Is Microcredit a Debt Trap for the Poor? Sifting Reality from Myth

There appears to exist a deep-seated scepticism about microcredit in popular perception in Bangladesh. One manifestation of this scepticism is the oft-repeated allegation, based mainly on hearsay or anecdotes, that microcredit is leading hordes of borrowers into a “debt trap.” The present paper makes the first systematic attempt to empirically investigate the existence, nature and magnitude of debt trap among microcredit borrowers in Bangladesh. The investigation relies on a large-scale nationally representative rural household survey, covering the period 2007-2013. The paper begins by examining the prevalence of two inter-related practices – namely, “overlapping borrowing” and “borrowing to repay,” which are often taken as indicators of debt trap in popular discussion of the subject. The paper argues that although these practices could sometimes lead to a debt trap, neither of them necessarily does so, so that the magnitude of debt traps could not be deduced from the magnitude of these practices. After defining the criteria for identifying a debt trap, the paper finds that debt traps can be said to characterise at most 4.5 per cent of microcredit borrowers who engage in “borrowing to repay” and only about 1.4 per cent of all microcredit borrowers. Furthermore, even in these few cases, microcredit cannot generally be held responsible for their plight. Debt traps occur when extremely vulnerable households are faced with overwhelming shocks; and the role of microcredit here is to help people to cope better with such shocks rather than to cause them.