Tools & Resources Over-indebtedness of Microborrowers in Ghana

Over-indebtedness of Microborrowers in Ghana

PoorBest

To give guidance on how to live up to the standard of responsible finance, the Smart Campaign developed the Client Protection Principles with widespread industry participation. Prevention of over-indebtedness is one of these principles. However, commitment is not sufficient to put a principle into practice. This report makes an important contribution to deepening knowledge on this elusive topic.

Providing access to finance for those excluded from the formal financial system was and still is the mission of microfinance. What has changed, however, are the main challenges on the way to success. In the past, the financial sustainability of the service was the main hurdle to be cleared. Today, responsibility in service provision claims more of our attention.

This is because something has happened that seemed virtually impossible only a few years back. In some parts of the world where microfinance services have expanded rapidly, the problem is no longer too little access to finance, but too much. A phenomenon that has previously been known exclusively in industrialized countries has reached the developing world: over-indebtedness.

Over-indebtedness has to be taken very seriously, particularly since in many countries where microfinance operates, customer protection and social safety nets are not well developed. Accordingly, a customer with an unsustainable debt burden cannot file for insolvency and expect official procedures to pave the way to a fresh start. Few debt counseling agencies exist, and in most places there is no social security system to provide a subsistence income for the family if a microfinance client fails. In a nutshell, when a microfinance client becomes over-indebted, she is on her own.

This is why microfinance institutions carry all the more responsibility to protect their customers. These institutions have a social mission to assist their customers in improving their lives through access to financial services—provided in a responsible way. To give guidance on how to live up to the standard of responsible finance, the Smart Campaign (www.smartcampaign.org) developed the Client Protection Principles with widespread industry participation. Prevention of over-indebtedness is one of these principles. Undoubtedly, most leading MFIs are firmly committed to this principle, as evidenced by the fact that the overwhelming majority of the MIX 500 largest MFIs have endorsed the Smart Campaign. However, commitment is not sufficient to put a principle into practice. This is especially true when there are large knowledge gaps, as is the case with overindebtedness. This report by Jessica Schicks, “Over-Indebtedness of Microborrowers in Ghana,” makes an important contribution to deepening knowledge on this elusive topic.

Download the Report (English) »

Download the Report (Spanish) »

Download the Report (Portuguese) »New!