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Are microcredit borrowers in Bangladesh over-indebted ?
 
Author:Khandker, Shahidur R.; Faruqee, Rashid; Samad, Hussain A.; Collection Title:Policy Research working paper ; no. WPS 6574
Country:Bangladesh; Date Stored:2013/08/15
Document Date:2013/08/01Document Type:Policy Research Working Paper
Language:EnglishRel. Proj ID:BD-Long-Term Dyamics Of Microcredit Pograms In Bangladesh -- -- P121355;
Region:South AsiaReport Number:WPS6574
Sub Sectors:Micro- and SME financeSubTopics:Bankruptcy and Resolution of Financial Distress; Currencies and Exchange Rates; Emerging Markets; Debt Markets; Banks & Banking Reform
Volume No:1 of 1  

Summary: Microcredit programs in Bangladesh have experienced spectacular growth in recent years, with a growing number of borrowers availing credit from multiple microcredit agencies. There is a growing concern that if there are not sufficient returns to borrowing from microfinance institutions (MFIS), some borrowers might be taking loans that they will not be able to repay. A household may be considered over-indebted, for example, if its debt liability exceeds 40 percent of its income or assets. Using a long panel of household survey data from Bangladesh, the paper finds that some 26 percent of microcredit borrowers are over-indebted on this measure versus 22 percent of non-microcredit borrowers. Econometric analysis suggests that both MFI competition and multiple borrowing raise indebtedness. However, repeated borrowing, while it affects short-term liability adversely, does affect the long-term debt-asset ratio favorably. That is, repeated borrowing helps increase assets more than debt over time. Microcredit borrowers in Bangladesh are thus not necessarily over-indebted. But when borrowing is seen as protection against shocks such as floods even at the cost of being indebted, MFIs may offer micro-insurance schemes to safeguard borrowers against economic shocks.

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