Over-Indebtedness of Microborrowers in Ghana

This paper examines the phenomenon of over-indebtedness from the viewpoint of microfinance clients in urban Ghana. It aims to inform decision makers about over-indebtedness and support their efforts to protect poor borrowers. It defines over-indebtedness in terms of the frequency and severity of sacrifices clients make to repay debts.

The paper describes microborrowers’ experiences in repaying their loans and measures debt struggles in Ghana. The microfinance market in Ghana does not have the levels of over-indebtedness found in recent crisis countries, but is starting to experience competition. The paper identifies likely drivers of over-indebtedness. It refutes some common assumptions of the current over-indebtedness debate. The paper also offers guidance on how to think about over-indebtedness from a customer protection perspective, how to identify over-indebtedness risks in other markets and how to prevent overindebtedness. Conclusions include:

• Many clients make serious and frequent sacrifices in order to repay debt, although the incidence of multiple lending and delinquency does not indicate a market in crisis;
• There is a gap between providers and clients in the perception and experience of over-indebtedness;
• Providers must observe clients’ situations, but must not restrict access to finance.