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Financial literacy fights overindebtedness

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08-06-2010

The rapid growth of the microfinance industry has not come without its challenges. Concerns have been raised on a number of issues, especially the increasing rate of client overindebtedness.

 

Over the past year, Oikocredit has been working hard to ensure we are part of the solution to the issue of excess debt among microfinance institution (MFI) clients. In addition to ongoing monitoring of the market and the industry, Oikocredit is supporting projects aimed at preventing overindebtedness through capacity building. Bosnia and Herzegovina: Financial literacy pilot project Oikocredit joined several other major funders in a feasibility study and the establishment of a financial literacy centre in Bosnia and Herzegovina.

 

In December 2009, the Center for Financial and Debt Counselling was opened in Tuzla (a city in north-east Bosnia) with the aim of supporting those in financial trouble. In 2008, the local economy had been hit hard by the effects of excessive provision of grants and low-cost loans to financial institutions. Strong growth, weak consumer protection and the global economic crisis contributed to a major increase in overindebtedness. According to CGAP, 40% of MFI borrowers had more than one loan in 2009. While reasons for excess debt vary from client to client it is clear there is need to improve consumer's financial knowledge and literacy.

 

The centre's mission is to address issues of overindebtedness by educating borrowers and increasing transparency in the sector. All services at the centre are free, and include credit advice, mediation services, debt-related legal and repayment advice and a national credit information helpline. Information on consumer rights, budgeting and reducing debt is available in local languages and with pictorials. Oikocredit has continued its support of the initiative, recently approving further capacity building funds to assist in hiring specialised legal, fiscal and financial advisors

 

Earlier this year, Oikocredit sought to be better informed on the present situation of overindebtedness and invited partner MFIs, microfinance investors (known as MIVs) and microfinance networks to share what they are doing and seeing in the field. The survey also asked for recommendations on how the issue might be addressed.

 

With over 250 responses including 236 MFIs spread across 39 countries, this is an issue many in the industry are keen to act on. Initiatives or approaches MFI project partners found most effective in preventing overindebtedness include improved credit analysis, adaptation of loan products and the addition of other financial products such as insurance and savings.

 

Oikocredit continues to stay abreast of developments in the sector.

 

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