> Posted by Jessica Schicks

Over-indebtedness is difficult to measure, but in principle don’t we all have a clear idea what it’s about? Don’t we know it when we see it? Many would say that over-indebtedness is when clients can’t repay. However, protecting clients is different from protecting the portfolio quality of MFIs. We define over-indebtedness as a situation in which a client makes repeated, serious sacrifices in order to repay debts. By that definition, the harm of having too much debt comes to clients long before it hits lenders in the form of delinquency and default.

In a joint study for my PhD at the Center for European Research in Microfinance (CERMi), together with the Smart Campaign at the Center for Financial Inclusion at ACCION International and with the Independent FC Evaluation Unit of KfW Entwicklungsbank, the German development bank, we interviewed 531 microborrowers in urban Ghana to find out when and how clients perceive over-indebtedness. Here is a glimpse of what we found:

  • In contrast with recent concerns, delinquency and multiple borrowing among Ghana’s top microlenders show no signs of a crisis.
  • Nevertheless, clients voice their own views about over-indebtedness. In our sample, 30 percent of microborrowers are struggling with their loan repayment to an extent they consider unacceptable. Many have to go hungry or take children out of school while trying to repay their loans on time. These borrowers are not delinquent, and most may never become delinquent. They willingly make deep sacrifices, because it means a great deal to them to maintain their good credit standing.

For all those who want to find out more about over-indebtedness in Ghana, how clients cope, and what the implications are for the industry, see our upcoming report, “The Over-Indebtedness of Microborrowers in Ghana – An Empirical Study from a Customer Protection Perspective,” in the CFI publication series.

Image credit: Srhat

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