Oikocredit's over-indebtedness report

For the past 35 years, Oikocredit's primary goal has been to provide credit and investment to organizations which may otherwise not have access to funding. Oikocredit is one of the world's largest sources of private funding to the microfinance sector. We also provide credit to cooperatives, fair trade organizations and small-to-medium enterprises (SMEs) in the developing world. Oikocredit believes that microfinance itself does not assure poverty alleviation, and success often requires express social performance strategies and continues performance monitoring.

Oikocredit’s top priority has always been the welfare of the microfinance end-client. With that in mind, investigating methods of reducing the risk of over-indebtedness are paramount to the Oikocredit mission. In January last year, Oikocredit issued a survey to explore the actions undertaken by microfinance institutions (MFIs), MFI networks and microfinance investors to address the danger of over-indebtedness. The survey aimed to provide clarity on the issue of over-indebtedness and highlight measures taken by Oikocredit as a social investor to address this issue among microfinance clients.

Of 508 active microfinance partners, 236 (45%)i responded from 39 countries. The survey examined the policy design of partners but not the effectiveness of these policies. Response rates were particularly high (over 80%) from the Balkans, Tajikistan, Cambodia, Guatemala and the Philippines.ii

Of those responding to the survey:

96% take client repayment capacity into consideration and have lending limits.
86% use credit bureaus and/or share information on a client's total debt burden with other MFIs.
81% endorsed the client protection principles or national codes of conduct for consumer protection, transparency and prudence.
77% offer savings in addition to credit. Such products may mitigate the danger of overindebtedness by building up reserves which help to reduce client vulnerability to shocks.
69% offer consumer education and financial literacy services to some of their borrowers. However, the quality and degree to which they offer these social services differs substantially.
More than two-thirds claimed to have procedures in place to handle customer complaints and provide debt-counseling or loan restructuring for clients with severe repayment difficulties.

Results show that some MFIs fear the financial consequences of client over-indebtedness may affect income streams and create defaults, while others express concern about the well-being of their clients. MFIs called for more prudence on the part of investors, and cautioned against flooding markets with too much funding which increases competition and leads to irresponsible lending. Analysis of client repayment capacity and the development of solid client relationships through regular contact and feedback mechanisms were identified as essential elements in preventing over-indebtedness. A number of respondents reported that while credit bureaus or other forms of credit information exchange are useful, they require strengthening. In fact, several MFIs cautioned against the assumption that credit bureaus will solve the problem. While credit bureaus are important, MFIs should take primary responsibility in carefully selecting, screening and monitoring clients. Other financial and non-financial services including savings, microinsurance, financial literacy training and debt counseling may also mitigate the danger of overindebtedness of clients.

From this brief overview of survey results, it is clear microfinance institutions struggle with the issue of over-indebtedness and strive to address it. Many indicate that addressing overindebtedness requires careful assessment of how clients repay, rather than if clients repay.

Oikocredit continues to actively monitor and address over-indebtedness via its own network, and through involvement in several key industry initiatives.

This is an excerpt from Oikocredit’s Report, “Over-indebtedness”. Download the full report (.pdf).

i There may be a bias in the response sample because institutions tend not to touch upon sensitive matters.
ii Many responses were received from regions where over-indebtedness is an issue this explains why the survey is not fully representative for the entire portfolio.

Oikocredit's over-indebtedness report

i There may be a bias in the response sample because institutions tend not to touch upon sensitive matters.ii Many responses were received from regions where over-indebtedness is an issue this explains why the survey is not fully representative for the entire portfolio.

i There may be a bias in the response sample because institutions tend not to touch upon sensitive matters.
ii Many responses were received from regions where over-indebtedness is an issue this explains why the survey is not fully representative for the entire portfolio.