Publication: Are Microcredit Borrowers in Bangladesh Over-indebted ?
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2013-08
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2013-10-02
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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 of 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. Econometric analysis suggests that both MFI competition and multiple borrowing raise indebtedness. However, repeated borrowing, while it affects short-term liability adversely, does affect the long-term debt-asset ratio favorably. That is, repeated borrowing helps increase assets more than debt over time. Microcredit borrowers in Bangladesh are thus not necessarily over-indebted. But when borrowing is seen as protection against shocks such as floods even at the cost of being indebted, MFIs may offer micro-insurance schemes to safeguard borrowers against economic shocks.
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“Faruqee, Rashid; Khandker, Shahidur R.; Samad, Hussain A.. 2013. Are Microcredit Borrowers in Bangladesh Over-indebted ?. Policy Research Working Paper;No. 6574. © World Bank. http://hdl.handle.net/10986/16007 License: CC BY 3.0 IGO.”
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