Over-Indebtedness in Microfinance – Who Should Bear the Risk?
While microfinance products and lending methodologies vary significantly on the ground, two main features of microfinance have made this enormous expansion of access to finance possible: microlending has become scalable due to cost efficient operating models and due to risk management methodologies that ensured high repayment rates.
We Need to Keep Learning about Overindebtedness
We need to look more carefully at the interactions between microfinance institutions and their clients, examining how MFI practices play out in lives of clients on an everyday basis. Stuart posed two specific hypotheses: if a lender needs clients to borrow continually, it incentivizes overselling and overindebtedness, and that insistence on immediate, in-full repayment drives some clients to begin bicycling loans.
Some Insights into Over-indebtedness in India
Microfinance Institutions in Andhra Pradesh and elsewhere in India are keen to avoid over-indebtedness or place clients in distress.
Over-Indebtedness and the Role of Investors
The consequences of over-indebtedness are shared among all stakeholders in microfinance. Households, individuals, and communities are affected by borrowers who cannot repay their debts.
Measuring Cross-indebtedness in Latin America
While over-indebtedness can be difficult to observe in practice, we can use simple surveys to estimate one proxy for over-indebtedness: cross-indebtedness, or the number of institutions from which the typical borrower has a loan.
Over-Indebtedness: Roles and Responsibilities of All Actors
Still one of the keys to addressing over-indebtedness is analyzing the ability of the borrower to repay.
Constructing an Early Warning Index
Over-indebtedness has a detrimental effect on all players involved: first and foremost for the borrower.
Two Cautionary Tales from Bangladesh
For leaders who devised Bangladeshi’s microfinance miracle in the first place, adjusting staff instructions and realigning incentives to remove these foolish practices should be a piece of cake.
Over-indebtedness: Striking the Right Balance
Over-indebtedness is as old as lending itself. A growing credit market will always bring about cases of client over-indebtedness. To put consumer protection measures in place is an essential part of good practice.