(0.010)
1.003
(0.005)
1.009***
(0.003)
3.416*
(2.478)
2.447***
(0.595)
2.724
(1.790)
2.613***
(0.884)
1.004
(0.011)
1.004
(0.005)
0.988**
(0.006)
0.051**
(0.068)
Added
367
0.2285
0.2923
Table 7: Ordered logit regression on the acceptability of the most common sacrifices
Dependent variable: 4-point scale for acceptability
of sacrifices
Average_monthly_income
Total_assets_in_thds
Unexpected_expense_shocks
Expected_expense_shocks
Unexpected_income_shocks
Loan_use:_At_least_one_non-productive_loan_use
Returns:_Increase_not_sufficient_to_repay_loan
Returns:_No_permanent_increase_in_earnings
Returns:_No_investment
Literacy:_Score_numeracy_test
Literacy:_Score_general_financial_literacy
Literacy:_Score_debt_literacy_test
Controls
Latent cut-off 1
Latent cut-off 2
Latent cut-off 3
Observations (N)
Pseudo R
Nagelkerke's R
(1)
Food
0.388
(0.349)
-0.034
(0.027)
-0.020
(0.059)
0.006
(0.011)
0.013
(0.029)
1.045
(1.232)
2.430
(2.155)
1.919
(1.880)
5.522
(3.742)
0.028
(0.034)
-0.004
(0.010)
0.017
(0.029)
Added
26.037
(5.946)
27.146
(5.72)
29.706
(6.064)
66
0.2973
0.5778
(3)
Work
0.064**
(0.030)
0.033**
(0.014)
-0.011
(0.008)
0.004
(0.009)
0.007
(0.008)
0.663**
(0.302)
1.608**
(0.706)
1.574**
(0.727)
0.397
(0.572)
0.001
(0.007)
-0.002
(0.003)
-0.018***
(0.006)
Added
4.517
(1.89)
5.786
(2.063)
7.681
(2.015)
241
0.2690
0.5271
(4)
Expenses
-0.064
(0.081)
0.031
(0.021)
-0.002
(0.009)
0.010*
(0.006)
-0.005
(0.003)
0.474
(0.651)
1.708**
(0.789)
2.097***
(0.409)
-15.247***
(1.275)
0.003
(0.009)
-0.012*
(0.007)
-0.001
(0.004)
Added
17.553
(2.854)
18.527
(2.162)
20.816
(2.734)
187
0.2871
0.5392
(5)
Savings
0.388
(0.349)
-0.034
(0.027)
-0.020
(0.059)
0.006
(0.011)
0.013
(0.029)
1.045
(1.232)
-0.149
(0.228)
0.052
(0.440)
0.607
(2.475)
0.014
(0.009)
0.008*
(0.004)
-0.010
(0.007)
Added
0.130
(1.024)
2.033
(1.134)
3.960
(1.285)
139
0.1450
0.3406
- 155 -
Table 8: Ordered logit regression on the frequency of the most common sacrifices
Dependent variable: 4-point scale for frequency of
sacrifices
Average_monthly_income
Total_assets_in_thds
Unexpected_expense_shocks
Expected_expense_shocks
Unexpected_income_shocks
Loan_use:_At_least_one_non-productive_loan_use
Returns:_Increase_not_sufficient_to_repay_loan
Returns:_No_permanent_increase_in_earnings
Returns:_No_investment
Literacy:_Score_numeracy_test
Literacy:_Score_general_financial_literacy
Literacy:_Score_debt_literacy_test
Controls
Latent cut-off 1
Latent cut-off 2
Latent cut-off 3
Observations (N)
Pseudo R
Nagelkerke's R
(1)
Food
1.652***
(0.411)
-0.066
(0.042)
0.161**
(0.078)
0.000
(0.010)
0.070*
(0.036)
3.503
(2.883)
0.049
(3.034)
-1.211
(3.257)
-1.018
(3.000)
0.020
(0.020)
-0.019
(0.017)
0.061**
(0.030)
Added
0.513
(2.703)
4.629
(3.633)
8.334
(3.902)
66
0.5041
0.7902
(3)
Work
-0.194**
(0.089)
-0.004
(0.014)
0.003
(0.008)
-0.005
(0.006)
0.005
(0.013)
-0.324
(0.654)
-0.806**
(0.358)
-0.449
(0.458)
-1.789*
(1.058)
-0.014*
(0.008)
0.008*
(0.004)
0.011**
(0.005)
Added
-4.509
(2.338)
-2.288
(2.033)
-1.116
(1.994)
241
0.1622
0.3438
(4)
Expenses
-0.187
(0.118)
-0.010
(0.011)
0.004
(0.014)
-0.006
(0.006)
0.003
(0.005)
-0.177
(0.742)
-0.998***
(0.326)
-0.659**
(0.331)
-0.855
(0.575)
0.005
(0.012)
-0.005
(0.006)
-0.001
(0.003)
Added
-19.745
(1.38)
-18.021
(1.342)
-17.071
(1.393)
187
0.1959
0.4239
(5)
Savings
1.652***
(0.411)
-0.066
(0.042)
0.161**
(0.078)
0.000
(0.010)
0.070*
(0.036)
3.503
(2.883)
0.619
(0.660)
0.577
(0.440)
-0.488
(0.733)
-0.028**
(0.013)
0.009*
(0.005)
-0.005
(0.010)
Added
-5.410
(2.437)
-2.851
(2.401)
-1.035
(2.676)
139
0.1639
0.3604
- 156 -
Numeracy
1. Compute 5+8
2. Compute 7*4
3. If the chance of getting a disease is 10%, how many people out of 100 would be expected to get
the disease?
4. If 5 people all have the winning number in the lottery and the prize is 2,000 Cedis, how much
will each of them get?
Debt literacy
8. You owe 100 and you are charged 20% interest per year compounded annually. If you never
pay anything off, you pay 20 interest in the first year. In the second year, do you pay A: less
interest, B: the same interest, C: more interest?
9. You owe 300 with 1% interest charged each month (i.e. 3). You pay an installment of 3
each month. How many years would it take to eliminate your debt: A: less than 5 years, B: 5-10
years, or C: never (you will continue to be in debt)?
10. You take a loan of 100. To repay, you are given the following two options: 1) Pay 12 monthly
installments of 10 each; 2) Pay back 120 a year from now. Which is the better offer: A:
option 1, B: option 2, or C: are they the same?
(Questions were developed based on {Lusardi 2007 #343 /footcit} and {Lusardi 2009 #166
/footcit}).
- 157 -
2)
3)
Work more than usual (e.g. take additional labor, work longer hours, on Sundays, and when ill)
4)
Postpone important expenses (e.g. for health, housing, business assets etc.)
5)
Deplete your financial savings (e.g. money in the house or in a savings account)
6)
7)
8)
Seizure of assets (MFI takes property by force to make up for missed payment)
9)
10) Suffer from shame or insults (also gossip about you/exclusion from a contract)
11) Feel threatened/harassed by peers/family/loan officer
12) Suffer psychological stress yourself or in your marriage
13) Other
Respondents ranked the acceptability and frequency of each sacrifice on a scale from 1 to 4.
Easily acceptable, Only just acceptable, Not really acceptable, Not acceptable at all.
Once in past year, 1-3 times in past year, > 3 times but not often, Frequently in past year
- 158 -
(1)
0.843**
(0.057)
0.988
(0.008)
1.002
(0.003)
1.003
(0.004)
1.007
(0.004)
1.304
(0.440)
2.857***
(1.087)
6.150***
(2.761)
5.160*
(5.024)
0.995
(0.008)
1.005
(0.005)
0.987**
(0.006)
2.073**
(0.680)
1.010
(0.021)
0.548
(0.462)
0.786
(0.369)
1.871
(0.867)
2.331
(1.457)
0.355
(0.263)
0.265
(0.314)
0.617
(0.516)
0.562
(0.522)
1.017
(0.144)
1.127
(0.102)
0.464*
(0.209)
0.998
(0.412)
1.718
(1.645)
(2)
0.843***
(0.025)
0.988
(0.009)
1.002
(0.002)
1.003***
(0.001)
1.007***
(0.001)
1.304
(0.238)
2.857***
(0.911)
6.150***
(3.983)
5.160***
(2.921)
0.995
(0.008)
1.005***
(0.002)
0.987***
(0.005)
2.073*
(0.802)
1.010
(0.023)
0.548
(0.420)
0.786
(0.485)
1.871***
(0.409)
2.331***
(0.236)
0.355**
(0.187)
0.265
(0.355)
0.617
(0.397)
0.562
(0.376)
1.017
(0.194)
1.127**
(0.066)
0.464*
(0.205)
0.998
(0.185)
1.718
(2.309)
- 159 -
(3)
0.856***
(0.030)
0.986
(0.009)
1.002*
(0.001)
1.004***
(0.001)
1.007***
(0.001)
2.513***
(0.658)
2.824***
(0.912)
6.229***
(4.210)
5.410**
(4.103)
0.993
(0.008)
1.005**
(0.002)
0.987**
(0.006)
3.068***
(1.195)
1.008
(0.024)
0.645
(0.440)
0.800
(0.532)
1.950***
(0.481)
2.527***
(0.383)
0.356**
(0.176)
0.259
(0.352)
0.577
(0.373)
0.617
(0.403)
1.021
(0.193)
1.123**
(0.062)
0.468*
(0.184)
1.135
(0.204)
1.997
(2.437)
(4)
0.875***
(0.016)
0.987**
(0.007)
1.002*
(0.001)
1.005***
(0.002)
1.008***
(0.001)
2.089***
(0.287)
2.579***
(0.693)
6.073***
(3.798)
7.089***
(3.547)
0.997
(0.006)
1.005**
(0.002)
0.985***
(0.005)
2.618**
(1.009)
0.393
(0.242)
0.928
(0.540)
1.959***
(0.318)
2.059***
(0.512)
0.297**
(0.165)
0.234
(0.384)
0.518
(0.222)
0.401
(0.268)
1.142***
(0.030)
0.376***
(0.139)
1.165
(0.223)
(5)
0.880***
(0.028)
0.992*
(0.004)
1.001
(0.002)
1.003**
(0.001)
1.006***
(0.001)
1.513**
(0.284)
2.924***
(0.755)
5.930***
(2.770)
5.049***
(1.314)
0.996
(0.007)
1.004**
(0.002)
0.985***
(0.003)
Appendix 3 continued.
