Are Microcredit Borrowers in Bangladesh Over-indebted?

Shahidur Khandker (), Rashid Faruqee and Hussain Samad

Working Papers from Institute of Microfinance (InM)

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 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. An econometric analysis that controls for both observed and unobserved variations at the household and community level suggests that MFI competition raises indebtedness. But when household participation is taken into account the community-level program density, a measure for MFI competition, it does not seem to have an independent adverse effect. However, although repeated micro-borrowing affects short-term liability adversely, it affects the long-term debt-asset ratio favorably. That is, repeated borrowing helps increase assets more than debt over time. As borrowing is often used to protect members against exposure to shock such as flood even at the cost of being over-indebted, the MFIs may offer cost-effective micro-insurance schemes to help them mitigate the adverse effects of shocks.

Pages: 35 pages
Date: 2014-07
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Citations: View citations in EconPapers (2)

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