Debt Spiral in Bangladesh’s Microfinance: An Assessment of its size and implication for indebted household and suggestions for remedial measures

ERG has signed a contract with Microcredit Regulatory Authority (MRA) for conducting a study to understand a detailed picture of the negative impacts of microfinance induced debt spirals and how this results into-increasing poverty, asset loss, mental as well as social stress and ultimately diminishing the trust in microfinance

Over the years, the Microcredit Regulatory Authority (MRA) introduced a series of policy measures aimed at strengthening the microfinance sector in Bangladesh, grounded in the belief that access to financial services for poor and vulnerable populations is essential for promoting inclusive and sustainable growth. Despite these efforts, concerns have been raised regarding the possible emergence of a ‘debt spiral,’ in which borrowers get trapped in repeated cycles of borrowing and repayment. There are apprehensions that microfinance’s role in alleviating poverty may be increasingly getting overshadowed by the worsening financial hardship of an increasing proportion of borrowers. MRA, therefore, seeks to measure the extent of overindebtedness and identify the underlying drivers of the debt spiral, whether linked to MFIs or other financial actors.

Objectives of the study:

• To understand a detailed picture of the negative impacts of microfinance induced debt spirals and how this results into increasing poverty, asset loss, mental as well as social stress and ultimately diminishing the trust in microfinance.
• To address these issues, the study will focus on evidence-based solutions to help the regulatory body and the government.
• To developed policy recommendations/suggestions for upholding the microfinance operation environment to achieve inclusive and sustainable growth for MRA license MFIs.
• Formulation of a policy guideline for Microfinance operating different Govt. Agencies, Banks in Bangladesh – that may help to explore to avoid the over indebtedness in Bangladesh.

In order to achieve the study objectives, data from primary and secondary sources will be reviewed to conceptualize indebtedness and understand its trajectory within the MFI framework. Three important surveys to be undertaken, which, along with a review of literature and policy documents, are expected to address the four objectives of the study. The household level survey followed by community case studies, and the third is the survey of MFI loan-related litigations in a selected number of districts.