Main_occupation_On-selling
2.528*
2.528***
2.603***
1.976**
(1.320)
(0.527)
(0.504)
(0.608)
Main_occupation_Production of goods/Other
2.165
2.165
2.228*
1.695
(1.622)
(1.021)
(1.052)
(0.687)
Health_problems_Minor/Strong heath problems
1.938*
1.938*
2.011*
1.922**
(0.698)
(0.722)
(0.765)
(0.593)
Level_of_education_Primary
1.840
1.840
2.020
(1.454)
(2.169)
(2.253)
Level_of_education_JSS/JHS/Middle School
1.457
1.457
1.601
(1.196)
(1.261)
(1.334)
Level_of_education_Secondary/vocational/technical/commerc
2.301
2.301
2.585
(2.146)
(2.287)
(2.515)
Level_of_education_Tertiary, university graduate
0.500
0.500
0.722
(0.585)
(0.677)
(0.945)
Income_volatility_Little volatility
9454958.000*** 9454958.000*** 5827024.000*** 5392843.000***
(14800000.000) (9325882.000) (7143987.000) (8835741.000)
Income_volatility_Strong volatility
6031196.000*** 6031196.000*** 3596522.000*** 3798558.000***
(9562575.000) (6412996.000) (4558067.000) (6590799.000)
1.000
1.000
1.000
Amount_of_savings_self_reported
(0.000)
(0.000)
(0.000)
1.511
1.511
1.556
Number_of_MFIs_crossborrowing
(0.768)
(0.999)
(0.932)
1.000
1.000
1.000
Total_amount_of_debt_disbursed
(0.000)
(0.000)
(0.000)
1.074*
1.074**
1.056*
1.057
Average_maturity_weighted
(0.045)
(0.035)
(0.034)
(0.041)
0.644
0.644
0.835
Group_or_individual_customer_ran
(0.255)
(0.173)
(0.325)
0.783*
0.783
0.770*
0.795*
General_fairness_of_MFIs_rank
(0.109)
(0.119)
(0.111)
(0.094)
0.364***
0.314***
Interaction_gender_with_loan_use
(0.065)
(0.090)
0.457
Interaction_methodology_with_loan_use
(0.290)
Main_lender_MFI 2
1.355
1.355**
1.260
1.560***
(0.663)
(0.161)
(0.179)
(0.159)
Main_lender_MFI 3
1.289
1.289
1.240
1.494***
(0.753)
(0.293)
(0.239)
(0.222)
Main_lender_MFI 4
2.082
2.082**
2.091**
1.787***
(1.001)
(0.640)
(0.632)
(0.395)
Main_lender_MFI 5
1.235
1.235
1.260
1.277**
(0.593)
(0.281)
(0.290)
(0.159)
Constant
0.000***
0.000***
0.000***
0.000***
0.380*
(0.000)
(0.000)
(0.000)
(0.000)
(0.190)
401
401
401
414
417
Observations (N)
0.2241
0.2241
0.2347
0.2196
0.1332
Pseudo R
0.3370
0.3370
0.3509
0.3311
0.2107
Nagelkerke's R
Odds Ratios. Robust Standard Errors in parenthesis. Standard Errors for models 2-4 clustered by Main_lender_among_my_MFIs
*, ** and *** denote significance at the 10% 5% and 1% level.
For each categorical variable we have dropped one reference category, i.e. the first category according to table 2.
- 160 -
(1)
1.077
(0.111)
0.981
(0.017)
0.990
(0.007)
1.002
(0.008)
1.017***
(0.005)
1.291
(0.621)
10.384**
(10.793)
25.337***
(25.580)
1.275
(3.361)
1.045**
(0.018)
0.978**
(0.009)
0.980**
(0.009)
0.004*
(0.013)
Added
386
0.4158
0.4781
(2)
1.077
(0.124)
0.981
(0.017)
0.990
(0.010)
1.002
(0.006)
1.017***
(0.006)
1.291
(0.702)
10.384***
(4.615)
25.337***
(21.229)
1.275
(4.804)
1.045***
(0.011)
0.978*
(0.012)
0.980***
(0.007)
0.004**
(0.010)
Added
386
0.4158
0.4781
(3)
1.060
(0.108)
0.979
(0.019)
0.991
(0.010)
1.002
(0.006)
1.018***
(0.006)
1.083
(0.760)
10.850***
(4.797)
27.580***
(21.263)
1.082
(4.472)
1.046***
(0.011)
0.979*
(0.012)
0.980***
(0.006)
0.002**
(0.006)
Added
386
0.4180
0.4804
(4)
1.077
(0.111)
0.981
(0.017)
0.990
(0.007)
1.002
(0.008)
1.017***
(0.005)
1.291
(0.621)
10.717***
(5.046)
20.623***
(13.022)
2.304
(5.315)
1.041**
(0.017)
0.989
(0.018)
0.980***
(0.006)
0.003***
(0.003)
Added
413
0.3069
0.3652
(5)
0.962
(0.060)
0.991
(0.009)
0.996
(0.003)
0.999
(0.003)
1.010***
(0.001)
1.139
(0.376)
3.857***
(0.903)
10.189***
(7.691)
2.064
(3.202)
1.031**
(0.013)
0.990
(0.008)
0.991
(0.005)
0.004***
(0.004)
Added
410
0.1560
0.1919
Odds Ratios. Robust Standard Errors in parenthesis, for models 2-4 clustered by Main_lender_among_my_MFIs
*, ** and *** denote significance at the 10% 5% and 1% level.
For each categorical variable we have dropped one reference category, i.e. the first category according to table 2.
Delinquency is a binary variable if a respondent was at least 1 day late on a loan at the day of the survey.
- 161 -
- 163 -
for MFIs. Operating costs may increase, market size may decrease, customer satisfaction may
deteriorate, and income may be postponed or even lost. Furthermore, there are internal and
external reputation effects that can lead to, for example, problems of staff attrition, the
uncontrolled spreading of delinquency problems, funding cuts, and political constraints faced
by the MFI.
In addition to the lenders and borrowers directly affected by over-indebtedness, third-party
stakeholders can face negative consequences. Spillover effects can affect borrowers who are
not over-indebted or MFIs that do not initially have an over-indebtedness problem in their
portfolio. Large over-indebtedness crises can affect complete microfinance markets, the
financial system, and the wider industry.
Chapter 2 shows that the consequences of over-indebtedness reach far beyond the direct
effects of delinquency and default that are the most commonly discussed in the debate about
over-indebtedness. It suggests that cultivating an awareness of these complex potential
downsides of debt will help MFIs to develop a more fine-tuned approach to lending, both in
terms of selecting borrowers and determining repayment capacity and in terms of designing
loan product features.
- 165 -
- 166 -
indebtedness consequences on MFIs indicate, is likely to make business sense in the long
run.1
Furthermore, recent repayment crises in microfinance markets have shown that when the risk
absorption capacity of microborrowers is over-extended and even severe sacrifices are no
longer sufficient to buffer repayment difficulties, the risk that had been shifted to borrowers
can shift back into MFI portfolios. Good customer protection therefore contributes to good
risk management. Identifying over-indebted borrowers is an excellent means for identifying
borrowers at risk of future delinquency.
Providing that high-level findings can be generalized to the microfinance industry in spite of
the context dependency of over-indebtedness and the subjective elements of our
measurement, the main policy implication of these findings in Chapter 3 is that microfinance
institutions must foster awareness of the downsides of debt and listen better to their
customers. This awareness is likely to have practical repercussions, for example, on loan
officers incentives, MFI regulation, investor and donors expectations, and on impact
measurement in microfinance. In general, the microfinance industry should place at least as
much importance on managing its impact as it does on managing its financial sustainability,
and it should focus on not only the potential positive impact but also the potential negative
consequences of debt on microborrowers.
1 This dissertation does not expand on the detailed practicalities of MFIs measuring over-indebtedness according to customer
satisfaction. While it encourages MFIs to work with this level of customer data from time to time, there are significant
challenges for MFIs to do sacrifice interviews themselves and total anonymity needs to be guaranteed to respondents for data
to be sufficiently reliable. Cooperation on an market level with qualified research firms might be useful and are in fact
already on their way in several microfinance markets.
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Finally, lenders can increase the risk of over-indebtedness by means of, for example, an
aggressive marketing and sales focus, with an inappropriate product offer such as instalment
schedules that are not appropriate for a borrowers repayment capacity, an exaggerated zerotolerance policy, and conducive lending and collections procedures such as lax evaluations of
repayment capacity, nontransparent terms and conditions, and coercive collection practices.
This analysis of the causes of over-indebtedness in Chapter 1 indicates that there exists a
broad range of levers for measures against over-indebtedness. It shows that the response to the
challenge of over-indebtedness is not necessarily a reduction of credit and thus a return to a
higher degree of financial exclusion. Although some causes are best addressed with more
conservative lending policies, others suggest that over-indebtedness can be reduced by means
of, among others, more appropriate credit products, flexibility in instalment schedules,
reasonable options for rescheduling, customer communication that is more appropriate for
borrowers mental abilities. Some borrowers may need less credit than the microfinance
industry currently offers but many may rather need better credit. The microfinance industry
needs to further develop its lending methodology and non-credit product offerings.
Although, for some of these measures, MFIs will have to accept trade-offs in the interest of
social performance or at least in the interest of maintaining a minimum level of customer
protection, many of these measures will make good business sense, improving portfolio
quality and contributing to business growth in the long run through enhanced customer
satisfaction.
This conceptual analysis of over-indebtedness causes is based however on the literature and
many of the findings have been transferred from the historical and geographical context of
high-income country consumer finance to the microfinance context. To develop more
concrete policy recommendations with regard to effective measures against overindebtedness, the microfinance industry needs to know which factors are empirically related
to over-indebtedness and which borrowers are most at risk. Optimally, it would tailor
solutions to the root causes of the challenge of over-indebtedness in a given context. Research
on the factors related to over-indebtedness is thus both in the interest of the risk management
of MFIs and in the interest of the promoters of microfinance customer protection.
Based on econometric regression analysis, Chapter 4 of this dissertation investigates four
hypotheses of potential factors related to over-indebtedness. It indicates that in the study
context in Ghana, poorer microborrowers in terms of income as well as assets are more likely
to be over-indebted. In addition, there is an independent effect of adverse economic shocks to
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low investment returns, more flexible instalment schedules allow borrowers to deal better
with low and volatile incomes and with adverse economic shocks. Temporary shocks may
also represent reasons for loan rescheduling or even for loan upgrades. Other approaches
could be based on the product mix of microfinance, the promotion of savings and insurance,
on financial literacy training, or - in countries where this may not be overly ambitious - on
government action with regard to safety nets and debt relief for over-indebted borrowers.
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a) Gender in microfinance
There is extensive literature on gender issues in microfinance, investigating the impact of
microfinance on gender empowerment (see Mayoux (2011) for a comprehensive framework)
and, although less frequently, the impact of gender on microfinance operations. With regards
to the former, microfinance is suggested to have a positive effect on gender equality,
empowering women borrowers to take more (financial) responsibility in the household and to
organise the interests of women on a community level (Hashemi et al., 1996; Kabeer, 2001;
Pitt et al., 2006). While this dissertation does not analyse the impact of microloans or include
data on the relationship between men and women, its findings about over-indebtedness are
more in line with the critical studies that suggest a potential negative effect of microfinance
on womens empowerment at least in the case of some borrowers, increasing the vulnerability
of female debtors (Goetz, Sen Gupta, 1996; Mayoux, 2001; Garikipati, 2008). The overindebtedness that this dissertation revealed is a sign of vulnerability. It underlines the request
by Mayoux (2011) to take gender issues more seriously, as opposed to simply expanding
access to finance by women, by ensuring real empowerment and an enhancement of well-
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being rather than capturing female savings for the sake of MFI profitability and triggering a
feminisation of debt.
With regards to the latter, the gender of microborrowers is said to influence the impact of
microlending. Women represent a particularly vulnerable and needy target group and use
microloans and their income more to the benefit of their households than do men. (Thomas,
1990; Engle, 1993; Khandker, 2003). Even the gender of children in a borrowers household
can impact borrowing behaviour (Agier et al., 2012). These streams of research are likely to
relate to the findings of Chapter 3 that differences exist between the over-indebtedness of
male and female borrowers. Chapter 3 revealed that women experience different sacrifice
situations than are men, for example resorting to economic coping strategies such as assets
sales or loan recycling less often. It also showed that for women, over-indebtedness based on
sacrifices seems to have a slightly different relationship to the typical risk management
indicators of over-indebtedness than for men. This observation may relate to the different
usage of loans and to the different level of attention to household welfare observed between
genders. Together with the above mentioned gender research, these findings may indicate that
the consequences of over-indebtedness on the household are more severe in the case of female
borrowers.
