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

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  • Jessica Schicks

Abstract

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

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Bibliographic Info

Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 10-048.

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Length: 35 p.
Date of creation: Sep 2010
Date of revision:
Publication status: Published by:
Handle: RePEc:sol:wpaper:2013/64675

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Related research

Keywords: Microfinance; Microcredit; Over-Indebtedness; Debt; Customer Protection; Consumer Finance; Behavioural Economics;

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References

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  1. Ana Del-Rí­o & Garry Young, 2005. "The impact of unsecured debt on financial distress among British households," Bank of England working papers 262, Bank of England.
  2. Beatriz Armendariz & Ariane Szafarz, 2009. "On Mission Drift In Microfinance Institutions," Working Papers CEB 09-015.RS, ULB -- Universite Libre de Bruxelles.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Microfinance Over-Indebtedness: Naming the beast and nailing the concept
    by Jessica Schicks in CGAP Microfinance Blog on 2011-01-31 23:17:08
  2. Save the Date: Bateman-Roodman Debate
    by philmader in governance across borders on 2012-01-23 14:50:12
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Cited by:
  1. Matteo Marinangeli & Andrea Filippo Presbitero, 2011. "Can the Poor Save More? Evidence from Bangladesh," Mo.Fi.R. Working Papers 57, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  2. Jessica Schicks, 2011. "From a supply gap to a demand gap? The risk and consequences of over-indebting the underbanked," Working Papers CEB 11-046, ULB -- Universite Libre de Bruxelles.
  3. Michael Hamp & Carolina Laureti, 2011. "Balancing flexibility and discipline in microfinance: Innovative financial products that benefit clients and service providers," Working Papers CEB 11-044, ULB -- Universite Libre de Bruxelles.

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