IDEAS home Printed from https://ideas.repec.org/p/sol/wpaper/2013-116700.html
   My bibliography  Save this paper

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

Author

Listed:
  • Jessica Schicks

Abstract

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.

Suggested Citation

  • Jessica Schicks, 2012. "Over-Indebtedness in Microfinance – An Empirical Analysis of Related Factors on the Borrower Level," Working Papers CEB 12-017, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:sol:wpaper:2013/116700
    as

    Download full text from publisher

    File URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/116700/1/wp12017.pdf
    File Function: wp12017
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ghatak, Maitreesh & Guinnane, Timothy W., 1999. "The economics of lending with joint liability: theory and practice," Journal of Development Economics, Elsevier, vol. 60(1), pages 195-228, October.
    2. Khandker, S.R. & Khalily, B. & Khan, Z., 1995. "Grameen Bank: Performance and Sustainability," World Bank - Discussion Papers 306, World Bank.
    3. Glenn B. Canner & Charles A. Luckett, 1991. "Payment of household debts," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Apr, pages 218-229.
    4. Paxton, Julia & Graham, Douglas & Thraen, Cameron, 2000. "Modeling Group Loan Repayment Behavior: New Insights from Burkina Faso," Economic Development and Cultural Change, University of Chicago Press, vol. 48(3), pages 639-655, April.
    5. Pitt, Mark M & Khandker, Shahidur R & Cartwright, Jennifer, 2006. "Empowering Women with Micro Finance: Evidence from Bangladesh," Economic Development and Cultural Change, University of Chicago Press, vol. 54(4), pages 791-831, July.
    6. Tokunaga, Howard, 1993. "The use and abuse of consumer credit: Application of psychological theory and research," Journal of Economic Psychology, Elsevier, vol. 14(2), pages 285-316, June.
    7. D'Espallier, Bert & Guérin, Isabelle & Mersland, Roy, 2011. "Women and Repayment in Microfinance: A Global Analysis," World Development, Elsevier, vol. 39(5), pages 758-772, May.
    8. Vogelgesang, Ulrike, 2003. "Microfinance in Times of Crisis: The Effects of Competition, Rising Indebtedness, and Economic Crisis on Repayment Behavior," World Development, Elsevier, vol. 31(12), pages 2085-2114, December.
    9. Marcel Fafchamps & David McKenzie & Simon Quinn & Christopher Woodruff, 2011. "When is capital enough to get female microenterprises growing? Evidence from a randomized experiment in Ghana," CSAE Working Paper Series 2011-11, Centre for the Study of African Economies, University of Oxford.
    10. Stone, Brice & Maury, Rosalinda Vasquez, 2006. "Indicators of personal financial debt using a multi-disciplinary behavioral model," Journal of Economic Psychology, Elsevier, vol. 27(4), pages 543-556, August.
    11. Kati Schindler, 2010. "Credit for What? Informal Credit as a Coping Strategy of Market Women in Northern Ghana," Journal of Development Studies, Taylor & Francis Journals, vol. 46(2), pages 234-253.
    12. repec:eee:joaced:v:28:y:2010:i:2:p:103-113 is not listed on IDEAS
    13. Beatriz Armendáriz & Jonathan Morduch, 2010. "The Economics of Microfinance, Second Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262014106, March.
    14. Karlan, Dean S. & Zinman, Jonathan, 2009. "Expanding Microenterprise Credit Access: Using Randomized Supply Decisions to Estimate the Impacts in Manila," CEPR Discussion Papers 7396, C.E.P.R. Discussion Papers.
    15. Ana del Río & Garry Young, 2005. "The impact of unsecured debt on financial distress among British households," Working Papers 0512, Banco de España;Working Papers Homepage.
    16. Godquin, Marie, 2004. "Microfinance Repayment Performance in Bangladesh: How to Improve the Allocation of Loans by MFIs," World Development, Elsevier, vol. 32(11), pages 1909-1926, November.
    17. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    18. Agier, Isabelle & Guérin, Isabelle & Szafarz, Ariane, 2012. "Child gender and parental borrowing: Evidence from India," Economics Letters, Elsevier, vol. 115(3), pages 363-365.
    19. Lusardi, Annamaria & Mitchell, Olivia S., 2007. "Baby Boomer retirement security: The roles of planning, financial literacy, and housing wealth," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 205-224, January.
    20. Bruhn, Miriam & Zia, Bilal, 2011. "Stimulating managerial capital in emerging markets : the impact of business and financial literacy for young entrepreneurs," Policy Research Working Paper Series 5642, The World Bank.
    21. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters,in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
    22. Alejandro Drexler & Greg Fischer & Antoinette Schoar, 2014. "Keeping It Simple: Financial Literacy and Rules of Thumb," American Economic Journal: Applied Economics, American Economic Association, vol. 6(2), pages 1-31, April.