Additionally, the control variables in Chapter 4 show that a borrowers gender is significantly
related to the likelihood of over-indebtedness. A supplementary analysis of the marginal
effects of the control variables in our parsimonious model of the main logistic regression
indicates that this relationship is in favour of women: ceteris paribus a female borrower has a
16.5% lower likelihood of being over-indebted than does a male borrower. While overindebtedness and a visibly poor repayment performance are not the same, they are related.
This finding may thus relate to the gender research that has proven the repayment rates of
women to be better than those of men (Khandker et al., 1995; Armendriz, Morduch, 2010),
confirming it from a customer protection point of view. The causes for this difference could
of course be manifold. Women may differ from men in terms of the sociological and
psychological influence factors on over-indebtedness that Chapter 1 has identified but that,
with the given data set, could not be tested in Chapter 4. For example, the gender literature
suggests that women behave differently in financial decisions and tend to be more risk averse
(Jianakopolos, Bernasek, 1998; Olsen, Cox, 2001). This risk aversion may help women avoid
certain risks of over-indebtedness, making them use their loans more carefully or inciting
them to better prepare for the risk of adverse shocks. The next paragraph adds the reverse
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perspective that differences may be due to gender effects on the treatment of borrowers by
MFIs.
With regards to the effects of gender on microfinance operations, the gender of borrowers has
been shown to impact the lending decisions of MFIs. Specifically, MFIs seem to discriminate
against women by granting them lower loan amounts (Agier, Szafarz, 2010, 2011). This may
influence over-indebtedness risks. For example, they could explain the lower overindebtedness risk of women borrowers, as loan officers seem to be stricter in their assessment
of repayment capacity when a borrower is a woman. Of course, the over-indebtedness
problem applies only to certain borrowers and other women may have benefitted from higher
loan amounts if they had not been discriminated against. Nevertheless, the higher overindebtedness risk for men might indicate that the positive discrimination of male borrowers by
MFIs is not always in the interest of male clients.
Finally, taking gender differences seriously can help MFIs design their products and
operations in a way that fits the needs of clients better. Gurin (2011) suggests that
microfinance services should be built on an improved understanding of the specific needs and
motivations of women in dealing with financial services and that they should take the preexisting informal financial practices into account that tend to display strong gender influences.
This is in line with this dissertations suggestion to tailor products better to clients needs and
to understand the complexity of the financial lives of microborrowers and the vulnerability
this implies, even when repayment rates are high. A more detailed analysis of gender
differences in the sacrifices that borrowers make and how acceptable the different coping
strategies are to men and women could help in developing the required understanding of
gendered finance needs.
2011; Gathergood, 2012). Another stream of research measures the effects of financial
literacy trainings and tries to identify the most effective type of training (DeLaune et al.,
2010; Drexler et al., 2010; Altman, 2012).
The present dissertation contributes to this literature by highlighting the relationship of debtspecific literacy to over-indebtedness. It suggests that debt literacy trainings that teach
borrowers to better understand loan contracts and repayment obligations can indeed reduce
the risk of over-indebtedness. At the same time, this dissertation sheds more light on the type
of training required: according to the available data, financial literacy education programs
need to be specifically tailored to the goal of promoting the understanding of loan contracts.
Numeracy training does not seem likely to have any effects on over-indebtedness, at least in
the Ghanaian sample where numeracy is already relatively good. And general knowledge
about savings and inflation even seemed to have negative effects potentially because people
who feel more knowledgeable about financial matters in general become less careful in their
financial decision making.
The fact that debt-literacy specific knowledge seems to be more helpful than general financial
skills could be in line with the studies that find general financial literacy trainings to have
very limited effects on behaviour and on reducing financial problems (Willis, 2008; Karlan,
Valdivia, 2011; Altman, 2012; Meier, Sprenger, in press). It is in line with research on the
intersection of financial literacy studies and behavioural economics: simple rules of thumb
that help borrowers with their decision making may be more effective than complicated
financial trainings that overload borrowers with knowledge that is hard to memorise and
difficult to put into practice (Tiwari et al., 2008; Drexler et al., 2010; Altman, 2012). The
same applies to financial literacy trainings being more effective in an informal format rather
than in the form of standard classroom trainings. For example theatre plays and soap operas
on TV convey indirect messages about the importance of savings and about caution with
regards to debt.
Finally, there is important criticism against relying on financial education as the sole solution
to customer protection against over-indebtedness. The following paragraphs are substantially
based on the critical analysis of Gurin (in press). Firstly, financial education cannot replace
financial market regulation or poor social security systems. Placing emphasis on financial
education to avoid over-indebtedness implicitly gives the responsibility for debt problems to
the customers alone and does not recognise most of the main causes of over-indebtedness.
This is in line with the framework of Chapter 1 that has identified the broad range and
- 175 -
creditworthiness. This section will briefly review the literature on credit bureaus and then
focus on details where this dissertations findings on over-indebtedness relate to the research
on credit bureaus.
Credit bureaus are considered one of the most important opportunities for the microfinance
sector and their lack one of the biggest current obstacles (Gardeva, Rhyne, 2011). The
promoters of credit bureaus argue that credit bureaus expand access to credit as they reduce
the risk for lending institutions and help good borrowers to build a positive credit history and
improve their access to loans (Christen et al., 2012). Also, national credit registries are said to
lower the interest rates on loans by reducing the cost of risk assessment and improving client
segmentation (Gardeva, Rhyne, 2011). Based on a randomised experiment with a microlender
in Guatemala, de Janvry et al. (2010) provide empirical evidence for both the credit expansion
and the efficiency effects in a microfinance context.2 This is in line with a study from the nonmicrofinance corporate lending sector in Eastern Europe and the Soviet Union that also finds
increased access to credit for companies and lower credit costs (Brown et al., 2009). It has
also been confirmed on a macroeconomic level, by a panel analysis of the effects of national
identification systems, which result in better functioning credit bureaus, on the extent and cost
of lending in 172 countries between 2000 and 2008 (Giannetti, Jentzsch). A macro analysis by
Ahlin et al. (2011) in contrast shows that the evidence on the effects of credit bureaus is not
clear. They analyse data from 373 MFIs merged with macroeconomic national data. With
regards to the effects of credit bureaus, they find that private credit bureau coverage (i.e.,
breadth of information) is correlated with faster loan-size growth, while the credit information
index (i.e., quality of information) is strongly associated with slower loan-size growth.
However, the main function of credit bureaus is currently seen in a reduction of multiple
borrowing and thus over-indebtedness (Gardeva, Rhyne, 2011; Lyman et al., 2011; Christen
et al., 2012). This dissertation has underlined the need for measures against over-indebtedness
in microfinance as an important priority for the microfinance sector. At the same time, the
framework of the causes of over-indebtedness in Chapter 1 highlights the complexity of the
matter and notes that the spectrum of factors that can lead to over-indebtedness is very broad.
Many of the causes identified in Chapter 1 cannot be addressed by credit bureaus. In fact, the
only cause of over-indebtedness that credit bureaus combat in a direct form is the
unreasonable behaviour of microborrowers to a certain extent, a credit information registry
2 These findings for the microfinance context may be specific to group-level information sharing rather than to individual
information in credit bureaus (McIntosh et al., in press).
- 177 -
could help lending institutions identify borrowers that are more likely than others to make
unreasonable decisions with their loan applications. It can reduce lending to such borrowers.
At the same time, credit bureaus are far from perfect for this purpose. They may provide
certain incentives for microborrowers to avoid a negative credit history and take loan
obligations more seriously (Chomsisengphet, Elul, 2006; de Janvry et al., 2010), but that is a
reduction of moral hazard, not of repayment difficulties among honest borrowers. Empirical
results from the introduction of a credit bureau in Albania in 2008 confirm this disciplinary
effect as the main impact of credit bureaus (Behr, Sonnekalb, 2012). Credit bureaus do not
address the underlying causes of the questionable decisions made by borrowers. For example,
they do not address temptation, or a lack of understanding of loan contracts, or social
pressures, and so on. Nor are credit bureaus perfect instruments to identify the borrowers that
are likely to run into difficulties. They may not estimate the repayment capacity and
willingness to repay of all borrowers correctly and can lead to the exclusion of certain
borrowers that could have benefited from credit and who would have repaid without
difficulties, while others may continue borrowing to their detriment. In the microfinance
context, even the correct identification of individuals as the same debtors with several
different lenders is already very challenging; furthermore, data protection standards are low,
thus raising additional customer protection concerns (Lyman et al., 2011).
With regards to lending institutions and the causes of over-indebtedness that Chapter 1
identified on the side of MFIs, credit bureaus do not improve the incentives for MFIs to lend
more responsibly. To a certain extent, they improve the ability of MFIs to lend responsibly,
but they do not address the pressures for growth that tend to push MFI management into
irresponsible lending, nor do credit bureaus help to improve unfair lending procedures or
promote MFIs to tailor products to the needs of clients. In contrast, the effect tends to be the
other way around: As information sharing between lenders by contributing to and using a
credit bureau can entail certain risks for the market share of participating lenders, the
willingness of lenders to share information depends on the extent of competition and the level
of information asymmetries in a market (Brown, Zehnder, 2010; Lyman et al., 2011).
Eventually, as concerns external factors that can cause over-indebtedness, credit bureaus
represent an element of the institutional environment and can have an effect on the
competitive situation in a microlending market. They provide incentives against moral hazard
on behalf of borrowers and against adverse selection in borrower groups (de Janvry et al.,
2010). However, they cannot address the most frequently cited external cause of overindebtedness: they do not protect borrowers from adverse shocks to their income or expenses.
- 178 -
Supplementing the theoretical analysis of how credit bureaus relate to the causes of overindebtedness, Chapter 3 of this dissertation provides empirical evidence on the relationship
between multiple borrowing and over-indebtedness. This is important insofar as, according to
the literature cited above, the reduction of multiple borrowing is the major mechanism of how
credit bureaus are supposed to combat over-indebtedness. The findings of Chapter 3 are rather
disappointing to those who consider credit bureaus the silver bullet solution. In the Ghanaian
case study the number of loans a borrower has outstanding is not related to the likelihood of
being over-indebted. Chapter 3 suggests that there are good reasons why borrowers might
want to take multiple loans, so a direct relationship between multiple borrowing and overindebtedness is not to be expected. This chapter also hypothesises that multiple borrowing
may become a problem only at very high, unmanageable levels. The relationship between the
two variables may therefore emerge only in markets with much higher levels of multiple
borrowing than is the case in Ghana. This interpretation of the findings in Chapter 3 suggests
that credit bureaus may be a good solution against unsustainable levels of loan accumulation
in highly competitive and overbanked markets (or market segments). However, the Ghanaian
case proves that a reduction of multiple borrowing is not always the key to fighting overindebtedness: the level of multiple borrowing in this market is very low and nevertheless 30%
of borrowers are over-indebted. A credit bureau and reduction of multiple borrowing would
not be able to address this over-indebtedness.
