Over-indebtedness and its welfare effect on households

Kingstone Mutsonziwa and Ashenafi Fanta

African Journal of Economic and Management Studies, 2019, vol. 10, issue 2, 185-197

Abstract: Purpose - Although credit plays a crucial role in modern society, the increased availability of credit is partly responsible for higher levels of debt burden and household over-indebtedness. However, despite the serious consequences of over-indebtedness on household welfare our understanding of the factors that determine over-indebtedness and the link between over-indebtedness and poverty is limited. The purpose of this paper is therefore to identify drivers of over-indebtedness at an individual level and its link with poverty. Design/methodology/approach - The authors analysed the determinants of over-indebtedness and its links with poverty employing a binary logistic regression model using data on 51,359 individuals from 11 economies in the Southern Africa Development Community. Findings - The results suggest that over-indebtedness is driven by, among others, lack of credit literacy, cross-borrowing and income. The results also suggest that over-indebtedness is likely to impoverish the indebted. Practical implications - Policies that encourage access to financial services such as credit should be designed such that increased financial inclusion does not aggravate poverty and inequality. Originality/value - The authors used a unique financial inclusion survey that reports data on financial inclusion and poverty measures to identify the determinants of over-indebtedness and its link with poverty.

Keywords: Africa; Poverty; Financial inclusion; Debt; SADC (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ajemsp:ajems-04-2018-0105

DOI: 10.1108/AJEMS-04-2018-0105

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