Households, Microenterprises, and Debt

Provides a conceptual framework which defines the household economic portfolio as a set of resources, a set of activities, and the circular flow of interaction between them. Argues that debt can be part of a strategy for increasing current income, investing in the future or coping with crises. Posits that in the current period, debt provides additional resources to support household activities, but it also represents a claim on future resources.

Reveals that in general:

• Debt from formal sources tends to be primarily for production purposes, secured by collateral, has high transaction costs and relatively low interest rates;
• Informal debt from relatives, neighbors, and friends tends to have low interest rates, indefinite repayment periods, high social pressures for repayment and high hidden costs;
• Informal debt from moneylenders typically has high interest rates and low transaction costs;
• Debt can contribute to household economic security by smoothing consumption when income is interrupted and by protecting key productive assets;
• Debt can play different roles over the various stages of enterprise growth.

[Author's abstract]