Addiction to Microcredit: An Obstacle to Social and Financial Mobility

This paper attempts to unravel the causes of microcredit addiction and provide recommendations that will enable addicted clients to break away from the craving for microcredit. It reviews the literature on social and financial impact of microfinance and finds that failure of microfinance in the delivery of its core mandate of poverty reduction results in clients’ addiction and eventually, inhibits their social and financial mobility. It suggests that contrary to the confidence in the ability of microfinance to uplift the poor most of the vulnerable people have now actually become addicted to microcredit due to various demand and supply-side factors. The paper covers the following sections in detail:

• Motivation and scope of the study;
• Theoretical issues with a focus on the theory of addiction and the win-win proposition;
• Definition of social and financial mobility;
• Supply side causes of addiction including upscaling intention of MFIs, unhealthy competition among MFIs, group lending, compulsory savings, and high interest rates and transaction costs;
• Demand side causes for addiction including client’s inability to save for the future, multiple borrowing, vicious cycle of repeated borrowing, and client’s satisfaction with MFI products and services;
• Recommendations to solve the problem of addiction among microcredit clients and a discussion on the limitations of the study.