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A customer-protection perspective on measuring over-indebtedness

Publication Papers

Over-indebtedness is one of the biggest current risks in microfinance. However, data on over-indebtedness is extremely scarce and the limited data that exists comes from a risk management perspective. There is no appropriate research to represent the perspective of clients and contribute to customer protection. This paper fills that gap and uses a customer-protection oriented definition of over-indebtedness based on the sacrifices that microborrowers experience. The definition is based on an interdisciplinary literature from sociology, psychology and economics. The data reveals the sacrifices that microborrowers experience and allows us to quantify over-indebtedness from a customer protection perspective. It reveals insights about the relationship of customer protection and risk management that challenge previous thinking in the industry. We have collected a unique database of 531 quantitative interviews among microborrowers. The methodology combines subjective information on the experiences and perceptions of microborrowers with econometric regression analysis. This innovative interdisciplinary approach allows us to represent the customer protection perspective on over-indebtedness, while at the same time providing quantifiable results and statistically significant findings about the relationship of risk management indicators and customer protection indicators of over-indebtedness.