This is part I of a two-part blog, summarizing some of the key findings of an edited volume that has just been released (Guérin I. Morvant-Roux S. Villarreal M. (eds) (2013) Microfinance, debt and over-indebtedness: Juggling with money, London: Routledge). More details about the book can be found here. Other project publications may be found at microfinance-in-crisis.org.
Although microcredit programmes have long been considered as efficient development tools, many forms of debt-induced distress such as suicide, repayment arrears or defaults have emerged in their wake. This has brought to light the problem of over-indebtedness, a topic that has been previously underexplored in academic literature.
Our book explores the manifestations, scale, and economic and social implications of household over-indebtedness in areas conventionally considered as financially excluded. This book approaches debt not only as a financial transaction but also as a form of social bond, and offers a socioeconomic analysis of over-indebtedness. It also raises the question as to whether microfinance policies (which represent only a small part of households' financial practices) are part of the solution, or in fact part of the problem.
Empirically, this book examines economic relations and financial practices with a particular focus on debt and over-indebtedness in a diverse set of countries around the globe, including India, Mexico, Madagascar, Kenya, Bangladesh, France and the United States. Its comparative perspective helps to highlight both disparities and strong similarities across cases.
Beyond the specificity of each case study, the book makes four main arguments, which are developed in the introduction of the volume. The first two are summarized in this post, and the last two will be covered in the new post.
1) Over-indebtedness and financialisation
Over-indebtedness has surged during the current financial crisis. While debt is not new in poor areas, increasing financialisation and global recession have brought new dangers. On the one hand, aspirations for a middle-class life have seen rising consumption, including by borrowing from formal and semi-formal sources. On the other hand, real incomes have been stagnant or declined, and social protection remains inadequate or entirely absent.
There is no doubt that microcredit delinquency crises vividly highlight how portfolio growth has been prioritised over social outcomes and the quality of financial services provided. Nevertheless, the true origin of these crises lies somewhere deeper. These crises are only the tip of the iceberg.
How can we explain the mass acceptance by the poor of a service that cannot deliver on its promises? Whether in terms of job creation or women's empowerment, the effects of microcredit are not what was expected, as evidenced by many studies available today. Yet demand for microcredit remains very strong. As shown throughout our book, microcredit responds to the need and desire to increase debt, whether to make ends meet, to climb social ladders or to free oneself from oppressive social bonds that come with informal debt. In some cases, such aspirations far exceed client incomes and creditworthiness. Cross debt (or multiple borrowing), debt rescheduling, juggling formal and informal loans, and migration may maintain an illusion of creditworthiness for some time. But sooner or later, the illusion is shattered.
In other words, while some microfinance institutions take some active responsibility, our case studies show that household over-indebtedness stems not only from aggressive microcredit policies, but also from the broader context of the evolution of modern societies and economies. We present in-depth descriptions of microfinance as a social process embedded in savings and multiple debt relationships. We also analyse the social and institutional processes through which microcredit intersects with a local cultural context of neoliberal political economics. Present-day societies are facing a widening gap between needs and cash incomes, due to increasing informal labour, growing urbanization and rising aspirations and consumer needs, including among the poor. This widening gap leads to an increase in household debt and new forms of exploitation. These do not arise from face-to-face relations as is typical with capital/labour relationships, but rather arise from the growing financial sector extracting added-value from the labour sector. Microcredit practices both reflect and reinforce these conflicts.
2) How to define over-indebtedness?
In this book, we do not seek to quantify over-indebtedness, but rather to understand its underlying processes. We define over-indebtedness as a process of impoverishment through debt, which significantly and continuously erodes one's assets or standard of living. However, over-indebtedness is not limited to material losses. When excessive debt results in tarnishing the debtor's social network, status and reputation, the resulting downward social mobility, extreme dependency, shame and humiliation experienced by the borrower can prove just as damaging.
Social and economic impoverishment through debt can develop in mutual contradiction. Some debts demand intolerable repayment sacrifices but can ultimately allow the debtor to "get by" with a socially and/or materially improved position once the debt is paid. Given rising social aspirations, including among marginalized and vulnerable populations, and the efforts and sacrifices that some families are willing to make to improve their homes and pay for their children's education or marriages, this is probably not an unusual situation. In contrast, some debt situations may bring about impoverishment and the deterioration of living conditions simply because the person is unable to pay his/her debt. It is not the payment of the debt which is a source of sacrifice, but its non-payment, exposing debtors to the risk of seizure, expulsion, moral or physical harassment, social exclusion or extreme dependence.
Rather than restricting over-indebtedness to financial and accounting matters (e.g. delayed payments, income-debt ratios, number of loans contracted), we argue that it should also be approached as a social process involving social and power relationships as well as issues of well-being, status and dignity. The social meaning of debt, which is defined here as the process by which debt sets debtors and creditors into local systems of hierarchies, may be as important as its financial criteria.
The local meanings of over-indebtedness reveal the extent to which accounting definitions can depart from the realities they seek to measure. Financial issues do matter, but debtors are also very sensitive to what can be labeled as degrading debts and which relate to issues of well-being, honour, reputation, independence and dignity.
In the microfinance industry, high default rates are often associated with over-indebtedness. It is now widely acknowledged that excellent repayment rates may result from pressure placed on borrowers as much as client satisfaction or well-being. Conversely, field realities indicate that late payment is not necessarily a sign of over-indebtedness. It may reflect local frameworks in which the debt is viewed as something that can be repaid in multiple ways over extended timeframes. This is consistent with common practice within the informal economy, where debt is often flexible and negotiable. Such negotiability is not financially or socially cost-free, but the fact remains that there are often no strict repayment deadlines.
In some cases, defaults to MFIs may also indicate a reduced incentive to repay, whether due to increased borrowing opportunities from among competing lenders, client dissatisfaction, or willingness to punish lenders who are seen as unfair.
Cross-debt may also be used as an indicator of over-indebtedness. It is true that in Northern countries, where mono-banking is more the rule than the exception, relationships with several creditors may be considered a sign of financial fragility. But cross-debt can simply mean that credit providers are offering insufficient loan amounts or unsuitable loan terms. Moreover, in the contexts studied here, cross-debt is an integral part of households' cash flow management strategies.
Other common indicators have used fixed thresholds for debt service to income ratio. Static analyses using ratios at a particular point in time can offer indications, but also may mislead, as they say little about households' vulnerability and the nature of their relationship with creditors. In cases where debt is primarily a matter of networking, interpersonal skills, trust and reputation, a high outstanding debt can be indicative of a large social network and the ability to mobilize and activate it. Debt service indicators may also be misleading, as they hide what is owed to the borrowers. More often than not, even the poorest borrowers are also lenders.
While households are often the primary unit of analysis, debt and over-indebtedness are clearly not gender neutral. Several chapters highlight the paradoxes women face. Many are not just fully responsible for managing their household budget, they also have no control over their income. As they are forced into financial dependency while having to make ends meet, they have no choice but to deploy a variety of strategies for saving, borrowing, lending and creating their own financial networks. Women must also choose their creditors carefully to avoid any suspicion over their 'morality'. The social control of women's debt is closely linked to the control of their bodies and sexuality.
In our next post, we address two other key findings: dealing with local decision frameworks and juggling practices, and the ambiguous role of microcredit.