> 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