The document discusses client over-indebtedness (OID) in microfinance. It defines OID as the inability to repay all debts fully and on time. While multiple indebtedness and OID are often confused, OID only occurs when the situation is chronic and against the borrower's will. The two biggest concerns in microfinance globally related to OID are credit risk and reputation risk. The document also presents methods for constructing an early warning index to predict crises related to over-indebtedness by identifying historical crises, selecting leading indicators, and applying the index.

1. Avoiding Client Over-Indebtedness March 2011 Loans that change lives

2. Client Protection Principles

3. What is over-indebtedness? (OID) Defined as the inability “to repay all debts fully and on time” (Haas 2006, 3) But, “over-indebtedness only occurs if the situation occurs chronically and against the borrowers’ will.”

4. What ’ s the problem? “ A key to the success of microcredit is the thorough assessment of microfinance borrowers’ repayment willingness and capacity, resulting in high repayment rates.” From Over-indebtedness and Microfinance: Constructing an Early Warning Index

5. What ’ s the problem? From the Microfinance Banana Skins 2011 report—two biggest global concerns: Credit Risk Reputation Both issues relate directly to client over-indebtedness (OID). Examples from Bolivia (1999), Bosnia and Herzegovina and Morocco (2008)

6. Interesting to note We should not confuse “multiple indebtedness” with “over-indebtedness”. In economic downturns, MFIs tend to be resilient while borrowers tend to be over-indebted

7. Who likes math? Indebtedness = total monthly installments on household debt / (total monthly gross income of the household – total monthly expenses of the household)

8. What is over-indebtedness? From CERISE Indicator 4.8

9. CERISE Indicator 4.8

10. Key Procedures 1

11. Key Procedures 2

12. Systems of Compliance 1

13. Systems of Compliance 2

14. Constructing an early warning index? Paper by the Center for Microfinance at University of Zurich, responsAbility, Council of Microfinance Equity Funds, Triodos Investment Management Five steps: Identify historical crisis episodes Select leading indicators as predictors Set leading indicators’ thresholds Construct composite leading indices Predict crises

15. Constructing an early warning index?

16. Applying the early warning index