Finally, the empirical findings reported at the beginning of this section indicate an expansion
of credit as a result of credit bureaus. This could also be interpreted as a sign of an increased
debt burden on individuals. The expansion is generally seen as positive based on the
assumption that credit is given to the more creditworthy individuals and is thus desirable. At
the same time, this dissertation has shown that the short-term risk management considerations
of MFIs who want to keep repayment discipline high are not always in line with the customer
protection perspective. Individuals may be creditworthy from a repayment point of view but
struggling excessively with their repayment obligations. The expansion of credit may partly
be based on the above-mentioned discipline effects of credit bureaus. According to this PhD
dissertation, pressure for repayment discipline may imply an increase in borrower sacrifices
and thus in over-indebtedness from a customer protection point of view. Also, the empirical
study by (Ahlin et al., 2011) cited above contrasts the common belief that credit bureaus
reduce default. All three indicators, private credit bureau coverage, public credit bureau
coverage, and the credit information index, are related to higher default levels among
microborrowers. The authors are unsure how to interpret these findings but suggest a potential
- 179 -
positive explanation that credit bureaus lead to the funding of more risky ventures and thus
higher default rates. This can be a desirable development if the levels of risk financing were
previously suboptimal. From a perspective of over-indebtedness it looks rather worrisome.
Of course, the above critical paragraphs about the effects of credit bureaus and their
relationship to the causes of over-indebtedness do not contradict the potential of promoting
credit bureaus in microfinance markets. Credit bureaus are most likely very useful and, given
all the obstacles to their development and the lengthy process of establishing functioning
credit bureaus (Lyman et al., 2011), the industry should build credit bureaus long before the
competitive situation in a market gets too critical. Nevertheless, this dissertation is a warning
that credit bureaus may not be a perfect solution to the over-indebtedness challenge, and it
proves that in cases like that of Ghana, other measures are necessary to prevent overindebtedness among microborrowers.
The explicit consideration of vulnerabilities is important not only for the design of
development policies it has equally important implications for the measurement of the
impact of development policies. Impact measurement is an intensely researched question in
microfinance (Duvendack et al., 2011; Karlan, Goldberg, 2011) as well as in most other fields
of development policy and in the broader literature on aid effectiveness for poverty alleviation
(Collier, Dollar, 2001; Cogneau, Naudet, 2007; Feeny, de Silva, 2012). Although this
dissertation does not measure the impact of microfinance, it raises pertinent questions about
the role of microcredit in the causal chain behind borrower sacrifices and over-indebtedness.
It suggests that future impact measurements of microfinance should not focus only on the
upside potential of microfinance impact but should also explicitly measure the potential
downsides. This is likely to contribute to the general discussion about commercialization in
development and may render potential trade-offs between commercialization and customer
protection apparent.
The need for explicit attention in microfinance impact studies to potential downsides applies
to the selection of variables for impact evaluation: Certain variables such as income or assets
can display both improvements and deteriorations. Other downsides such as stress and
pressure, negative health effects, and social repercussions of bad debt would usually go
undetected unless they were measured explicitly. The need for explicit attention to negative
effects of interventions also applies to the level of detail in impact analysis: Impact
evaluations tend to focus on average developments in the treatment group. However, to
determine whether an intervention that is useful for some recipients but harmful to others,
impact evaluations need to disaggregate the average developments and identify segments in
the groups of the recipients that have been impacted in different ways. Both the variable
selection effect and the disaggregation effect apply to all development policy impact
evaluations that track impact variables on an individual level far beyond microfinance.
This thesis suggests explicitly addressing the potential negative impact of microfinance in
future randomised control trials, the most precise type of impact evaluation in terms of
avoiding selection-biases (Duflo et al., 2007). However, it underlines the case both for
complementing randomised control trials with and basing them on qualitative work and
macro-analysis (Rodrik, 2008) as well as for linking theory (in this dissertation for example
behavioural economics) to empirical research (Duflo et al., 2007; Deaton, 2010). Once again,
the implications for measuring the impact of microfinance are applicable to the individuallevel impact measurement of development policies in general.
- 181 -
Finally, the implications of this dissertation for general development research result from the
use of a subjective approach to understanding the experiences of recipients. This approach is
still unusual and tends to encounter a certain resistance by other researchers who are used to
more objective measurements and therefore are less sensitive to the shortcomings of standard
measurements3 while remaining highly sensitive to the shortcomings of indicators with
subjective elements.
There are two different perspectives on over-indebtedness in microfinance, the risks
management perspective and the customer protection perspective. For the risk management
point of view, over-indebtedness can be defined based on straight forward, objective concepts.
For the customer protection perspective, researchers recognize that the phenomenon is more
complex and has personal elements on the individual level. Nevertheless, many researchers
doubt that a subjective approach to measuring over-indebtedness can provide useful results.
This dissertation demonstrates that a subjective definition of over-indebtedness works in
practice and that it provides new insights that previous research based on objective indicators
was not able to address.
The subjective approach contributes to a growing literature from other fields that consider
subjective indicators more reliable for questions of well-being and happiness than the usual
material proxies, such as income or consumption (Dolan et al., 2008; Oshio, Kobayashi, 2010;
Angner, 2010). It is in line with Sens concept of development as freedom that promotes a
much larger view on the desired impact of development than just improving the material
situation of the poor (Sen, 1999). Rather than just at increasing consumption, the concept of
development as freedom aims to increase the capabilities of people, their freedom to live
according to their own choices.4 Copestake (2008) equally promotes a focus on well-being
during the evaluation of the desired and non-desired outcomes of development practices,
highlighting that well-being is influenced by peoples feelings and perceptions rather than
solely depending on material indicators. Engelbrecht (2009) argues for a new welfare
economics of sustainability based on subjective measures of well-being. On a
macroeconomic cross-country level, the paper makes the case for incorporating the subjective
3 Deaton (2010) make the point that the usual material measurements of poverty and inequality are also much less objective,
reliable, and comparable than we like to think.
4 In this dissertation, not only the definition of over-indebtedness is related to Sens concept of development but also the
resulting findings. Chapter 2 establishes the link of this dissertations findings about over-indebtedness among microfinance
borrowers to the concept of development as freedom, showing that the consequences of over-indebtedness represent
reductions in capabilities and could thus be interpreted as a form of impoverishment.
- 182 -
approach to measuring well-being into the discourse on sustainable development and natural
capital.
The question of subjectivity is related to a trend towards interdisciplinarity, questioning the
role of economics in development research. According to Fine (2002), development research
is prone to a risk of economic imperialism, where the economic discipline has too much
weight compared to other social sciences and forecloses the analytical agenda of development
research. Similarly, education and curriculum development research by Gervedink Nijhuis et
al. (2012) expresses a need for more culturally sensitive approaches in development policy.
Along the same lines, Kanbur (2002) points towards the benefits of considering non-economic
disciplines such as political science, sociology and anthropology in development research. He
argues in favour of interdisciplinarity. Given the difficulties that interdisciplinary research
tends to pose in practice, he hopes that future studies will increasingly serve as examples of
interdisciplinary research on development policy, showing how the influence of multiple
disciplines changes the common thinking based on a single discipline.
This PhD thesis implements his recommendation. It provides multiple examples where, taking
the insights from other disciplines than economics into account, common misconceptions of
the microfinance industry do not hold against local realities. It challenges common thinking
about the relationship between delinquency and over-indebtedness, about the riskiness of
multiple borrowing, about the benefits of tight, high-frequency instalment schedules, about
the effects of the zero-tolerance-policy, and so on. Importantly, the vulnerability revealed by
the Ghana case study in this dissertation is only partly a question of financial vulnerability.
Several of the sacrifices that make up the vulnerability experiences of the microborrowers in
Chapter 3 are culturally specific vulnerabilities. They result from the social interaction
between individuals and from the local, culturally dependent perception of honour, reputation
and personal dependency. The extent of over-indebtedness that this dissertation identifies in
Ghana is therefore dependent on its subjective, interdisciplinary approach and would have
gone over-looked by an objective economics approach based on risk management indicators.
Interdisciplinarity tends to be complicated, take time and reduce the comparability of results.
Nevertheless, based on its interdisciplinary approach, this PhD provides a new answer to the
measurement of over-indebtedness from the customer protection perspective and goes further
into the analysis of the causes, consequences and solutions than would have been possible
with a purely economic approach. By highlighting the difference that interdisciplinarity
- 183 -
makers should take the full spectrum of potential consequences of over-indebtedness into
account applies to consumer finance in industrialised nations as much as it does to
microfinance in developing countries.
Understanding the full breath of consequences of over-indebtedness also feeds back into the
definition of a minimum existence level in developed country insolvency regulations.
Recognising certain psychological and social risks of over-indebtedness (and poverty in
general), the concept of a minimum existence level in developed countries already reaches
beyond the mere guarantee of survival. Minimum existence levels are not only supposed to
ensure that borrowers will keep the resources to eat and live in decent accommodations, but
they tend to be sufficiently generous to allow for a minimum level of social participation. The
analysis of the consequences of over-indebtedness in this PhD thesis can contribute to the
definition of what a minimum existence level should comprise, pointing out the full range of
problems that borrowers experience, and highlighting the importance of financial and social
participation. Also, the data from Ghana provides local information on the subjective
evaluation of hardship in terms of acceptability. Finally, the analysis of consequences can
identify the potential consequences of over-indebtedness that no minimum existence level can
prevent.
Finally, this dissertation has developed a framework of the causes of over-indebtedness. This
framework is built in large part on consumer finance research from developed countries (e.g.,
Webley, Nyhus, 2001; Soman, Cheema, 2002; Brown et al., 2005; Christen, Morgan, 2005;
Stone, Maury, 2006; Lusardi, Tufano, 2009). It is therefore likely to apply to this context. The
framework of the causes of over-indebtedness unites previous research into a comprehensive
tool for analysis that was not previously available, neither in microfinance nor in consumer
finance in industrialised countries. It can guide future research on over-indebtedness in
developed countries as much as it can in microfinance, ensuring a comprehensive perspective
on the causes of over-indebtedness and the complex interaction of influence factors. It can
enrich the debate about whose responsibility it is to prevent over-indebtedness. And it can
broaden the solution space for measures to prevent and alleviate over-indebtedness - also in
the context of developed countries.
- 186 -
- 189 -
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Appendix
Schicks, J. and R. Rosenberg (2011) 'Too Much Microcredit? A Survey of the Evidence on
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- 214 -
OCCASIONAL PAPER
No. 19
September 2011
Jessica Schicks and
Richard Rosenberg
Executive Summary
Microcredit has long had an enviable repayment
recordlevels of delinquency and default have
been very low. But more recently, collection
problems have appeared in some major markets.
In a review of four countries, Chen, Rasmussen,
and Reille (2010) reported that delinquent loans,
which averaged 2 percent of portfolio in 2004,
skyrocketed to 2009 levels of 7 percent in Bosnia
Herzogovina, 10 percent in Morocco, 12 percent
in Nicaragua, and 13 percent in Pakistan. In some
of these countries, subsequent levels have risen
quite a bit higher. More recently, collection has
collapsed in the Indian state of Andhra Pradesh.1
Delinquency and default threaten the viability of
microlending institutions. But this paper looks at
repayment problems mainly from the perspective
of the clients, not the lenders. We examine
definitions of over-indebtedness in some detail,
1 In Nicaragua, Pakistan, and Andhra Pradesh, at least some of the repayment problem was due to strategic default: borrowers who were able to
repay choosing not to do so.
2 Well address what serious means later in the discussion.
Prevalence
A rapidly increasing number of microcredit
markets, especially regional markets within
a country, are becoming competitive and
3 The final qualifying clause is important: this statement and much of this paper have reference to the simple and relatively rigid microcredit
products that have made up most of the supply until now. Many microlenders are now looking to supplement their offerings with more flexible
and client-responsive products, including not just loans but also voluntary and commitment savings, insurance, and money transfer services.
