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Are microcredit borrowers in Bangladesh over-indebted ?

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Listed:
  • 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.

Suggested Citation

  • Khandker, Shahidur R. & Faruqee, Rashid & Samad, Hussain A., 2013. "Are microcredit borrowers in Bangladesh over-indebted ?," Policy Research Working Paper Series 6574, The World Bank.
  • Handle: RePEc:wbk:wbrwps:6574
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    References listed on IDEAS

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    1. Ana del Río & Garry Young, 2005. "The impact of unsecured debt on financial distress among British households," Working Papers 0512, Banco de España.
    2. Dilip Soman & Amar Cheema, 2002. "The Effect of Credit on Spending Decisions: The Role of the Credit Limit and Credibility," Marketing Science, INFORMS, vol. 21(1), pages 32-53, September.
    3. Jessica Schicks, 2010. "Microfinance Over-Indebtedness: Understanding its drivers and challenging the common myths," Working Papers CEB 10-048, ULB -- Universite Libre de Bruxelles.
    4. 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.
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    Cited by:

    1. Béné, Christophe & Chowdhury, Fahim S. & Rashid, Mamun & Dhali, Sabbir A. & Jahan, Ferdous, 2017. "Squaring the Circle: Reconciling the Need for Rigor with the Reality on the Ground in Resilience Impact Assessment," World Development, Elsevier, vol. 97(C), pages 212-231.
    2. Khandker, Shahidur R. & Samad, Hussain A., 2014. "Dynamic effects of microcredit in Bangladesh," Policy Research Working Paper Series 6821, The World Bank.
    3. Khandker, Shahidur R. & Samad, Hussain A., 2016. "Transformation of Rural Bangladesh: Role of Infrastructure and Financial Institutions," Working Papers 128, JICA Research Institute.
    4. Chichaibelu, Bezawit Beyene & Waibel, Hermann, 2017. "Borrowing from “Pui” to Pay “Pom”: Multiple Borrowing and Over-Indebtedness in Rural Thailand," World Development, Elsevier, vol. 98(C), pages 338-350.
    5. 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.
    6. Sunil Puliyakot, 2020. "Determinants of overindebtedness among microfinance borrowers: a poverty line-based approach," Asia-Pacific Sustainable Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 27(1), pages 20-41, June.

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