Over-Indebtedness presentation

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Over-Indebtedness presentation

  1. 1. Avoiding Client Over-Indebtedness March 2011 Loans that change lives
  2. 2. Client Protection Principles
  3. 3. What is over-indebtedness? (OID) <ul><li>Defined as the inability “to repay all debts fully and on time” (Haas 2006, 3) </li></ul><ul><ul><li>But, “over-indebtedness only occurs if the situation occurs chronically and against the borrowers’ will.” </li></ul></ul>
  4. 4. What ’ s the problem? <ul><li>“ A key to the success of microcredit is the thorough assessment of microfinance borrowers’ repayment willingness and capacity, resulting in high repayment rates.” </li></ul><ul><ul><li>From Over-indebtedness and Microfinance: Constructing an Early Warning Index </li></ul></ul>
  5. 5. What ’ s the problem? <ul><li>From the Microfinance Banana Skins 2011 report—two biggest global concerns: </li></ul><ul><ul><li>Credit Risk </li></ul></ul><ul><ul><li>Reputation </li></ul></ul><ul><li>Both issues relate directly to client over-indebtedness (OID). </li></ul><ul><li>Examples from Bolivia (1999), Bosnia and Herzegovina and Morocco (2008) </li></ul>
  6. 6. Interesting to note <ul><li>We should not confuse “multiple indebtedness” with “over-indebtedness”. </li></ul><ul><li>In economic downturns, MFIs tend to be resilient while borrowers tend to be over-indebted </li></ul>
  7. 7. Who likes math? <ul><li>Indebtedness = total monthly installments on household debt / (total monthly gross income of the household – total monthly expenses of the household) </li></ul>
  8. 8. What is over-indebtedness? From CERISE Indicator 4.8
  9. 9. CERISE Indicator 4.8
  10. 10. Key Procedures 1
  11. 11. Key Procedures 2
  12. 12. Systems of Compliance 1
  13. 13. Systems of Compliance 2
  14. 14. Constructing an early warning index? <ul><li>Paper by the Center for Microfinance at University of Zurich, responsAbility, Council of Microfinance Equity Funds, Triodos Investment Management </li></ul><ul><li>Five steps: </li></ul><ul><ul><li>Identify historical crisis episodes </li></ul></ul><ul><ul><li>Select leading indicators as predictors </li></ul></ul><ul><ul><li>Set leading indicators’ thresholds </li></ul></ul><ul><ul><li>Construct composite leading indices </li></ul></ul><ul><ul><li>Predict crises </li></ul></ul>
  15. 15. Constructing an early warning index?
  16. 16. Applying the early warning index

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