Causes of Over-Indebtedness
Multiple factors contribute to over-indebtedness:
lender behavior can put borrowers at undue risk,
clients themselves make bad borrowing decisions,
and external factors beyond either partys control
(e.g., illness or natural disaster) can push borrowers
into situations where its very difficult or impossible
to repay.
It seems plausible that very rapid growth of an
individual lender could strain its systems and lead
to loan portfolio problems. But it is hard to find
support for this proposition in the statistical data.
Rather, it appears more likely that repayment
deterioration is associated with characteristics of
the aggregate market (which is not necessarily a
nationwide market), including the growth rate in
aggregate number or amount of active loans, as
well as the penetration ratei.e., the percentage
of the population in the market who have loans.
As noted, microcredit providers may relax their
lending standards or stray from proven loan
management methods under conditions of
competition in markets approaching saturation.
Over-aggressive marketinge.g., pressuring
borrowers to take out a new loan after they
have paid off an old oneadds to risk. Lenders
sometimes fail to give borrowers clear and
accurate information about loan costs and terms,
communicated in a format that supports good
decision making. The common system of gradually
increasing loan sizes sometimes becomes
practically automatic, which eventually puts clients
at risk if there has not been sufficient investigation
of their ability to repay. Loan products that are
too inflexible and repayment schedules that are
4 In this clear cut hypothetical example, the borrower would probably not declare her skipped meals as an unduly high sacrifice related to the loan
repayment. But real situations are often less clear cut.
Methodology
Definition
of Over-indebtedness
Findings
Bolivia 19972001
(Gonzalez 2008)
Costly unanticipated
actions to repay
Ghana 2009
(Grammling 2009)
12% over-indebted,
Microbusiness
decapitalizing (as assessed another 16% at risk
by researchers)
Country X 2009
(restricted report)
Qualitative interviews,
observation, and HH
survey (N=344)
Impoverishment through
debt
Multi-country study
(Kappel, Krauss, and
Lontzek 2010)
Preliminary composition
of an early warning index,
largely based on signaling
analysis with an MFI
survey + MIX market data
Lender actions
Product design
Flexible product offerings, including savings
Reduction or tailoring of loan increments in
graduated lending ladders
Sales
Marketing practices and follow-on loans
Fair and intelligible disclosure of loan terms
Measures to improve clients financial literacy/
capability
Expansion into new areas rather than already
served ones
Loan underwriting
Evaluation of affordability in light of borrower
cash flows
Specific limits on debt-service ratios
Verification of borrowers repayment history
and other debts
Collection
Restraining of abusive collection practices
Appropriate rules for renegotiation of loans
Avoidance of inappropriate use of penalty
interest
Redress mechanisms for customer complaints
Other microlender practices
Staff incentives that dont encourage overlending
Staff training on avoiding over-indebtedness
Written policies, enforced through internal
audit
Specialized portfolio audits
Early warning systems for over-indebtedness
Marketwide tools
Industry codes
Credit reporting systems
Funders actions
Some observers think that an over-supply
of funding, along with funders pressure on
microlenders for growth and profitability, has
contributed to over-indebtedness crises. Donors
or socially oriented investors should factor
over-indebtedness risk into their evaluation of
microlenders as potential grantees or investees.
This includes looking at the saturation level of the
particular market, and whether the microlenders
are dealing appropriately with the range of options
presented above.
At a minimum, donors as well as public and socially
motivated investors ought to assure themselves
that any microlender they fund is
not using deceptive or high-pressure
marketing tactics
not structuring staff incentives in ways that
encourage over-lending
taking reasonable measures to check
on borrowers repayment capacity, past
repayment history, and outstanding
obligations with other lenders
maintaining and communicating clear written
policies to guide employees in addressing
over-indebtedness risk
not using collection techniques that are
abusive, given the local setting.
Donors that have grant funding for supporting
public goods can also finance some of the
above measures directlye.g., development of
credit reporting services, early warning systems,
or financial capability campaignsor support
regulators efforts to control over-indebtedness risk.
Introduction
Microcredit has long had an enviable repayment
recordlevels of delinquency and default in
competent institutions have been very low for
8 In this paper, the terms microlender, microcredit provider, and MFI are used indiscriminately, referring to any formal institution that makes
microloans, whether or not it also provides other financial services or serves other target clients.
9 After discussion, the conferees did go on to list over-indebtedness as a major threat (http://www.db.com/csr/en/docs/Pocantico_Declaration.pdf).
10 We use poor throughout this paper as shorthand for poor and low-income. New tools have been developed for testing the poverty status of
microfinance clients. (See http://www.povertytools.org; http://progressoutofpoverty.org/.) Application of these tools over the past five years has
amply confirmed what experienced practitioners have been saying for a long time: most MFIs serve not only customers below the official poverty
line, but also substantial numbers of low-income customers who are, at least at a given point in time, above the poverty line.
11 Microlenders face a tight margin for error when it comes to collecting their loans. Delinquency (delay in payment) tends to spin out of control
if more than 10% of a portfolio becomes late by more than one repayment period. The corresponding critical maximum for annual rates of loan
losses (default) tends to be about 5% of portfolio. See Rosenberg (1999).
10
12 For a fuller discussion of demand estimates, see Anand and Rosenberg (2008).
13 Gonzalez focuses on national population and penetration because the MIX data he relies on do not give regional breakouts. In fact, at the present
time microcredit markets in most countries are more likely to be regional rather than national.
14 Presentations at CGAP and at Deutschebank over-indebtedness roundtable, January 2011. Retail credit is aimed at the level of households
(including, among other things, their consumption and their informal income-producing activities) rather than at formal firms.
15 E.g., Robb (2007), Schoell (2010), Lupica (2009), White (2007), and Dick and Lehnert (2010).
16 Hellman, Murdock, and Stiglitz (2000) link increasing competition to opportunistic behavior by lenders. Their argument is that competition
reduces profits, lower profits imply lower franchise or charter values (namely, the capitalized value of expected future profits), and lower franchise
values reduce the incentives for making good loans, as bank owners would have a lower stake in the outcome. (Gonzalez 2008).
11
12
20 Lending costs are not the only component of microcredit interest rates. Shareholders profits also contribute to the price paid by borrowers, and
there is controversy about how much profit is appropriate for institutions serving poor people.
13
21 This is a utilitarian approach, trying to achieve the best collective outcome for those involved. Some people might argue that there are levels of
damage (e.g., suicide) that are not acceptable under any circumstances, no matter what the benefit to others may be.
22 E.g., Rosenberg (2010); Collins, Morduch, Rutherford, and Ruthven (2009); and Karlan and Zinman (2007).
14
2. The Causes of
Over-Indebtedness
Over-indebtedness is a complex phenomenon; in
most cases, multiple factors are at work. Lender
behavior can put clients at undue risk, clients
themselves make mistakes in their borrowing
decisions, and sometimes external factors beyond
either partys control push debt to unsustainable
levels.23 We can describe some of these dynamics,
but there isnt enough evidence yet to make strong
assertions about how prevalent most of them are or
how heavily they contribute to over-indebtedness.
15
16
33 We would probably include borrowers who make dishonest statements in their loan applications, embellishing their financial situation or not
admitting the real purpose of a loan, as long as they borrow in good faith that they will repay the debt to the MFI and, if problems arise, will make
serious efforts to fulfill their repayment obligations.
34 E.g., Mullinaithan and Krishnan (2008)
35 E.g., Laibson (1997); Laibson, Repetto, and Tobacman (2003).
36 E.g., Akerlof (1991), Gul and Pesendorfer (2004), Fudenberg and Levine (2006)
17
18
19
20
b
c
High default in a market usually involves serious over-indebtedness. But high default for a particular lender, when other lenders
in the market are collecting successfully, is more likely to be a symptom of poor loan management and insufficient attention to
collection systems and performance. Also note that in some repayment crises, political agitation may be a major contributor, leading
to opportunistic default by many borrowerse.g., Krishnaswamy and Ponce (2009a). Of course, the political agitation may have
resulted from a real over-indebtedness problem in the first place.
E.g., Collins, Morduch, Rutherford, and Ruthven (2009) and Morvant-Roux (2009).
Rescheduling or renegotiating loans is appropriate when borrowers have temporary cash flow problems but are likely to be able to
pay off their obligations somewhat later. Rescheduling is inappropriate, indeed dangerous, when it is done to postpone the day of
reckoning on loan amounts that are unlikely ever to be recovered.
21
43 Debt-to-asset ratios are also used: over-indebtedness starts when a borrowers total debt exceeds Y% of the borrowers assets. This approach is close
to the common definition of corporate bankruptcy as a situation where liabilities exceed assets. But debt-to-asset ratios tend to be less relevant in
microfinance. Microborrowers tend to have few assets, their loans are usually uncollateralized, and the lenders typically expect to be repaid out
of current income, not by liquidation of assets.
44 In group lending programs, decisions about a borrowers creditworthiness are usually made by fellow group members, not a loan officer. But when
group members make such judgments, surely it is not unusual for them think about whether the borrower has enough income to make the loan
payments.
45 For an extreme illustration, imagine someone who spends his entire take-home pay every month on consumption, uses a credit card for all
purchases, and pays off the card each month without incurring any interest. The debt service ratio is 100% of take-home pay, yet the use of credit
rather than cash is completely manageable, and leaves the borrower no worse off.
22
46 E.g., Maurer and Pytkowska (2010), Vogelgesang (2001), Rinaldi and Sanchez-Arellano (2006).
47 Strictly speaking, multiple borrowingcarrying more than one loan at a timewould include having two or more loans from a single lender.
Cross-borrowing refers to simultaneous loans from different lenders. This section focuses on the latter situation. But we retain the term multiple
borrowing because it is the one most commonly used.
48 E.g., Grammling (2009).
23
49 E.g., Maurer and Pytkowska (2010), Chaudhury and Matin (2002), CARE/Bangladesh (2005), Martinez and Gaul (2011), Grammling (2009),
Krishnaswamy and Ponce (2009a).
50 E.g., CARE/Bangladesh (2005, 2005a).
51 Cf. Rhyne (2010).
52 Gonzalezs definition includes opportunistic default (in this case, it is the lenders expectations that are not met), even though most people would
not describe such defaulters as over-indebted.
24
53 In this simple example, the borrower would probably not rate the sacrifice of going without food as unduly high. But real situations are usually
more complex.
54 Cf. footnote 56.
25
26
56 Gonzalezs focus was not to identify problem lending, but rather to explore clients willingness to make extra efforts to repay loans.
57 In Ghana (and no doubt in some other countries as well), borrowers are culturally reluctant to discuss loans, and especially their difficulties in
repaying loans. Grammling provides a useful description of techniques he used to overcome this problem.
58 This analysis treats household expenses as a fixed amount per month (probably drawn from loan officers appraisal of borrowers cash flow as
recorded in the MFIs loan files). In fact, household expenditures are somewhat flexible and can rise or fall to accommodate loan payments.
27
59 Some alert readers may wonder how the math in this sentence works. It makes sense if some of the debt is amortized over a period greater than
a year. The most common sources for loans in Gurins study were well-known people and pawnbrokers. Self-help groups, which are often
included within the boundaries of microfinance, ranked third, being used by 41% of the households.
