Over-Indebtedness and Microfinance: Constructing an Early Warning Index

Fostering development of a sustainable microfinance sector

This study develops a methodology for an early warning system to signal a problem with over-indebtedness in microfinance.

Customer over-indebtedness in microfinance can be measured by comparing periodic debt obligations with net periodic household income. Unfortunately, such data has not been collected systematically for households or for the range of loan suppliers available to microfinance clients. The study:

  • Uses an indirect approach;
  • Examines data at the country, industry and firm levels to identify influences on the numerator and denominator of the over-indebtedness formula;
  • Develops variables that react earlier than the open manifestation of over-indebtedness through raised portfolio at risk and loan loss rates;
  • Proposes an index for pilot countries that uses these variables;
  • Allots weights for variables based on review of past crises.

The paper states that there are no comparative databases for some variables even in the small selection of pilot countries in this study. Hence, the resulting index is merely a rough indication of the over-indebtedness danger in any given country. Further research, therefore, would be indispensable to improve the database and the resulting index.

About this Publication

By Kappel, V., Krauss, A. & Lontzek, L.