Over-Indebtedness and “Unacceptable Sacrifices”
Jessica Shicks’s post in this series argues that from a consumer protection perspective–I assume that’s the most relevant perspective for development practitioners–the notion of over-indebtedness should include not just situations where the borrower can’t repay, but also situations where the borrower can repay but only at the cost of “unacceptable” sacrifices. Adrian Gonzalez made much the same point in his doctoral dissertation; likewise Beth Rhyne in a blog post a few months ago. I think that they’re right, and that it makes sense to incorporate this sacrifice dimension into a definition of over-indebtedness for research purposes.
But there’s a knotty problem here. When we talk about “over-indebtedness,” we usually assume that it’s something that ought to happen pretty rarely if credit is being delivered responsibly. But take Jessica’s example of a woman who is “over-indebted” in the sense that she has to go hungry in order to make a loan payment. Suppose she goes without food for three days to pay off a loan: at first blush, this probably sounds like an unacceptable sacrifice. But further suppose that she borrowed the money in the first place to avoid going without food for three weeks. This is a loan that resulted in over-indebtedness as we’ve defined it, even though the loan may have been a good deal for the borrower, and we’d want the same deal to be available to plenty of other borrowers if they’re in similar circumstances.
Paying off a loan is just one among many payments that poor people have to make. The fact that they’re poor implies that coming up with cash for any purpose can be associated with serious sacrifices—someone may, for instance, have to go hungry or sell productive assets to pay school fees or medical expenses. With this in mind, maybe we should expect to find substantial levels of over-indebtedness (thus defined) among poor microborrowers, even if the lending is responsible.
Of course, a lot depends on how high we set the bar in defining which sacrifices are “unacceptable.” This is really a tough one. It’s hard to argue with Jessica’s position that the answer has to come from the borrowers themselves. But like everything else about over-indebtedness, this involves complications too. Do we wind up defining over-indebtedness as loans the borrowers wish they hadn’t taken? I’ll be very interested to see how this is operationalized in Jessica’s forthcoming paper on her Ghana research.
(Adrian Gonzalez’s dissertation avoided the question of what was “unacceptable,” and focused instead on whether a sacrifice was “unanticipated.” This may be easier to determine in a field interview, but it further weakens the link between “over-indebtedness” thus defined and a conclusion about whether the lending operation is a responsible one.)
Also in this Series
Over-Indebtedness in Microfinance – Who Should Bear the Risk?
While microfinance products and lending methodologies vary significantly on the ground, two main features of microfinance have made this enormous expansion of access to finance possible: microlending has become scalable due to cost efficient operating models and due to risk management methodologies that ensured high repayment rates.
We Need to Keep Learning about Overindebtedness
We need to look more carefully at the interactions between microfinance institutions and their clients, examining how MFI practices play out in lives of clients on an everyday basis. Stuart posed two specific hypotheses: if a lender needs clients to borrow continually, it incentivizes overselling and overindebtedness, and that insistence on immediate, in-full repayment drives some clients to begin bicycling loans.
Comments
Overindebtedness is a tough
Overindebtedness is a tough nut to crack, but perhaps it’s worth separating theoretical and practical measures. I’ll deal with latter, which in my mind comprise to aspects:
1) conduct appropriate verification beforehand to insure that loan repayments are reasonable given the client’s income. This is standard practice in most lending, but it is unfortunately often given short-shrift in microfinance, especially in group-lending methodologies. However, I don’t think any serious commitment to avoid overindebtedness can avoid this step, and groups have shown themselves to be incapable of doing it themselves. Note that this must also include evaluation of existing debt.
2) Provide reasonable workout strategies in cases of serious need — job loss, serious illness, etc. In the worst situations, such as the death or incapacity of the family’s primary breadwinner or severe natural disaster, the loan could be written off. However, evaluating whether a borrower must skip a meal or make other sacrifices to pay is simply not a viable path. Unfortunately, sacrifices are all too common among the poor, and making that a metric would be tantamount to a mass waiver.
I think implementing these two measures would go a long way to addressing overindebtedness.
Hi Rich (and Jessica)
Hi Rich (and Jessica)
Thanks for your efforts in promoting research on overindebtedness and for reviving some of the ideas from my dissertation. This takes me back to The Ohio State University, where I started working on the topic under de supervision of Professor Claudio Gonzalez-Vega.
In my dissertation’s conceptual framework, I chose the term “costly actions/extraordinary repayment capacity” to refer to your “unacceptable sacrifices”. My terminology makes no judgmental values, and without further analysis, it doesn’t suggest that policy measures are necessary to prevent this actions . However, calling them “unacceptable sacrifices” is a direct call for potentially unnecessary policy intervention. In your example, the borrower helps the household going without eating for a three weeks. Therefore, not eating for three days in order to eat for three weeks is an acceptable sacrifice.
As you mention at the very end of your post, a second distinction from my conceptual frame, is the condition that costly actions were not planned at the time the decision to borrow was made by the household. Therefore, in your example, if the woman knew at the time she borrowed that she will have to go without eating for three days, this will not be considered as overindebtedness. However, if at the time of repayment, in addition to not eating for three days, she had use her saving to repay and this action was not planned when she borrower, then, under my definition, she was overindebted.
Your main concern seems to be the link between overindebtedness and whether lending operations are responsible. The challenge here is tougher because overindebtedness can have many causes, and as in the Bolivia episode of 1999-2002, they usually interact with each other and from the analytical perspective, it is very hard to separate their effects. Some of the causes of overindebtedness includes borrowers’ opportunistic behavior, lender’s opportunistic behavior (irresponsible lenders will be part of this), and adverse (negative) shocks.
A final comment, most people associate multiciplicity of loans with overindebtedness, but at least in the case of Bolivia, my dissertation showed that the number of loans was not an important factor determining the overindebtedness of different households. Not surprisingly, systemic shocks were the main cause of overindebtedness back then.
Thanks
"Suppose she goes without
"Suppose she goes without food for three days to pay off a loan: at first blush, this probably sounds like an unacceptable sacrifice. But further suppose that she borrowed the money in the first place to avoid going without food for three weeks...."
IMO: If she hadn't borrowed she would not have paid interest in her repayments, and thus would have more money available the next time she got hungry. I.e. in a nett sense MC for income-smoothing makes you more poor and likely to be hungry, not less.
BTW Rich, it looks like my NGO will receive funding to do a pilot of a RCT of microcredit in Cambodia, beginning next year.
John
Add new comment