28
Remittances
Market penetration
Growth rates of total volume of loan portfolios
Quality and use of credit information sharing
systems
Perceived commercial bank involvement
Perceived level and trends in competition
Perceived investment flows
MFI liquidity
Average loan balance per borrower
Loan requirements and lending methodologies
Productivity
Growth and market targets
Multiple lending
Consumer lending
60 We are providing percentages to give the reader an idea of the magnitude of problems identified by this study. However, we cannot draw reliable
statistical conclusions about the distribution of households within this smaller subsample of only 68 respondents.
61 Microfinance Information Exchange, an online information portal based on self-reports but offering the broadest global database on MFIs to date.
www.mixmarket.org
62 The loan loss rate and write-off ratio measure unrecoverable loan amounts as a percentage of total loan portfolio.
29
and Georgia display the lowest risks of overindebtedness according to the selected indicators.
[There have been several studies of overindebtedness among low-income and other
borrowers in South Africa. We have not included
them here because little of the lending involved
was the kind of microcredit that is the focus of this
paper. Nevertheless, its worth noting that these
South Africa studies have generally found worrisome
levels of over-indebtedness.63] As noted, the list of
quantitative studies available so far seems much too
short. We hope that many more researchers will work
on such studies, including not only academic research
but also less rigorous market research conducted by
MFIs and regulators. See Table 2 for a summary of
the empirical studies discussed in this section.
Methodology
Definition
of Over-indebtedness
Findings
Bolivia 19972001
(Gonzalez 2008)
HH survey
Costly unanticipated
actions to repay
Ghana 2009
(Grammling 2009)
12% over-indebted,
another 16% at risk
Country X 2009
(restricted report)
Qualitative interviews,
observation, and HH
survey (N=344)
Impoverishment through
debt
Multi-country study
(Kappel, Krauss, and
Lontzek 2010)
Preliminary composition
of an early warning index,
largely based on signaling
analysis with an MFI
survey and MIX Market
data
30
MFI actions
MFIs can consider revisions to product design:
Flexible loan product offerings that better
meet client needs. The incomes and expenses of
microborrowers tend to be irregular and unreliable.
The harder it is for them to match their actual cash
flow with their loan repayment schedule, the more
debt stress is likely to occur.
In the early years of microcredit, most MFIs settled
on one-size-fits-all loan products with lockstep
installments due every week or every month.
The MFIs understood that this rigid approach
didnt fit their borrowers cash flows very well.
They chose the model because a single cookiecutter product helped keep costs low (cost was
the central challenge of early microcredit), and
frequent regular installments reduced repayment
risk for uncollateralized borrowers.
But much of the industry has moved a long way up
the learning curve since then. Lending institutions
are more experienced and solid. Numerous MFIs
have demonstrated the skill needed to offer
multiple loan products, including more flexible
products, without delinquency or costs spinning
out of control. Grameen Bank, for instance, has
had great success with its Grameen II product
line up, which includes options for borrowers
who have temporary problems making their
64 E.g., Rutherford, Maniruzzaman, Sinha, and Acnabin & Co (2004).
31
32
33
73 The Smart Campaign (2011) cautions that if the lender is calculating debt service ratios, [i]t is also useful to have a qualitative definition of overindebtedness to help staff keep the main objective in mind and to avoid the rote use of numeric tools. An example of such a definition is a state
in which a borrower has to make significant sacrifices to his or her standard of living or business affairs in order to repay debts.
74 The Smart Campaigns checklist on collection practices is at http://www.smartcampaign.org/storage/documents/Tools_and_Resources/
Collections_Guidelines_FINAL.pdf. For a good example of a collections policy, see Swadhaar (2011).
34
75 In some cases, poor collection results not so much from borrower distress as from managements failure to keep their staff strongly focused on loan
repayment.
35
36
77 Our discussion of this topic draws on Christen, Lauer, Lyman, and Rosenberg (2011). This paper distinguishes three broad approaches to the
sharing of borrower information among lenders: government-run credit registries, privately owned credit bureaus, and MFI-specific databases
that are usually set up because credit registries and bureaus wont incorporate lower income borrowers or lending institutions that are not licensed
and prudentially regulated.
78 Data accuracy and client privacy are common issues. And in one sense, credit bureaus can increase repayment stress for borrowers. Without a
credit bureau, the borrower can default with one MFI but then get loans from its competitors. Once the credit bureau is in place, the pressure on
the borrower to pay is higher, because default could reduce access to finance and potentially other types of transactions in the long run.
37
Funder actions
Some observers have concluded that the behavior
of fundersi.e., the donors and investors that
finance MFIscan contribute to credit crises.
For instance, Chen, Rasmussen, and Reille (2010)
found that in four crisis countries rapid growth,
market saturation, and in some cases over-lending
were fueled by the large supply of funding
mainly debt fundingfrom international investors
and domestic apex wholesalers. Some of this
funding was purely commercial, but most of it
came from sources that included social welfare in
their objectives. Naturally, fundersespecially the
more commercially oriented oneswant to invest
in strong MFIs with solid track records in dynamic
markets. This biases them toward markets where
the risk of saturation-induced over-indebtedness
may be higher.
Many of the institutions that fund MFIs face
disbursement pressure of their own. The supply of
money they have to move sometimes exceeds the
demand from appropriate investees. If they overfund an MFI or a market, they are solving their own
problem in a way that can hurt the very clients the
money is supposed to be helping.
38
Conclusion
We began this paper by listing reasons for paying
close attention to the risk of over-indebting
microborrowers, especially as more and more
markets become competitive and eventually
approach saturation. We pointed out that there is
often a trade-off between over-indebtedness on
one hand and access or cost for borrowers on the
other: the only way to eliminate over-indebtedness
completely is to stop lending.
39
References
Abed, Sharmeran. 2011. Over-Indebtedness: A
Practitioners Perspective. CGAP Microfinance
Blog. 22 February. http://microfinance.cgap.org/
author/Shameran-Abed/
Akerlof, G. A. 1991. Procrastination and
Obedience. The American Economic Review,
81(2): 119.
Anand, Malika, and Richard Rosenberg. 2008. Are
We Overestimating Demand for Microloans?
Brief. Washington, D.C.: CGAP, April. http://
www.cgap.org/gm/document-1.9.2724/BR_
Overestimating_Demand_Microloans.pdf
Ashraf, N., D. Karlan, and W. Yin. 2005.
Tying Odysseus to the Mast: Evidence from a
Commitment Savings Product in the Philippines.
Yale University Economic Growth Center
Discussion Paper No. 917. New Haven, Conn.: Yale
University. http://people.hbs.edu/nashraf/SEED.
pdf
Bannerjee, Abhijit, and Esther Duflo. 2007. The
Economic Lives of the Poor. Journal of Economic
Perspectives, 21/1 Winter: 14167.
40
41
. 2011. Some Insights into Overindebtedness: Fresh Data from India. CGAP
Microfinance Blog, 29 March. http://microfinance.
cgap.org/2011/03/29/some-insights-into-overindebtedness-fresh-data-from-india/#more-1876
Krishnaswamy, Karuna, and Alejandro Ponce.
2009. A preliminary analysis of mass defaults in
Karnataka, India. Presentation slides.
Laibson, David. 1997. Golden Eggs and
Hyperbolic Discounting. Quarterly Journal of
Economics, 112(2) 44377.
Laibson, David, Andrea Repetto, and Jeremy
Tobacman. 2003. A Debt Puzzle. In Philippe
Aghion, et al., eds. Knowledge, Information,
and Expectations in Modern Macroeconomics.
Princeton, N.J.: Princeton University Press, 22866.
Laschelles, David. 2008. Microfinance Banana
Skins 2008. London: Centre for the Study of
Financial Innovation. http://www.cgap.org/gm/
document-1.9.2956/MF_BananaSkins2008.pdf
42
Rhyne, Elisabeth. 2010. Perplexed about OverIndebtedness? Center for Financial Inclusion
Blog, 4 May. http://centerforfinancialinclusionblog.
wordpress.com/2010/05/04/perplexed-aboutoverindebtedness/
43
storage/documents/Client_Protection_in_the_
Group_Lending_Process__INDIA.pdf
No. 19
September 2011
The authors of this Occasional Paper are Jessica Schicks and Richard
Rosenberg. Schicks is a doctoral candidate at the Centre for European
Research in Microfinance at Solvay Brussels School of Management,
Centre Emile Bernheim, Universit Libre de Bruxelles. She is currently
on educational leave from an international strategy consulting firm.
Rosenberg is a senior adviser at CGAP. Sections 2 and 3 draw on
Schicks (2010). The authors are grateful for extensive research and
analysis by Jonna Bickel and Abigayle Seidel, as well as material on
credit reporting from Xavier Reille, Tim Lyman, and Gregory Chen;
on redress mechanisms from Kate McKee; and on financial capability
from Margaret Miller. The paper has been improved by review and
comments from Gabriel Davel, Gregory Chen, Robert Christen, Daryl
Collins, Tilman Ehrbeck, Marek Hudon, Kate McKee, Alexia Latortue,
David Porteous, Marguerite Robinson, David Roodman, Stuart
Rutherford, Jeanette Thomas, and Jacob Yaron. Of course, this does
not imply that they agree with everything in the paper.
Over-Indebtedness of
Microborrowers in
Ghana
Over-Indebtedness of
Microborrowers in Ghana
An Empirical Study from a
Customer Protection Perspective
Jessica Schicks
CERMi (Centre for European Research in Microfinance)
Solvay Brussels School of Economics and Manangement (SBS-EM)
Universit Libre de Bruxelles (ULB)
November 2011
Contents
Preface
iv
Acknowledgments
1
2
3
Microborrowers in Ghana
Over-indebtedness, coping strategies, and sacrifices
The causes of over-indebtedness
6
7
12
16
16
17
17
References
19
20
21
Figures
Figure 1. Measuring Over-Indebtedness by Customer Protection Standards
Figure 2. A Detailed Split of Loan Uses by Microborrowers
Figure 3. The Prevalence of Repayment Struggles among Microborrowers in Accra, Ghana
Figure 4. The Over-Indebtedness of Microborrowers in Ghana
Figure 5. The Acceptability and Frequency of Borrower Sacrifices
Figure 6. Potential Causes of Over-Indebtedness
5
7
8
9
10
14
Preface
Providing access to nance for those excluded from the formal nancial system was and still is the mission
of micronance. What has changed, however, are the main challenges on the way to success. In the past, the
nancial sustainability of the service was the main hurdle to be cleared. Today, responsibility in service provision claims more of our attention.
This is because something has happened that seemed virtually impossible only a few years back. In some parts
of the world where micronance services have expanded rapidly, the problem is no longer too little access to
nance, but too much. A phenomenon that has previously been known exclusively in industrialized countries
has reached the developing world: over-indebtedness.
Over-indebtedness has to be taken very seriously, particularly since in many countries where micronance
operates, customer protection and social safety nets are not well developed. Accordingly, a customer with an
unsustainable debt burden cannot le for insolvency and expect ofcial procedures to pave the way to a fresh
start. Few debt counseling agencies exist, and in most places there is no social security system to provide a
subsistence income for the family if a micronance client fails. In a nutshell, when a micronance client becomes over-indebted, she is on her own.
This is why micronance institutions carry all the more responsibility to protect their customers. These institutions have a social mission to assist their customers in improving their lives through access to nancial servicesprovided in a responsible way. To give guidance on how to live up to the standard of responsible nance,
the Smart Campaign (www.smartcampaign.org) developed the Client Protection Principles with widespread
industry participation. Prevention of over-indebtedness is one of these principles. Undoubtedly, most leading
MFIs are rmly committed to this principle, as evidenced by the fact that the overwhelming majority of the
MIX 500 largest MFIs have endorsed the Smart Campaign. However, commitment is not sufcient to put a
principle into practice. This is especially true when there are large knowledge gaps, as is the case with overindebtedness. This paper makes an important contribution to deepening knowledge on this elusive topic.
