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The Definition and Causes of Microfinance Over-Indebtedness: A Customer Protection Point of View

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  • Jessica Schicks

Abstract

With over-indebtedness emerging among microfinance customers, the industry's sustainability and social impact are at risk. Filling a void in the literature, this paper develops a definition of over-indebtedness that is appropriate for customer protection purposes. It provides a framework for the causes of over-indebtedness that highlights the role of external influences and the responsibility of lenders. It recognises the role borrowers play in their own over-indebtedness. This paper challenges several misconceptions and oversimplifications about microfinance over-indebtedness. These include the belief that default-based risk management indicators are sufficient to signal concerns in relation to customer protection. Further misconceptions are the undesirability of consumption loans, as well as the benefits of competition, of regular instalment schedules, of a zero-tolerance policy and of annual percentage rates. By enhancing our understanding of microfinance over-indebtedness and its causes, this paper provides the means for measuring over-indebtedness and tailoring solutions to its root causes. The analysis shows that combating over-indebtedness does not automatically mean reducing access to microcredit. Although a soundevaluation of repayment capacity is essential, tailoring products to clients' needs also reduces over-indebtedness.

Suggested Citation

  • Jessica Schicks, 2013. "The Definition and Causes of Microfinance Over-Indebtedness: A Customer Protection Point of View," Oxford Development Studies, Taylor & Francis Journals, vol. 41(sup1), pages 95-116, August.
    • Handle: RePEc:taf:oxdevs:v:41:y:2013:i:sup1:p:s95-s116
    DOI: 10.1080/13600818.2013.778237
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    References listed on IDEAS

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    1. Karlan, Dean S. & Zinman, Jonathan, 2009. "Expanding Microenterprise Credit Access: Using Randomized Supply Decisions to Estimate the Impacts in Manila," Center Discussion Papers 52600, Yale University, Economic Growth Center.
    2. Karlan, Dean & Zinman, Jonathan, 2009. "Expanding Microenterprise Credit Access: Randomized Supply Decisions to Estimate the Impacts in Manila," Working Papers 68, Yale University, Department of Economics.
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