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Are microcredit borrowers in Bangladesh over-indebted ?

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Author Info

  • Khandker, Shahidur R.
  • Faruqee, Rashid
  • Samad, Hussain A.

Abstract

Microcredit programs in Bangladesh have experienced spectacular growth in recent years, with a growing number of borrowers availing credit from multiple microcredit agencies. There is a growing concern that if there are not sufficient returns to borrowing from microfinance institutions (MFIS), some borrowers might be taking loans that they will not be able to repay. A household may be considered over-indebted, for example, if its debt liability exceeds 40 percent of its income or assets. Using a long panel of household survey data from Bangladesh, the paper finds that some 26 percent of microcredit borrowers are over-indebted on this measure versus 22 percent of non-microcredit borrowers. Econometric analysis suggests that both MFI competition and multiple borrowing raise indebtedness. However, repeated borrowing, while it affects short-term liability adversely, does affect the long-term debt-asset ratio favorably. That is, repeated borrowing helps increase assets more than debt over time. Microcredit borrowers in Bangladesh are thus not necessarily over-indebted. But when borrowing is seen as protection against shocks such as floods even at the cost of being indebted, MFIs may offer micro-insurance schemes to safeguard borrowers against economic shocks.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6574.

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Date of creation: 01 Aug 2013
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Handle: RePEc:wbk:wbrwps:6574

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Keywords: Debt Markets; Bankruptcy and Resolution of Financial Distress; Currencies and Exchange Rates; Banks&Banking Reform; Emerging Markets;

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  1. Luisa ANDERLONI & Daniela VANDONE, 2008. "Households over-indebtedness in the economic literature," Departmental Working Papers 2008-46, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
  2. Jessica Schicks, 2010. "Microfinance Over-Indebtedness: Understanding its drivers and challenging the common myths," Working Papers CEB 10-048, ULB -- Universite Libre de Bruxelles.
  3. Ana del Río & Garry Young, 2005. "The impact of unsecured debt on financial distress among British households," Banco de Espa�a Working Papers 0512, Banco de Espa�a.
  4. Ulrike Vogelgesang, 2001. "Microfinance in Times of Crisis: The Effects of Competition, Rising Indebtedness, and Economic Crisis on Repayment Behavior," GK working paper series 2001-06, Post Graduate Programme "Allocation on Financial Markets", University of Mannheim, revised Nov 2001.
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Cited by:
  1. Khandker, Shahidur R. & Samad, Hussain A., 2014. "Dynamic effects of microcredit in Bangladesh," Policy Research Working Paper Series 6821, The World Bank.

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