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Education is a basic human right, but that doesn’t mean it’s within reach for everyone. Many children don’t have access to education, and may later struggle to manage their money and meet household expenses.
While accessible savings accounts and affordable loans have become increasingly available in emerging economies through microfinance, problems such as over-indebtedness have also increased over recent years.
What is over-indebtedness?
Over-indebtedness starts long before an individual defaults on a loan. To pay off a debt, they may have gone abroad to earn extra income, or had to move, pull their children out of school, reduce their food intake or sell their land to make ends meet. This pressure can lead to a person experiencing shame and embarrassment in their community while losing confidence in their abilities.
Why do people become over-indebted?
When a person becomes over-indebted, it doesn’t just affect them: it can also have a significant effect on their dependents, or their families who may need to support them, and is extremely difficult to overcome.
Many factors can contribute to over-indebtedness, including:
- Borrowing from unaccredited lenders
If a person is not aware of their rights or the options available to them, they can make uninformed decisions when dealing with financial institutions and lenders. If they feel pressure to pay back an existing loan, or need to support their business, they may resort to taking a loan from an unaccredited lender. These lenders may charge unreasonable interest rates or impose inappropriate conditions, such as insisting on collateral like land titles or buildings. Once a person has lost these important assets, it is hard to get them back.
- Loan refinancing and multiple lending
If a person cannot afford to pay back a loan, they may be encouraged to take out a larger loan (or refinance their loan) in order to pay back the money they owe. People sometimes borrow money from more than one Microfinance Institution (MFI), sometimes taking out as many as 4 to 5 loans, which they may struggle to repay. This is often a result of lenders not doing due diligence to check if the individual can afford the loan repayments.
- Unproductive loans
When microfinance is emerging in a new area, an individual may receive multiple offers as a potential client to start borrowing money for consumer loans (for unproductive items) without paying attention to the repayment level and interest rates. This can stem from competition among MFIs which can lead to MFIs pushing multiple loans onto the same person.
Can education help?
Over-indebtedness is a long-standing issue in the microfinance sector. The good news is that steps can be taken to reduce the risk that someone may become over-indebted.
Studies have shown that educating people on how to handle and understand their finances gives them the skills they need to avoid the factors that lead to over-indebtedness.
After attending financial capability training through Good Return’s Consumer Awareness and Financial Empowerment (CAFE) program, a partner organisation found that 79% of learners in Nepal reported an increase in their financial confidence.
This year in Cambodia, strong financial behaviour change (65.7% improvement) and increased confidence (57.1% improvement) were observed from 1,026 learners completing the CAFE program.
Chay Kongkea is a 35-year-old Cambodian when she joined the CAFE program. She lives with her mother, her child, and her nephew in their family home.
Before undertaking CAFE training, Chay was a rice farmer and didn’t have a stable income. As a result, she would take out loans for extra family expenses and social obligations in the village, which led to multiple debts. When her neighbour asked her to be a guarantor for a loan, Chay agreed but didn’t understand the consequences. This decision led her further into debt.
Knowing she needed to make some changes, Chay enrolled in the CAFE program in her village. After a few weeks, she started using the Weekly Money Tracker – one of the tools offered in the program – and learned how to track income and expenses for the household, which has reduced her financial stress.
Chay is also exploring how to make extra income through subsidiary crops and chicken raising. Now that she knows her rights and responsibilities as a microfinance consumer, she also knows how to select the best financial products and services that fit her needs and priorities.
Speaking of her experience with the CAFE program, Chay says “I can say that I am no longer burdening my family with my financial situation. Now I will share this information and my experience with my family members and my neighbours to help them.”
What can you do to help?
We need strong support systems from governments, donors, and individuals to support the organisations that are delivering sustainable solutions to empower individuals in the last mile.
If you are also building pathways out of poverty in the Asia-Pacific region, get involved to empower over 50,000 learners.