> Posted by Marco De Natale
This post marks the Center’s launch of “Over-Indebtedness of Microborrowers in Ghana,” a new report written by Jessica Schicks.
“Over-Indebtedness of Microborrowers in Ghana” is an innovative and already influential study on what is currently the main concern of microfinance practitioners (cf. “Microfinance Banana Skins 2011,” CSFI).
The research considers a very relevant country for global microfinance trends, as Ghana is a prime example of a well-developed sector where observers have noted potential warning signs of over-indebtedness: Urban markets (especially in the capital, Accra, and in the business capital, Kumasi) are increasingly served by a variety of financial institutions (mainly deposit-taking NBFIs and NGOs), the credit bureau system is arguably still not up to speed, and there is a relatively large number of informal/unregulated credit providers.
Indeed, a recent study of the Center for Microfinance at the University of Zurich identifies Ghana having a “medium to high level of early warning signals for over-indebtedness” based on a set of 14 macro/industry indicators.
The author’s approach to assessing potential over-indebtedness is to turn the tables on the methodology used so far, putting the perspective firmly on the final borrowers, rather than on the lenders (or the macro/industry structure). Over-indebtedness could indeed happen, even in the absence of arrears, if microfinance clients undergo unacceptable sacrifices in order to repay (a situation which could go undetected, despite the clear risk of deteriorating into defaults). The study thus proceeds to interview over 500 clients (borrowers) of five of the largest Ghanaian institutions (jointly representing nearly half of the Ghanaian microfinance market, according to MIX Market), asking them about sacrifices in terms of food, education, work, or social interactions to assess the “hidden costs” of their indebtedness.
While at the macro/industry level the survey sees no major concern in terms of penetration rates, competitive behavior of the MFIs, delinquency, or multiple borrowing, the report finds that 30 percent of microborrowers “struggle so much with their repayments that we call them over-indebted from a customer protection perspective.” This result has clear policy implications that would need to be addressed by Ghanaian MFIs in terms of product design. (Encouragingly, all the largest Ghanaian MFIs we have met with at BlueOrchard appeared aware of the study and of its implications.)
In sum, “Over-Indebtedness of Microborrowers in Ghana” is a much-needed reminder to practitioners and researchers to focus on repayment struggles, as well as on arrears and penetration rates, putting customer protection at the center of the efforts to track over-indebtedness and design products.
Have you read?
Peruvian MFIs Advance ASOMIF Initiative Targeting Over-Indebtedness
‘We Need to Keep Learning About Over-Indebtedness’ – Beth Rhyne on CGAP Microfinance Blog
Study on Over-Indebtedness in Microfinance Markets Published
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November 22, 2011 at 11:42 am
Paul Rippey
I’m glad to see the new emphasis on over-indebtedness, a phenomenon that has been becoming increasingly obvious for a couple of decades. The interesting question is where to draw the line beyond which one is “over-indebted”. Is it when the level of debt reaches such a proportion that portfolio quality drops, recovery costs rise, and the financial institutions suffer? Or, as Jessica Schicks admirably puts it, when “microfinance clients undergo unacceptable sacrifices in order to repay”? Or – I’ll go a step further – is it when the optimum level of debt for the borrowers has been reached. The optimum level might be much less than simply borrowers having to make unacceptable sacrifices. Saving is often a better strategy for amassing lump sums, even if borrowing is quite “acceptable”. I mention this in hopes that our love affair with credit might be replaced by a more evidence-based assessment of the financial services that people want and need. I am skeptical that social good varies in any linear, consistent or predictable way with the level of debt. You might find some correlation with the level of savings, however.
April 16, 2014 at 7:04 pm
Ezra Uvalles
I quite take pleasure in you posting this material.
It is the time suitable for Ghana to develop, embrace in unison and
also see how to focus this country in the right direction and overcome the prevailing challenges.
Thanks a lot for such insightful blog post.