    23. Agier, Isabelle & Szafarz, Ariane, 2013. "Microfinance and Gender: Is There a Glass Ceiling on Loan Size?," World Development, Elsevier, vol. 42(C), pages 165-181.
    24. Sarah Bridges & Richard Disney, 2004. "Use of credit and arrears on debt among low-income families in the United Kingdom," Fiscal Studies, Institute for Fiscal Studies, vol. 25(1), pages 1-25, March.
    25. Gathergood, John, 2012. "Self-control, financial literacy and consumer over-indebtedness," Journal of Economic Psychology, Elsevier, vol. 33(3), pages 590-602.
    26. Giesbert, Lena & Schindler, Kati, 2012. "Assets, Shocks, and Poverty Traps in Rural Mozambique," World Development, Elsevier, vol. 40(8), pages 1594-1609.
    27. 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.
    28. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, June.
    29. Carter, Michael R. & Little, Peter D. & Mogues, Tewodaj & Negatu, Workneh, 2007. "Poverty Traps and Natural Disasters in Ethiopia and Honduras," World Development, Elsevier, vol. 35(5), pages 835-856, May.
    30. Adele Atkinson & Stephen McKay & Sharon Collard & Elaine Kempson, 2007. "Levels of Financial Capability in the UK," Public Money & Management, Taylor & Francis Journals, vol. 27(1), pages 29-36, February.
    31. Marek Hudon, 2007. "Fair interest rates when lending to the poor," ULB Institutional Repository 2013/14204, ULB -- Universite Libre de Bruxelles.
    32. 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.
    33. Stefan Dercon, 2002. "Income Risk, Coping Strategies, and Safety Nets," World Bank Research Observer, World Bank Group, vol. 17(2), pages 141-166, September.
    34. Michal Bauer & Julie Chytilová, 2010. "The Impact of Education on Subjective Discount Rate in Ugandan Villages," Economic Development and Cultural Change, University of Chicago Press, vol. 58(4), pages 643-669, July.
    35. Isabelle Agier & Ariane Szafarz, 2013. "Subjectivity in credit allocation to micro-entrepreneurs: evidence from Brazil," Small Business Economics, Springer, vol. 41(1), pages 263-275, June.
    36. Jianakoplos, Nancy Ammon & Bernasek, Alexandra, 1998. "Are Women More Risk Averse?," Economic Inquiry, Western Economic Association International, vol. 36(4), pages 620-630, October.
    37. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
    38. Hashemi, Syed M. & Schuler, Sidney Ruth & Riley, Ann P., 1996. "Rural credit programs and women's empowerment in Bangladesh," World Development, Elsevier, vol. 24(4), pages 635-653, April.
    39. Drentea, Patricia & Lavrakas, Paul J., 2000. "Over the limit: the association among health, race and debt," Social Science & Medicine, Elsevier, vol. 50(4), pages 517-529, February.
    40. Carter, Michael R. & Lybbert, Travis J., 2012. "Consumption versus asset smoothing: testing the implications of poverty trap theory in Burkina Faso," Journal of Development Economics, Elsevier, vol. 99(2), pages 255-264.
    41. Skoufias, Emmanuel, 2003. "Economic Crises and Natural Disasters: Coping Strategies and Policy Implications," World Development, Elsevier, vol. 31(7), pages 1087-1102, July.
    42. Goetz, Anne Marie & Gupta, Rina Sen, 1996. "Who takes the credit? Gender, power, and control over loan use in rural credit programs in Bangladesh," World Development, Elsevier, vol. 24(1), pages 45-63, January.
    43. Lea, Stephen E. G. & Webley, Paul & Levine, R. Mark, 1993. "The economic psychology of consumer debt," Journal of Economic Psychology, Elsevier, vol. 14(1), pages 85-119, March.
    44. Kabeer, Naila, 2001. "Conflicts Over Credit: Re-Evaluating the Empowerment Potential of Loans to Women in Rural Bangladesh," World Development, Elsevier, vol. 29(1), pages 63-84, January.
    45. Garikipati, Supriya, 2008. "The Impact of Lending to Women on Household Vulnerability and Women's Empowerment: Evidence from India," World Development, Elsevier, vol. 36(12), pages 2620-2642, December.
    46. Greenwald, Bruce C., 1983. "A general analysis of bias in the estimated standard errors of least squares coefficients," Journal of Econometrics, Elsevier, vol. 22(3), pages 323-338, August.
    47. Jessica Schicks, 2010. "Microfinance Over-Indebtedness: Understanding its drivers and challenging the common myths," Working Papers CEB 10-048, ULB -- Universite Libre de Bruxelles.
    48. Altman, Morris, 2012. "Implications of behavioural economics for financial literacy and public policy," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 41(5), pages 677-690.
    49. Lea, Stephen E. G. & Webley, Paul & Walker, Catherine M., 1995. "Psychological factors in consumer debt: Money management, economic socialization, and credit use," Journal of Economic Psychology, Elsevier, vol. 16(4), pages 681-701, December.
    50. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 443-478.
