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Avoiding Client Over-

Indebtedness

March 2011

Loans that change lives

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Client Protection Principles

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What is over-indebtedness? (OID)

• Defined as the inability “to repay all debts fully and on time” (Haas 2006, 3)

– But, “over-indebtedness only occurs if the situation occurs chronically and against the borrowers’ will.”

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What’s the problem?

• “A key to the success of microcredit is the thorough assessment of microfinance borrowers’ repayment willingness and capacity, resulting in high repayment rates.”

– From Over-indebtedness and Microfinance: Constructing an Early Warning Index

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What’s the problem?• From the Microfinance Banana Skins 2011

report—two biggest global concerns: – Credit Risk – Reputation

• Both issues relate directly to client over-indebtedness (OID).

• Examples from Bolivia (1999), Bosnia and Herzegovina and Morocco (2008)

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Interesting to note

• We should not confuse “multiple indebtedness” with “over-indebtedness”.

• In economic downturns, MFIs tend to be resilient while borrowers tend to be over-indebted

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Who likes math?• Indebtedness =

total monthly installments on household debt / (total monthly gross income of the household – total monthly expenses of the household)

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What is over-indebtedness?From CERISE Indicator 4.8

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CERISE Indicator 4.8

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Key Procedures 1

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Key Procedures 2

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Systems of Compliance 1

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Systems of Compliance 2

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Constructing an early warning index?• Paper by the Center for Microfinance at University of

Zurich, responsAbility, Council of Microfinance Equity Funds, Triodos Investment Management

• Five steps:– Identify historical crisis episodes– Select leading indicators as predictors– Set leading indicators’ thresholds– Construct composite leading indices– Predict crises

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Constructing an early warning index?

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Applying the early warning index