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

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