It is surprisingly difcult to agree on a rm denition of over-indebtedness, and just as difcult to determine
the point at which a specic individual becomes over-indebted. Financial service providers generally identify
over-indebtedness with chronic delinquency. They see debt stress as a clients inability to make regular loan
repayments, and move into action only when overdue collections or restructuring becomes necessary. In some
respects, this approach resembles the curative rather than preventive approach to medicine. More recently in
highly competitive markets, multiple loans from several different providers have become a concern.
In order to be effective at preventing over-indebtedness, it is essential to know more about the clients situation. This is exactly what the research presented here is aiming at, choosing the urban micronance market in
Ghana as an example. This study works from a client perspective, dening over-indebtedness in terms of the
frequency and severity of sacrices clients make to repay debts. Ghana was chosen as a market that has not
experienced an over-indebtedness crisis, but that has a number of signicant micronance institutions addressing the same clients. The study reveals that while the incidence of multiple lending and delinquency does not
indicate a market in crisis, there are nevertheless many clients in good standing who make serious and frequent
sacrices in order to repay debt. There is thus a gap between the providers and the clients in the perception and
experience of over-indebtedness. This gap challenges providers to take greater care in observing the situation
of clients, while avoiding the pitfall of restricting access to nance (and therefore pulling back from their mission). This is not an easy challenge.
iv
Even though these results are restricted to a single country and certainly do not answer all our questions, they
offer new insights from the clients perspective that must be incorporated into our understanding of overindebtedness. These insights will serve as valuable inputs to improve MFIs efforts, in Ghana and in similar
contexts, to make the prevention of over-indebtedness work in practice.
Elisabeth Rhyne
Center for Financial Inclusion at ACCION International
Eva Terberger
Independent FC Evaluation Unit
KfW Entwicklungsbank
Acknowledgments
Many organizations and individuals cooperated in making this study possible. The author would like to thank
the Independent Financial Cooperation Evaluation Unit of KfW Entwicklungsbank and the Smart Campaign for
their cooperation and nancial support. This paper has beneted from their contribution to research design as
well as from comments by Elisabeth Rhyne, Managing Director of the Center for Financial Inclusion, and Eva
Terberger, Gunhild Berg, Ron Weber, and Jan Schrader from KfWs Financial Cooperation Evaluation Unit.
KfWs Africa Department, especially the Competence Center for Financial Sector Development, also played
an important facilitating role. Equally important, Rich Rosenberg (CGAP) and Prof. Marek Hudon (Center for
European Research in Micronance) provided valuable input to earlier drafts. We gratefully acknowledge the
Marie Christine Adam Foundation and the German National Merit Foundation for their funding.
Special thanks go to our partner MFIs in Ghana who supported us in sampling their clients for the interviews:
ProCredit Ghana, Opportunity International Ghana, Sinapi Aba Trust, EB-ACCION, and Advans Ghana. We
also thank the National Bank of Ghana, the Ghanaian credit bureau XDS data, and our research assistants from
MEL Consulting. This project would not have been possible without them. Finally, we are extremely grateful to the Ghanaian borrowers who shared their sorrows and aspirations with us and gave us insight into their
nancial situations. Many have done so in the belief that telling us about their struggles would improve the
experiences of microborrowers in the future, and we share this hope with them.
of MFIs and investors to invest in protection against over-indebtedness is an important step toward client protection in micronance. However, for efforts to be effective, the industry needs a sound understanding of the
phenomenon; of the meaning of over-indebtedness from a perspective of micronance clients; of the prevalence of the phenomenon outside of crisis markets such as Bosnia, Nicaragua, and certain regions in India;
and of the mechanisms that may put clients at risk. To evaluate which prevention measures are most helpful
among the typical suggestions such as introducing credit bureaus, conducting literacy campaigns, or tightening
lending standards, we need to gain a sound understanding of what over-indebtedness is about for micronance
customers on the ground.
This paper is based on a study that the author has conducted as part of her PhD research.3 The research project
was designed and implemented with the support of the Independent Evaluation Department of the German
development bank KfW Entwicklungsbank and of the Smart Campaign, hosted by the Center for Financial
Inclusion at ACCION. It aims to address the most urgent questions about over-indebtedness from the viewpoint of the clients of micronance. Instead of working with the usual risk management indicators of overindebtedness, it uses an over-indebtedness denition based on the subjective experiences of microborrowers
with their loans.
The purpose of this paper is to inform decision makers who are promoting nancial inclusion in developing
countries about the over-indebtedness challenge and to support their efforts to protect poor borrowers. It aims
1. See Appendix 1 for the list of Client Protection Principles. After focusing on microcredit initially, they have been revised as of July
2011, to include all nancial products.
2. Lascelles and Mendelson (2011).
3. Watch the authors upcoming academic publications for more detail on over-indebtedness denitions, causes, and predictors.
of debt struggles in a
micronance market that, while starting to experience competition, is far from the exceptional
levels of debt found in recent crisis countries.
Suggests what the
may be and refutes some common assumptions
of the current over-indebtedness debate.
Offers guidance to the industry in how to think
about the phenomenon of over-indebtedness from
a customer protection perspective and how to
in other markets.
Identies
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in repaying their loans.
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Learning from a normal market. This research analyzes a micronance market that is not yet suffering
from an explicit over-indebtedness crisis. The market in Ghana has reached a certain level of development, but one that may count as rather usual in
the micronance industry. Instead of highlighting
the downsides of extreme cases, the project informs
readers about the common experiences of microborrowers with their debt under ordinary circumstances.
It emphasizes that risks are an inherent feature in every borrowing and lending activity and that the micronance methodology can still improve and adapt
increasingly well to these risks.
clients replied.
project uses a client-focused denition of over-indebtedness, rather than common proxies like debtservice ratios or default/delinquency. It considers
debt-service ratios too imprecise and inexible to
take the individual circumstances of each borrower
into account. While some families regularly spare
30 percent of their income for debt repayments, for
others this can be a serious struggle. Default as an
approach for measuring over-indebtedness is equally inappropriate to our purposes: It reects only the
last stages of over-indebtedness, whereas problems
have almost always started much earlier. Default
assesses the consequences of over-indebtedness
from a risk management perspective but does not
take into account the struggles of microborrowers
who are often going to great lengths to pay back
their loans.8
8. See Schicks and Rosenberg (2011) for a discussion of overindebtedness denitions and Schicks (2010) for a more academic perspective.
From all active microborrowers in the Accra branches of our ve partner institutions, we drew a random
sample of micronance customers and contacted
them with an independent team of researchers for
anonymous interviews at a site of their convenience.10
We oversampled delinquent customers according to
the MFIs management information system (MIS)
data. For purposes of evaluation, we corrected for
this bias as well as the response rate of different
groups with sample weights.11 All data reported in
Following the above denition, borrowers are overindebted if they struggle to repay their loans on time
and structurally make unacceptable sacrices. Sacri12. Once in past year, 13 times in past year, > 3 times but
not often, or Frequently in past year. For a respondent cutting
down on food at several points for a week at a time, instead of
every individual day, each week would count as one occurrence.
In this paper sacrices experiences >3 times count as repeated
or frequent sacrices.
13. Easily acceptable, Only just acceptable, Not really acceptable, or Not acceptable. In this paper we summarize the
rst two categories under acceptable and the latter two under
unacceptable.
in the next section, we would like to point out a potential source of misunderstanding: Our respondents
have indicated that they perceive their sacrices as
related to loan repayments. Also, 86 percent of them
state that they had suffered no or fewer sacrices
before borrowing. Nevertheless, our analysis does
not track causality. We are not saying and cannot tell
from our data that the microloans caused the borrowers struggles. Increasing nancial difculties
might also have been the reason for some to start
borrowing. Similarly, difculties in the course of the
loan term are not necessarily related to the overall
impact a loan has on borrowers lives in the long run.
In fact, the vast majority of our interviewees, even if
struggling, stated that they do not regret the amount
they borrowed, and many of them wish they could
have borrowed more.15
Microborrowers in Ghana
The microborrowers in our Ghanaian sample can generally be considered typical micronance customers: 72
percent of our respondents are female, most of them married. The most frequent ethnicities are those predominant in Accra, especially the Akan (65 percent), the Ewe (14 percent), and the Ga (12 percent). Nearly without
exception, our microborrowers main source of income is self-employment. The majority of businesses (82
percent) are active in trading, either importing goods from abroad or buying wholesale and selling in small
convenience stores or on the markets. Services such as hairdressing and manufacturing account for only a
small share of microbusinesses. Only seven borrowers (1.3 percent) have permanent employment as salaried
workers.
Poor but not extremely poor. The sample conrms that, while living vulnerable lives on low incomes, the typi-
cal micronance clients are not extremely poor. On average, a respondent household lives on 500-650 GH per
month, about US$400. With ~ve members per household, this is clearly above the local poverty line (World
Bank, 2011) or the international poverty line of US$2 per person per day. The median of personal assets of all
households in our sample of microborrowers amounts to ~6,000 GH. More than half of the loans (59 percent)
are less than 1,000 GH at the time of disbursement and most of them (87 percent) are below 2,000 GH.
Careful and experienced borrowers. Once borrowers have access to an MFI, they tend to borrow repeatedly,
many following the traditional model of loan cycles in group lending or coming back for individual loans
demonstrating that they value the services of MFIs. In our sample, 68 percent of borrowers have previous
experience with borrowing from (semi-)formal institutions, 41 percent having borrowed for several years in a
row. Nevertheless, the group of borrowers who have had only a single semi-formal loan so far (32 percent) is
a relevant portion of the sample.
The sample is about evenly split between group (48 percent) and individual (52 percent) loans. However,
practices differ between lending institutions. NGOs and lenders with NGO roots give more group loans, while
some of the more commercial MFIs focus almost exclusively on individual lending. In terms of loan use, the
emphasis on enterprise loans is very strong; 96 percent of loans are used at least partly for business purposes.16
Repeating the messages of lenders, many borrowers claim that they would never do otherwise, as consumption loan uses make repayments far too difcult. They tend to be quite curious but rather incredulous about
interviewers potentially thinking otherwise. Nevertheless, 27 percent of all borrowers do admit thatbesides
investing in their businessthey also used part of their loan for a personal or household use. Of these, education (37 percent) and day-to-day consumption (22 percent) are by far the most common loan uses. They are
followed by expenses for housing or land (10 percent), emergencies (9 percent), special consumption such as
a mobile phone (9 percent), and the acquisition of durables for the household (6 percent).
16. This is approximate information only, as it does not account for the fungibility of money, borrowers investing less of their household
resources in their business when they get the loan and thereby implicitly cross-subsidizing their consumption. Also, many borrowers
report not investing the full loan amount but holding a substantial part of it back for the rst repayments, without perceiving or reporting
this as using their loans for consumption purposes.
