From a Supply Gap to a Demand Gap? The Risk and Consequences of Over-indebting the Underbanked

This paper examines the consequences of over-indebtedness through microfinance on borrowers, MFIs, and other stakeholders. It emphasizes that these consequences reach beyond risk management concerns of MFIs and investors. The paper reviews existing empirical research on microfinance over-indebtedness and examines its prevalence in current microfinance markets. The paper states that the microfinance industry can develop appropriate measures against over-indebtedness and adapt to the challenge of oversupply, if it knows the extent of the problem and its effects. Conclusions include:

• The microfinance industry still faces a large supply gap globally;
• Situations of oversupply emerging in many submarkets have the potential to be detrimental to microfinance customers and lending institutions;
• Borrowers are likely to suffer material, sociological, and psychological consequences;
• Over-indebtedness can result in increased operating costs, reductions of market size, loss of customer satisfaction, lost income, and reputation for lending institutions;
• Existing research demonstrates that actors in the microfinance industry need to consider the possibility of over-supply and the downsides of debt for borrowers;
• This might help improve the product offering for microfinance customers, regulate the balance of supply, and help develop codes of conduct and customer protection mechanisms.