Overindebtedness in Microfinance: Case-study of the Clientele of Financiera CREAR in Los Olivos, Lima Norte, Peru

This case study empirically analyzes the causes and effects of overindebtedness among the clientele of Financiera CREAR Arequipa S.A. in Lima Norte, Peru. It states that overindebtedness of its beneficiaries is one of the greatest threats caused by microfinance and is in sharp contradiction with its main goal, which is to decrease vulnerability and exclusion of the target group.

The study reveals that overindebtedness is generated by a mix of causes related to increased competition between MFIs and specific client behaviours when abundant credit is offered to them. This produces a series of effects at institutional and client levels, such as desperate borrowing and loan bicycling. Conclusions include:

• Microfinance stakeholders should analyze the current state of the industry and debate on issues that will help microfinance retain its financial inclusion feature;
• Microfinance needs to expand by covering new markets, such as those in rural and remote areas;
• Microfinance can keep its promise of financial inclusion only if it provides access to credit to new layers of unserved people;
• Role of bank supervision and regulation is crucial in the contexts of increased competition and market saturation.