PDF_logo Dynamics of Overlapping in the Microcredit Sector of Bangladesh

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Dynamics of Overlapping in the Microcredit Sector of Bangladesh

Paper No:51

Author:S. R. Osmani, M. A. Baqui Khalily and Mehadi Hasan



Overlapping borrowing, defined as the practice of taking new loan before an earlier loan has been fully repaid, has become an important phenomenon in the microcredit sector in Bangladesh. The paper outlines the trend and pattern of overlapping over the period 2005-2014, examines the rationale for overlapping and investigates its short and long term consequences, by using a panel dataset. The study finds that starting from a relatively low level in 2005, the extent of overlapping has increased sharply to about 41 per cent of all borrowers by 2014, accounting for about 25 per cent of total microcredit loan in recent years. Enterprise financing is the main reason behind overlapping, accounting for nearly half of all overlapped loans. There are two distinct groups of overlappers who use the strategy of overlapping for two distinct reasons. The first group – consisting of about half of all overlappers – uses it as a strategy for scaling up economic activities without incurring a sharp discrete jump in repayment burden. The other group uses it as a coping strategy to deal with contingencies that compel them to take loans for non-productive purposes. The first group is able to enjoy both higher income in the short run and stronger financial viability in the long run in comparison with non-overlappers, but this is not so for the second group. For the latter, overlapping is still a useful coping strategy in the face of shocks but it is a poor substitute for a proper system of social protection.

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