PDF_logo Are Microcredit Borrowers in Bangladesh Over-indebted?

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Are Microcredit Borrowers in Bangladesh Over-indebted?

Paper No:26

Author:Shahidur R. Khandker, Rashid Faruqee and Hussain A. Samad



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 household survey data from Bangladesh, the paper finds that some 26 percent of microcredit borrowers are over-indebted on thisĀ  measure versus 22 percent of non-microcredit borrowers. An econometric analysis that controls for both observed and unobserved variations at the household and community level suggests that MFI competition raises indebtedness. But when household participation is taken into account the community-level program density, a measure for MFI competition, it does not seem to have an independent adverse effect.

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