    51. Suresh de Mel & David McKenzie & Christopher Woodruff, 2009. "Returns to Capital in Microenterprises: Evidence from a Field Experiment," The Quarterly Journal of Economics, Oxford University Press, vol. 124(1), pages 423-423.
    52. Livingstone, Sonia M. & Lunt, Peter K., 1992. "Predicting personal debt and debt repayment: Psychological, social and economic determinants," Journal of Economic Psychology, Elsevier, vol. 13(1), pages 111-134, March.
    53. Courchane, Marsha & Gailey, Adam & Zorn, Peter, 2008. "Consumer credit literacy: What price perception," Journal of Economics and Business, Elsevier, vol. 60(1-2), pages 125-138.
    54. Lo Prete, Anna, 2013. "Economic literacy, inequality, and financial development," Economics Letters, Elsevier, vol. 118(1), pages 74-76.
    55. Daryl Collins, 2008. "Debt and household finance: evidence from the Financial Diaries," Development Southern Africa, Taylor & Francis Journals, vol. 25(4), pages 469-479.
    56. Moulton, Brent R, 1990. "An Illustration of a Pitfall in Estimating the Effects of Aggregate Variables on Micro Unit," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 334-338, May.
    57. Sharma, Manohar & Zeller, Manfred, 1997. "Repayment performance in group-based credit programs in Bangladesh: An empirical analysis," World Development, Elsevier, vol. 25(10), pages 1731-1742, October.
    58. Dean Karlan & Ed Kutsoati & Margaret McMillan & Chris Udry, 2011. "Crop Price Indemnified Loans for Farmers: A Pilot Experiment in Rural Ghana," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 78(1), pages 37-55, March.
    59. Mark Schreiner, 2001. "Scoring Drop-Out at a Microlender in Bolivia," Development and Comp Systems 0109009, EconWPA.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Antonia Grohmann & Theres Klühs & Lukas Menkhoff, 2017. "Does Financial Literacy Improve Financial Inclusion? Cross Country Evidence," Discussion Papers of DIW Berlin 1682, DIW Berlin, German Institute for Economic Research.
    2. repec:eee:asieco:v:56:y:2018:i:c:p:1-23 is not listed on IDEAS
    3. Kajenthiran. K & Achchuthan. S & Ajanthan. A, 2017. "A Quest for Seeking Microcredit among Youth: Evidence from an Emerging Nation in South Asian Region," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 7(2), pages 1-8.
    4. Grohmann, Antonia & Klühs, Theres & Menkhoff, Lukas, 2018. "Does Financial Literacy Improve Financial Inclusion? Cross Country Evidence," Rationality and Competition Discussion Paper Series 95, CRC TRR 190 Rationality and Competition.
    5. Angioloni, Simone & Kudabaev, Zarylbek & Ames, Glenn & Wetzstein, Michael, 2015. "Household Allocation of Microfinance Loans in Kyrgyzstan," 2015 Conference, August 9-14, 2015, Milan, Italy 210949, International Association of Agricultural Economists.
    6. Fenton, Adrian & Paavola, Jouni & Tallontire, Anne, 2017. "The Role of Microfinance in Household Livelihood Adaptation in Satkhira District, Southwest Bangladesh," World Development, Elsevier, vol. 92(C), pages 192-202.
    7. Aggarwal, Raj & Goodell, John W. & Selleck, Lauren J., 2015. "Lending to women in microfinance: Role of social trust," International Business Review, Elsevier, vol. 24(1), pages 55-65.
    8. repec:eee:wdevel:v:98:y:2017:i:c:p:338-350 is not listed on IDEAS
    9. Islam, Asadul & Nguyen, Chau & Smyth, Russell, 2015. "Does microfinance change informal lending in village economies? Evidence from Bangladesh," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 141-156.
    10. Chichaibelu, Bezawit & Waibel, Hermann, 2015. "The Interrelated Dynamics of Multiple Borrowing and Over-indebtedness among Rural Households in Thailand and Vietnam," 2015 Conference, August 9-14, 2015, Milan, Italy 211463, International Association of Agricultural Economists.
    11. Agarwalla, Sobhesh Kumar & Barua, Samir K. & Jacob, Joshy & Varma, Jayanth R., 2015. "Financial Literacy among Working Young in Urban India," World Development, Elsevier, vol. 67(C), pages 101-109.
    12. repec:eee:pacfin:v:43:y:2017:i:c:p:218-237 is not listed on IDEAS
    13. Shen, Chung-Hua & Lin, Shih-Jie & Tang, De-Piao & Hsiao, Yu-Jen, 2016. "The relationship between financial disputes and financial literacy," Pacific-Basin Finance Journal, Elsevier, vol. 36(C), pages 46-65.
    14. repec:eee:joreco:v:23:y:2015:i:c:p:39-48 is not listed on IDEAS
    15. B. Mak Arvin & Byron Lew (ed.), 2015. "Handbook on the Economics of Foreign Aid," Books, Edward Elgar Publishing, number 15762.

    More about this item

    Keywords

    Microfinance; Microcredit; Over-Indebtedness; Debt; Customer Protection; Sacrifices;

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O50 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sol:wpaper:2013/116700. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Benoit Pauwels). General contact details of provider: http://edirc.repec.org/data/cebulbe.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.