Microfinance and Debt Trap

Md Akther Uddin,S M Sohrab Uddin

doi:10.4018/ijabim.20210701.oa24

Abstract

This paper studies microfinance and debt trap nexus. We have used an ethnographic approach, unstructured observation and interviews, to develop scenarios with the help of which we try to explain the phenomenon. Our research was carried out in DipKalaMoral, a small village located in Shikalbaha union under Karnaphuli Upazila of Chittagong in Bangladesh. We have found that excessive leverage through multiple borrowing lead to debt trap when households face unexpected income shocks due to economic cycle, unexpected weather (like heavy monsoon), wedding expenditure or paying dowry, and unexpected healthcare expenditure. In addition to that, we have found that informal money lenders tend to exploit households when households are heavily leveraged. Interestingly, we have identified a new phenomenon, ‘borrowing for others’ when households borrow from Micro Finance Institutions (MFIs) to lend money to others. A number of policy measures have been recommended which could be beneficial for policy makers and MFIs.

Highlights

Microfinance has enjoyed exponential growth across the world for the last three decades or so
We have presented three hypothetical scenarios based on our observation and informal unstructured interview to develop our theoretical arguments to show the flaws of existing microfinance practices, which increase over indebtedness and multiple borrowing, and promote informal money lending activities
When we consider the awareness of the people, financial literacy, savings habit, and capacity building as a whole, microfinance seems a positive change maker (Dorfleitner, Priberny & Röhe, 2017; Khandker and Samad, 2014)

Summary

Introduction

Microfinance has enjoyed exponential growth across the world for the last three decades or so. It gets attention for alleviating poverty, reducing inequality, empowering women, developing human capital, and promoting inclusive growth (Morduch, 2000; Khandker and Samad, 2013; Cull, Demirgüç-Kunt & Morduch, 2018). From its birthplace in a small village of Chattogram, a port city in Bangladesh, the idea has expanded in developing countries and in developed countries. In Bangladesh total outstanding loan in this sector was around BDT 673.90 billion in 2018 with total clients of 31.22 million (MRA, 2018). Microfinance research has been growing its popularity in academia along with its phenomenal growth (García-Perez, et al, 2017). In one of the most recent papers, Gutiérrez-Nieto & Serrano-

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Conclusion