> Posted by Maura Hart, Communications Manager, Microfinance CEO Working Group

In conjunction with the release of two new publications on over-indebtedness, the MCWG has launched the Over-Indebtedness Transparency Discussion Forum as a platform for discussion and encourage readers to join in. We invite you to share your thoughts and questions with other microfinance practitioners.

Over-Indebtedness: A Risk Management ApproachUnderstanding the causes and potential remedies for over-indebtedness is critical to socially responsible lending. The fallout from over-indebtedness can be extensive, not only to the clients whose inability to repay loans can lead to social, economic, and personal problems with long-lasting repercussions, but if over-indebtedness is widespread, it can create adverse economic impact on the community and ultimately cause a significant economic crisis in that region. We have seen tragic examples of this in Bolivia and India just in the last 15 years.

Recognizing the ongoing urgency of this issue, the Microfinance CEO Working Group – a collaborative effort by the leaders of eight pioneering microfinance organizations – Accion, FINCA International, Freedom from Hunger, Grameen Foundation, Opportunity International, Pro Mujer, VisionFund International, and Women’s World Banking – commissioned two new studies:

The Working Group and our colleagues in the socially responsible lending community are anxious to avoid a debt crisis in Mexico, similar to those that have caused major upheavals in other countries. The Working Group commissioned Over-Indebtedness in Mexico: Its Effect on Borrowers to learn of the causes of over-indebtedness in Mexico directly from borrowers and those who are on the frontlines of the loan application and approval process.

Over-Indebtedness: A Risk Management Approach is designed to help other microfinance institutions (MFIs) identify the leading indicators of the trend toward over-indebtedness and mitigate the risks—and ultimately reduce the likelihood that over-indebtedness will happen. The study examines the leading indicators of over-indebtedness and suggests steps MFIs can take to avoid over-indebting their clients. It also identifies the risk mitigants and controls that will reduce the likelihood of MFIs being affected should over-indebtedness hit the wider market.

We hope these two papers will be the catalyst for an open dialogue among practitioners and thought leaders in the microfinance sector so that we might collaborate to develop preventive solutions. As these initiatives become established, the Working Group will share these resources with other MFIs and the microfinance sector. We also plan to provide additional platforms to continue the fruitful discussion of over-indebtedness remedies.

Over-Indebtedness in Mexico: Its Effects on BorrowersIn addition to the analysis and recommendations in the papers, our findings have already spurred some of the Microfinance CEO Working Group’s MFI members to create additional resources to help the entire sector mitigate and prevent the causes of over-indebtedness. For example:

  • One MFI outlined 24 ways to mitigate over-indebtedness and has implemented those methods throughout its networks.
  • Another MFI recalibrated relevant internal policies and loan handling procedures to ensure that processes and incentives are in place at every level to detect the early warning signs of over-indebtedness, prevent situations of over-indebtedness, and promote responsible microfinance.
  • Other MFIs are engaged in developing client education initiatives, including financial literacy programs, to communicate the consequences of over-indebtedness and methods to prevent them from falling into the same trap.
  • Other MFIs are working with regulators to develop client protection programs in those countries.

Collectively, the Microfinance CEO Working Group encompasses more than 230 microfinance institutions in 70 countries, representing over 44 million clients. Since 2011, the Working Group has sought to support the microfinance industry in bringing a broad range of financial and related services to those who have traditionally been excluded. The Center for Financial Inclusion serves as the secretariat for the Working Group.

Have you read?

Microfinance CEOs: Smart Campaign Certification is a “Clear Step” Toward Responsible Microfinance

Straight Talk on Client Protection — Monitoring Client Indebtedness

Banana Skins 2012: Over-Indebtedness Tops the Risk Charts