What Causes Multiple Borrowing in Microfinance? A Developing Country Experience

• Date: 01 March 2017
• Published date: 01 March 2017
• DOI: http://doi.org/10.1002/jsc.2112

RESEARCH ARTICLE

Strategic Change 26: 83–99 (2017)

Published online in Wiley Online Library

(wileyonlinelibrary.com) DOI: 10.1002/jsc.2112

Copyright © 2017 John Wiley & Sons, Ltd.

Strategic Change: Briengs in Entrepreneurial Finance

Strategic Change

DOI: 10.1002/jsc.2112

What Causes Multiple Borrowing in Micronance?

A Developing Country Experience1

Md Aslam Mia

Department of Development Studies, University of Malaya, Malaysia

Multiple borrowing in micronance is caused by factors from both the demand

and supply sides and poses a credible threat to the long‐term sustainability

ofthe sector.

Micronance aims to provide nancial and non‐nancial services to the rural poor

who do not have access to formal nancial institutions. e program has some

unique features, such as group lending and ‘collateral‐free’ loan facilities, which

are signicantly dierent from the conventional banking system (Mia, 2014; Mia

and Chandran, 2016). A vast amount of research has been dedicated to examining

the downstream eect of micronance (that is, the eect at the clients’ level), and

new studies are still being added on a regular basis. e topics of interest range

from poverty alleviation and women’s empowerment to employment creation and

other conventional socio‐economic development indicators. A simple screening of

the existing literature leads one to draw the conclusion that the results are mixed.

Micronance has been purported to have positive eects (Imai and Azam, 2012;

Imai et al., 2012; Khandker, 2005; Mazumder and Lu, 2015; Quayes, 2012, 2015;

Swain and Floro, 2012), with very little or no eect at the clients’ level (Bateman,

2012; Ghosh, 2013; Morduch, 1999, 2000; Roodman and Morduch, 2014). e

academic community has put special eort into identifying the causes of success

or failure in micronance, both from client and institutional perspectives.

ere are several factors that have derided the eminence of micronance and

arguably, multiple borrowing is one of them. In the last 10 to 15 years, multiple

borrowing has severely hit the micronance industry in Bangladesh and in other

countries (Dichter et al., 2007; Faruqee and Khalily, 2011). e problem of mul-

tiple borrowing, with its attendant consequence of the ‘micronance bubble,’ has

continued to bedevil the concept of micronance. Hence, granting access to

nance has turned out to be a problem rather than a solution. is is further

compounded by exogenous and endogenous shocks in the sector (Lutzenkirchen

and Weistroer, 2012).

1 JEL classication codes: D11, D21, G23, H31.

Multiple borrowing has severely

affected the micronance industry

in Bangladesh over the past 10 to

15 years.

A multitude of micronance

operations, aggressive expansion,

high penetration rate, and

institutional leakages are the

main supply‐side factors.

The consumption demand of the

poor, new or expanding micro‐

enterprises, and household

characteristics are the leading

demand‐side factors.

84 Md Aslam Mia

Copyright © 2017 John Wiley & Sons, Ltd. Strategic Change

DOI: 10.1002/jsc

Multiple borrowing refers to the multiple member-

ship of an individual or a household (Faruqee and Khalily,

2011; Lahkar and Pingali, 2014; Lutzenkirchen and Weis-

troer, 2012). When an individual borrows from more

than one micronance institution (MFI), it is called ‘indi-

vidual multiple borrowing,’ whereas if more than one

person from the same household (normal household unit)

borrows from the same or dierent MFIs, it is known as

‘household multiple borrowing’ (Faruqee and Khalily,

2011). Generally, borrowing from dierent MFIs and

investing the nances together in a productive business

may enhance the social well‐being of the borrowers

(Krishnaswamy, 2007). However, it may have a disastrous

eect if borrowers keep accumulating debt with little or

no ability to repay.

Furthermore, multiple borrowing is sometimes syn-

onymous with over‐indebtedness when monthly loan

repayments exceed 50% of income (Maurer and Pyt-

kowska, 2010). Over‐indebtedness has been dened as a

situation whereby a borrower fails to make repayments,

which in the long run increases the borrower’s nancial

vulnerabilities (Schicks, 2014). Over‐indebtedness has a

negative impact on the livelihood and well‐being of bor-

rowers in society, which is in contrast to the original

promise of micronance. As a result of over‐indebtedness,

some borrowers further engage in multiple borrowing,

which creates even more dire problems, such as families

going hungry (Chaudhury and Matin, 2002). us,

instead of borrowers gaining nancial freedom, they are

forced into a ‘debt trap’ or ‘debt peonage’ (Fafchamps and

Gubert, 2007; Faruqee and Khalily, 2011).

e news about the suicide incident in Andhra

Pradesh, India, sparked global interest in multiple bor-

rowing. A number of Indian farmers from Andhra Pradesh

(one of the areas most penetrated by the micronance

industry) committed suicide because they were unable to

repay multiple loans taken from MFIs (Levin, 2012).

Multiple borrowing may have a direct impact on such

incidents (Ashta et al., 2011; Biswas, 2010); however, its

severity and actual eect are still largely unknown. us,

multiple borrowing and the causes of multiple borrowing

have recently become a topic of interest among academi-

cians in micronance. Based on the author’s knowledge,

comprehensive discussions on factors from both the

demand and supply sides, and the impact of multiple

borrowing, have not been fully explored in the existing

literature. Hence, this study attempts to examine the

factors behind multiple borrowing and their potential

impact on suppliers, borrowers, and scientic research.

e undertaking of this research contributes in several

ways to the existing literature. First, factors of multiple

borrowing are discussed in the context of Bangladesh,

which has one of the largest (in terms of number of

clients) and oldest micronance sectors in the world

(Micro‐Credit Regulatory Authority, 2015). Second, the

impact of multiple borrowing is examined based on exist-

ing literature and the discussion is further extended to

various stakeholders in micronance. ese ndings

unravel several policy prescriptions that could be used to

mitigate the problems of multiple borrowing. It should

be noted that this study does not oppose the view of

micronancing; rather, it aims to raise concern among

the respective authorities to reassess their expectations

and rethink ongoing policies targeted toward the micro-

nance industry.

e rest of the article is organized as follows. e next

section briey discusses the market interaction of multiple

borrowing. en, supply and demand factors of multiple

borrowing are comprehensively discussed in the second

and third sections, respectively. e fourth section dis-

cusses the impact of multiple borrowing. e study con-

cludes with policy implications, limitations of the study,

and suggestions for possible future research in the eld.

Multiple borrowing: Interaction of demand

and supply

‘Necessity knows no laws’ is the most relevant concerning

of the poor. Although the creation of MFIs aims to provide

credit for establishing micro‐enterprises, borrowers are