Viewing all posts with tag: Overindebtedness  

WSJ: Financial Inclusion in Asia and Microcredit's Impact

This week, The Wall Street Journal featured a pair of articles on current issues in microfinance. The first highlights the varied strategies governments across Asia are employing to promote financial inclusion, including mobile technologies and India's policy of universal bank accounts.  However, some are concerned about the $80 overdraft feature of these accounts, and liken the potential risk of indebtedness to the past failures of microfinance.  FAI's Executive Director Jonathan Morduch notes that indeed, microfinance's impact on poverty alleviation to date has been "disappointing" . . . 

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Worse than AP: The Damage of a Repayment Crisis in Chiapas

A month ago I wrote a post singling out the Mexican state of Chiapas as a potential site of a coming repayment crisis. No, this is not a follow-up announcing that it has begun, nor am I rooting for one to start. In my next post, I will review the options that the Mexican microfinance sector has to avoid it, and what the global microfinance community can do to help. But for now, let’s dig a bit deeper into what a Chiapas crisis might mean, and why I continue to focus on Mexico, as opposed to the broader issue of excessive credit and over-indebtedness.

Let’s be blunt: not all countries are created equal. Some remember my warning three years ago about the danger of a credit crisis in Andhra Pradesh. Back then I compared a possible crisis in India to the crisis in Bolivia a decade before: "India is no Bolivia – if the bubble bursts there, the entire global microfinance sector will find itself reeling." Well, Mexico is no India . . . 

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What's Next: Another Repayment Crisis?

It's been over two years since the start of the great India insolvency.  Four years since the Bosnia blight and No Pago Nicaragua.  And nearly six years since the Morocco microfinance meltdown. 

At this point, it's reasonable to say that the first global crisis in microfinance has passed.  Life is on the mend. 

In a recent email, Alok Prasad, head of the Microfinance Institutions Network in India (MFIN) described its most recent quarterly report as "green shoots in evidence."  The numbers certainly bear him out. Elsewhere, investors speak of tightening their exposure to countries with overheating markets, pay attention to issues of overindebtedness, and are wary of the sort of runaway growth that was being posted by Indian MFIs back in 2008-10.

Development of sector-level infrastructure is likewise moving apace, with ever increasing credit bureau coverage of microfinance clients and increasing implementation of client protection practices . . . 

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Banking the World: Empirical Foundations of Financial Inclusion

About 2.5 billion adults, just over half the world’s adult population, lack bank accounts. If we are to realize the goal of extending banking and other financial services to this vast “unbanked” population, we need to consider not only such product innovations as microfinance and mobile banking but also issues of data accuracy, impact assessment, risk mitigation, technology adaptation, financial literacy, and local context. In Banking the World, a new collection of research papers edited by Robert Cull, Asli Demirgüç-Kunt, and Jonathan Morduch, experts take up these topics . . . 

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Sanjay Sinha: A Rough Year for Microfinance

The microcredit movement is premised on the idea that access to capital will be liberating, empowering, and profit-making. But as the Indian microfinance sector closed out another year, it’s hard to be so ebullient.

The Indian microfinance crisis continued through 2011, and we now have good data and the distance to get a clearer perspective. More than anything else, the data show disturbingly high levels of debt pushed into communities. While the government blames microfinance institutions for excessive lending, government-sponsored self-help groups turn out to have contributed to a large share of the problems . . . 

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Freedom to Default: dealing with overindebtedness when all else fails

If there’s one microfinance word that rose above all others in 2011, it’s overindebtedness. As of the time of writing, it racks up the highest count on CGAP blog’s tag cloud (not counting generic terms like “microfinance”).  It seems fitting, then, to start 2012 with a blog post on this very subject. 

When we talk about overindebtedness, it usually comes for the perspective of the industry’s responsibility, whether the MFI, funders, or regulators. Prevention of overindebtedness came up as the most widely evaluated client protection principle in the Smart Campaign’s survey of social rating agencies and microfinance investors.  

This is, of course, all right and proper. It is the industry’s job to practice responsible lending, and avoiding overindebting clients deserves a place at the top of that agenda. But no matter the level of diligence on the part of lenders and financial education provided to clients, some borrowers will still become overindebted – be it because of bad business decisions, destabilizing macroeconomic shifts, or simply a string of bad luck. So what becomes of clients that, despite best efforts, still become overindebted?  

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ideas42 on Turning Interest Into Savings

Low-income households are often trapped in a “debt-cycle”: They borrow to cover necessary expenses, repay the loan with their subsequent income, then borrow again because they have nothing remaining after repayment. Inconsistent income and seasonality, especially for farmers, makes borrowing attractive at the time of necessity. However, the associated interest costs may stifle the chances for the borrower to accumulate savings. Piyush Tantia from ideas42 discusses the case study, "Turning Interest into Savings," which describes the design, implementation and results of piloting a debt-to-savings product in India . . . 

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Rethinking Multiple Borrowing

Some time ago, I had a conversation with a microfinance investor. What is the greatest challenge facing the sector? – I asked. His answer: multiple borrowing – multiple borrowing was getting people into too much debt; multiple borrowing was transforming micro-enterprise lending into consumer finance; and multiple borrowing was rewriting the traditional relationship between MFIs and their clients.  

Of course, multiple lending is present in all of these cases. But thinking about multiple borrowing along these lines misunderstands the basic situation. Multiple borrowing isn’t a reflection of some recent or extreme developments to be ascribed to runaway growth, greed, or willing ignorance. Nor is it some foreign element to be excised from microfinance.  No, multiple borrowing is an intrinsic part of the practice, one that has been with us for years. Nor, despite press articles to the contrary, is it a result of heavy market penetration, or even saturation. 

This is a realization I came upon during a recent trip to Haiti . . . 

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Reflections on the Microfinance Conference from Jonathan Morduch and Dean Karlan

We featured the perspectives of some of the conference organizers on Day 1’ s highlights. Here are some additional perspectives on Day 2:

Jonathan Morduch, Financial Access Initiative

1. As Rich Rosenberg pointed out there is good reason to be concerned that over-indebtedness is a real problem. At this point, though, we don’ t have a good definition of how much debt is too much for different clients, much less data. As a result, we're flying blind. I think Rich’ s presentation could be a Nouriel Roubini moment for microfinance.

2. There are a lot of puzzling things about the behavior of borrowers and how their businesses do or don’t grow . . . 

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