Over-Indebtedness in Microfinance: An Empirical Analysis of Related Factors on the Borrower Level

This paper analyzes the overindebtedness of microborrowers in Ghana. It defines over-indebtedness from a customer protection perspective and considers borrowers over-indebted if they continuously struggle with repayment and experience unacceptable sacrifices related to their debt. The study employs logistic regression analysis to identify how poverty, adverse shocks, loan returns, and financial literacy relate to over-indebtedness. It breaks down the relationship of the above factors to the specific sacrifices that borrowers make, to how frequently they repeat them, and to how acceptable sacrifices are to borrowers. Findings include:

• Poorer microborrowers are more likely to be over-indebted;
• Risk of over-indebtedness further increases with the occurrence of adverse economic shocks to a borrowers income or expenses;
• Likelihood of over-indebtedness is higher for borrowers with low returns on their investment and if borrowers use loans at least in part for non-productive purposes;
• It is higher for borrowers with low, debt-specific financial literacy. General financial literacy has negative effects on over-indebtedness.