Calling all Stakeholders: How to Prevent Over-indebtedness
Outcomes of the virtual conference on multiple borrowing and over-indebtedness.
At what point does multiple borrowing result in over-indebtedness? How do we know clients are over-indebted if they are still making payments on their loans? What role should various stakeholders, such as MFIs, investors, and governments, play in preventing over-indebtedness?
These are just some of the key questions raised duringlast week’s virtual conference organized by CGAP, IFMR, and MicroSave. While there are no easy answers, several insights did emerge from the nearly 700 comments posted during the conference. I compiled some of the points I took away from the conference, and invite you to submit your takeaways in our comments section.
First, multiple borrowing is not the same as over-indebtedness. Multiple borrowing may lead to over-indebtedness, but not always.
Second, multiple borrowing can help individuals meet their financial needs. If someone is not able to meet their financial needs using the products of a single MFI, they may take loans from a number of institutions.
Third, a client’s capacity to repay a loan depends more on their sources of income than on whether they have multiple loans. A clear understanding of an individual’s financial situation is important for MFIs to determine their capacity to repay, but this becomes increasingly difficult when client’s have loans from multiple institutions. It is this information asymmetry which can result in over-indebtedness.
There were a number of concrete suggestions of ways in which MFIs, investors, and governments can work to prevent over-indebtedness. What else would you add to this list?
Put consumer protection measures in place. Of particular importance: (1) disclosure guidelines for product terms and pricing, and (2) redress mechanisms.
Promote financial literacy training so individuals can make informed decisions about the products and services they use.
Put credit bureaus in place so institutions have more information on potential clients to use in their underwriting process.
Work with their MFI investees to develop long-term goals. When too much focus is placed on the short-term, MFIs might seek to grow too quickly and engage in irresponsible lending practices.
Set reasonable return expectations for your investors so as not to put excessive pressure on investees.
Implement early-warning index to predict problems in certain markets.
Develop products according to client needs rather than a one-sized fits all approach. If products were better suited to their needs, individuals may avoid multiple borrowing. As discussed earlier, multiple borrowing does not necessarily result in over-indebtedness but it does make it difficult for an MFI to understand the client’s full financial picture and make credit decisions accordingly.
Set reasonable goals for growth. Ambitious growth plans may lead to reckless lending decisions.
Train staff to better assess the payment capacity of potential clients (cash flow analysis).
Train staff to better anticipate payment problems among their clients by looking for signs, such as tension among group members or groups scrambling to make payments at a group meeting.
Create staff incentives to report potential problems with their clients. If incentives are aligned only with having a positive portfolio quality, loan officers may be more likely to make threatening comments to their clients about the need to make payments on time.
Add a credit scoring component to the underwriting process.
Commit to transparency in product pricing and terms.
Product development was a recurring theme throughout both days of the virtual conference. Given the increased attention to this topic, the Gateway will be devoting the month of February to product development. Stay tuned if you want to learn more the topic and where to find practical tips and resources from the experts.
Micro entrepreneurs can shop up to 13 formal and informal lenders. Irresponsible MFI are burying people in debt. They are pirating clients from other MFI. Over indebtedness is the result of competition. The other side of microfinance is savings. MFI slogan should be "freedom from the bondage of credit."
Philippines
21 Jan 2012
reply to elephant in the room
I agree with Bret that its always borrowing rather than savings. MFIs have always concluded financial inclusion with lending & that is what they preach. There is a need to sit with household & do "Wealth Management" for them. Also MFIs should always enable its customers or make them able to decide what is best for them, borrowing or savings. The mission of all the MFIs should be to first make their target population financially literate & then plan to achieve it. In doing that they will slowly move to a larger products offering including micro savings, insurance etc.
anil nautyal India
19 Jan 2012
The Elephant in the Room
Why is no one acknowledging how important it is to offer safe, flexible savings services to poor people to reduce overindebtedness?
Is it that some people at this forum genuinely have no idea what it would be like to have to pay for: their children's primary education -- not by saving, but by borrowing; health emergencies -- not by saving, but by borrowing; their family's food security -- not by saving, but by borrowing; their social and reciprocity obligations in a traditional society -- not by saving, but by borrowing; their consumer purchases -- never by saving, always by borrowing.
Of course savings inclusion is no 'magic bullet' -- but savings reduce household risk. Savings help poor people who are aware of their situation -- and most are very aware -- to steer clear of overindebtedness.
Watching the microfinance world from the standpoint of a practitioner for the past 12 years, I have found that the most tragic aspect has been how 'the forgotten half of microfinance' was first remembered, then acknowledged to be absolutely critical, then placed on the 'to do' list -- and then, year after agonizing year, pushed further and further down it. There are a lot of excuses, but really it is just the ultimate act of procrastination. Safe, flexible savings for all are both possible and necessary. And it's high time we got on with it.
Brett Matthews Mathwood Consulting Company Canada
19 Jan 2012
IT is not MULTIPLE BORROWING ....IT IS MULTIPLE LENDING
It is multiple lending not multiple borrowing. While lending whether it is bank or any financial institute or for that purpose even MFI should know the the purpose, it is very important...what is the over all income of the prospective borrower...what is his/her requirement for sustenence, then the remaining is sufficient to meet the repayment obligation. When a person is already borrowing, is it prudentor ethical to lend further without seeing all his financials? Is it ethical to lend without informing the organisation which has been financing him/her?T hese are all some of the ethical aspects should be thought of. It should not be a one long jump of expanding our lending portfolio, it is not over shooting the area to say in a different language. Outreach, it is not poaching or grabbing the client. Normally commercial banks do have some sort of ehtics like this. With out bothering about the repaying capacity of borrowing, without bothering that the borrower has already availed loan from others, and go on resorting to multiple landing will definitely cripple the system. Poor borrowers will take it because he is hungry, he needs money for his bare necessities. We cannot find fault with him.