Business
only 68.6%
27.2%
Mainly business
with a secondary
loan use
4.2%
Mainly
household
Borrowers are either very careful about taking multiple loans or simply constrained in terms of access:
The maximum number of loans reported by any borrower at the same time is three. Only 8 percent of
borrowers take loans from more than one lender in
parallel, of which less than 1 percent borrow from
three lenders at the same time. While self-reports
may understate difcult-to-admit phenomena such
as multiple borrowing, delinquency, and sacrices,
we do not nd evidence of borrowers lying about
their loans, at least with regard to formal borrowing:
Their information is consistent with what we nd in
the MIS of the participating MFIs. Instead, the low
level of multiple borrowing may to a large extent
be due to the sound lending decisions of the participating institutions and may thus not apply to other
MFIs in the same lending market.
Helpful loans. While this study is not an impact
study, we asked borrowers to provide a subjective
assessment of their returns on investment. Out of all
borrowers that invested their loans in their business,
43 percent state that their earnings increased signicantly and on a regular basis due to the investment;
40 percent claim increases in income that were not
sufcient or not stable enough to cover repayments,
at least over the period of the loan. The remaining 17
percent of respondents did not experience a permanent increase in earnings as a result of their loan.
Education
Day-to-day consumption
Housing expenses or land
Emergencies
Special consumption (e.g., mobile)
Household durables (e.g., fridge)
Give money to someone else
Social purpose (e.g., wedding)
Pay off a loan (own or for someone)
Other
%
37
22
10
9
9
6
3
2
1
2
Not struggling
26%
31%
Struggling rarely
Struggling regularly
26%
17%
a. No repeated experience required for unacceptable sacrifices of suffering an asset seizure, taking a new loan to repay, or selling/
pawning assets.
b. Either >3 unacceptable sacrifices, or 1 unacceptable sacrifice made > 3 times.
rst and apply them rather frequently as regular coping strategies. Out of the borrowers who increased
their work load, 72 percent did so more than three
times in a year. For those who postponed expenses,
60 percent did so more than three times. If depleting savings is a less frequent strategy (28 percent),
this is most likely because after the rst occurrence
there are simply no savings left and it is difcult for
most microborrowers to build them up again in better times.
If these sacrices are classied as coping strategies,
that is because they are common reactions by borrowers to debt problems and not necessarily a sign
of over-indebtedness. Most borrowers easily accept that they have to make an extra effort for the
purpose of their loan. Some may have even made a
conscious choice of working harder in their business
when they get the loan, hoping for their efforts to
bear fruit. These cases are not yet a reason to worry
about over-indebtedness.
Of course, the spectrum of subjective experiences is
broad, and in some cases these same coping strategies reach the extent where we would call them serious sacrices. For those borrowers, for example,
who consider working harder unacceptable, this
does not imply that they are lazy: Some borrowers
SACRIFICES
Work more than usual
Postpone important expenses
Deplete savings
Reduce food quantity/quality
Use family/friends support
Suffer psychological stress
Reduce education
Borrow anew to repay
Sell or pawn assets
Feel threatened/harassed
Suffer from shame or insults
Seizure of assets
10
% OF BORROWERS
FINDING SACRIFICES
UNACCEPTABLEb
32%
33%
38%
72%
73%
80%
80%
85%
90%
100%
100%
100%
% OF BORROWERS
MAKING SACRIFICES
FREQUENTLY (>3 TIMES)b
72%
60%
28%
63%
21%
53%
53%
50%
40%
44%
23%
33%
Finally, the indebtedness experiences that no borrower is willing to accept are being threatened or harassed, suffering from shame and insults, and losing
their assets in a seizure. This shows how personal
honor and integrity can be more important than nancial hardships and material sacrices. Nevertheless, 5 percent of the borrowers in our sample were
not able to avoid this level of sacrice, some even
experiencing these repeatedly. As an inherent risk
to any lending activity, some customers will always
end up unable to repay despite their best efforts. As
much as collections have to be strict, our ndings
underline the importance of treating those borrowers
with dignity.
reason might be that for many borrowers these resources are simply not available or, as good tools of
liquidity management, have already been sacriced
at an earlier stage of debt struggles. As a result, those
borrowers are more likely to slip into arrears.
Independently of their status with regard to overindebtedness and delinquency, we nd that female
borrowers differ from their male peers in several
ways: Men resort to external solutions more often,
taking new loans to repay old ones and selling or
pawning assets. This might partly be due to their
easier access to alternative loans and assets. In contrast, women have a higher likelihood of reducing
their food intake. They are probably the ones that
are responsible for the familys meals and in difcult
times try to keep up their childrens eating habits by
compensating for problems with their own nutrition.
For all other sacrices, wherever we have sufcient
observations to judge, we do not nd a difference
between the experiences of men and women. Equally, in spite of a tendency for less delinquency and
more sacrices in groups, there are no signicant
differences in delinquency and the total amount of
sacrices between group customers and individual borrowers. However, group customers deplete
their savings more often, rely more on the support
of friends or family, and suffer more psychological
stress than individual customers. These differences
may result from peer pressure.
Neverending optimism. As we have indicated earli-
11
12
debtedness across different subgroups of our population, without paying attention to statistical signicance just yet, we nd an above-average share of 44
percent over-indebtedness among minority ethnicities.20 Potentially, ethnic outsiders face additional
economic challenges in terms of business opportunities and safety network. There also is slightly more
over-indebtedness among borrowers living without a
marital partner (34 percent) than among married bor20. Minority borrowers indicated their ethnic background as
Gurma or Other. The majority ethnic groups (Akan, DagboneDagomba, Ewe, and Ga) have an over-indebtedness share of 29
percent.
13
0.170***
n/a
0.156**
n/ab
n/a
n/a
0.173***
0.211***
0.180***
0.191***
KENDALLS TAU-ca
0.056*
0.111***
0.199***
0.161***
0.102**
0.126***
RELATIONSHIP
CONFIRMED
()
()
While most borrowers consider their MFIs treatment as fair, their terms and conditions as transparent, and their evaluation of repayment capacity as
fair and sound, borrower opinions are split when it
comes to specic product features. Many borrowers state that MFIs disburse loans too late for their
investment opportunities (53 percent), offer tooshort maturities (51 percent), insist on too-frequent
installments (47 percent, mainly those that are on
weekly instalment schedules),and do not provide
14
25. For measures that are specic to the group lending methodology, percentages apply to group borrowers only. They may
understate borrower expectations as not all respondents were
familiar with the effects of delinquency in group lending.
tices in the Indian context. In our sample, 49 percent indicate that loan ofcers threaten borrowers
or use abusive words, although only 24 percent say
that MFIs are generally impolite in the collections
process. This seeming contradiction probably results
from the general politeness of loan ofcers except
in especially difcult repayment situations. Borrowers fears may be linked more to hearsay and the experience of others than their own. After all, only 3
percent of borrowers listed threats or harassment as
their own sacrices in the past year. Also, some borrowers do not classify threats as impolite but consider them necessary loan ofcer behavior.
15
borrowers reach the stage of delinquency, collections practices may in some instances be too tough
and aggravate the over-indebtedness experiences of
microborrowers.
Among the target group of micronance that is living
on low and volatile incomes, difculties in regularly
assembling the cash for loan repayments are not surprising. For a long time, these customer experiences
havent earned much attention, seeming less relevant
in the face of a strong belief in the positive impact
of micronance on borrowers lives. Nevertheless,
cash demands are a challenge for the poor, and credit
is always a risk as well as an opportunity. In the context of the industrys current focus on responsible
nance and client protection, it needs to pay attention to the hardships that some microborrowers go
through and try to reduce them. At the same time,
given the value even struggling borrowers place on
further access to loans, simply stopping or reducing
microcredit does not seem an appropriate reaction
in the Ghanaian context. While some measures may
involve smaller loan sizes or recognizing that not
everybody needs a loan, other measures may rather
be about improving credit products to make repayment easier.
17
protection measures to reduce the potential for overindebtednessnot only in terms of portfolio quality
but also in terms of borrower sacrices.
This paper highlights the experiences of microborrowers with their loans and aims to raise awareness
of their repayment struggles. At the same time, it
contributes to the micronance industrys understanding of what over-indebtedness means from
the perspective of clients and how we can assess it
empirically. While getting reliable information from
customers about their sacrices represents both a
challenge and a large effort, this paper suggests an
innovative way to identify over-indebtedness risks
from the viewpoint of micronance clients. We will
need many more research projects of this type to get
a more comprehensive understanding of borrower
experiences, also in other countries and cultural contexts. In the long run, we will need to identify proxies of over-indebtedness that are easier to track for
MFIs and regulators.
There are also policy implications from this research
for the development of customer protection mechanisms and especially for preventive measures against
over-indebtedness. The ndings are of course limited to the Ghanaian context, but are likely to be of
relevance to other markets as well: Even signicant
levels of over-indebtedness in a micronance market
do not automatically imply that there should be no
more microlending. In fact, microborrowers in Accra continue to express a strong interest in borrowing
in spite of their struggles. Looking at the causes of
over-indebtedness can inform us about better reactions to the over-indebtedness challenge. Both borrower sacrices and delinquency may result not only
from too much access to credit but alternatively from
18
References
9(3) 327355.
Augsburg, B., and C. Fouillet. 2010. Prot Empowerment: The Micronance Institutions Mission Drift.
Kappel, V., A. Krauss, and L. Lontzek. 2010. Over-Indebtedness and MicronanceConstructing an Early
Warning Index. Center for Micronance, University
of Zurich, responsAbility, Council of Micronance
Equity Funds, Triodos Investment Management
Zurich.
Gonzalez, A. 2008. Micronance, Incentives to Repay, and Overindebtedness: Evidence from a Household Survey in Bolivia. Doctoral thesis. Ohio State
University, Ohio.
Godquin, M. 2004. Micronance Repayment Performance in Bangladesh: How to Improve the Alloca32(11)
tion of Loans by MFIs.
19091926.
19
Providers will take adequate care to design products and delivery channels in such a way that they do not
cause clients harm. Products and delivery channels will be designed with client characteristics taken into
account.
Prevention of over-indebtedness
Providers will take adequate care in all phases of their credit process to determine that clients have the
capacity to repay without becoming over-indebted. In addition, providers will implement and monitor internal systems that support prevention of over-indebtedness and will foster efforts to improve market-level
credit risk management (such as credit information sharing).
Transparency
Providers will communicate clear, sufcient, and timely information in a manner and language clients can
understand so that clients can make informed decisions. The need for transparent information on pricing,
terms, and conditions of products is highlighted.
Responsible pricing
Pricing, terms, and conditions will be set in a way that is affordable to clients while allowing for nancial
institutions to be sustainable. Providers will strive to provide positive real returns on deposits.
Financial service providers and their agents will treat their clients fairly and respectfully. They will not
discriminate. Providers will ensure adequate safeguards to detect and correct corruption as well as aggressive or abusive treatment by their staff and agents, particularly during the loan sales and debt collection
processes.
The privacy of individual client data will be respected in accordance with the laws and regulations of individual jurisdictions. Such data will only be used for the purposes specied at the time the information is
collected or as permitted by law, unless otherwise agreed with the client.
Providers will have in place timely and responsive mechanisms for complaints and problem resolution
for their clients and will use these mechanisms both to resolve individual problems and to improve their
products and services.
(www.smartcampaign.org)
20
Respondents ranked the acceptability and frequency of each sacrice on a scale from 1 to 4.
Acceptability:
Easily acceptable, Only just acceptable, Not really acceptable, Not acceptable at all.
Frequency:
Once in past year, 1-3 times in past year, > 3 times but not often, Frequently in past year.
21
DISSERTATION
By
Jessica Schicks, MPhil, Dipl.Oec
At the
Centre for European Research in Microfinance (CERMi)
Solvay Brussels School of Economics and Management
Universit libre de Bruxelles