Are Microcredit Borrowers in Bangladesh Over-Indebted?

43 Pages Posted: 20 Apr 2016

See all articles by Shahidur R. Khandker

Shahidur R. Khandker

World Bank - Development Research Group (DECRG)

Rashid Faruqee

World Bank

Hussain A. Samad

World Bank

Date Written: August 1, 2013

Abstract

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.

Keywords: Debt Markets, Bankruptcy and Resolution of Financial Distress, Currencies and Exchange Rates, Banks & Banking Reform, Emerging Markets

Suggested Citation

Khandker, Shahidur R. and Faruqee, Rashidur R. and Samad, Hussain A., Are Microcredit Borrowers in Bangladesh Over-Indebted? (August 1, 2013). World Bank Policy Research Working Paper No. 6574. Available at SSRN: https://ssrn.com/abstract=2311107

Shahidur R. Khandker (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Rashidur R. Faruqee

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Hussain A. Samad

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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