Microfinance and Debt Trap: An Ethnographic Evidence From a Village in Bangladesh

1. Introduction

Microfinance has enjoyed exponential growth across the world for the last three decades or so. It gets attention for alleviating poverty, reducing inequality, empowering women, developing human capital, and promoting inclusive growth (Morduch, 2000; Khandker and Samad, 2013; Cull, Demirgüç-Kunt & Morduch, 2018). From its birthplace in a small village of Chattogram, a port city in Bangladesh, the idea has expanded not only in developing countries but also in developed countries. Due to the emergence of microfinance, those who were unbankable once, due to lower credit score or lack of collateral, now have been integrated into the financial system. For example, in Bangladesh total outstanding loan in this sector was around BDT 673.90 billion in 2018 with total clients of 31.22 million (MRA, 2018).

Microfinance research has been growing its popularity in academia along with its phenomenal growth (García-Perez, et al., 2017). In one of the most recent papers, Gutiérrez-Nieto & Serrano-Cinca (2019) reviewed 1874 papers published from 1997 to 2017 to perform a scientometric analysis of the microfinance field. They have shown that despite the success claimed earlier by microfinance; shortcomings of it are arising as the sector is maturing. A growing number of researchers argued that it has failed to bring about desired outcomes and drifted away from its mission (Ali et al., 2017; Beisland, D’Espallier, & Mersland, 2017), could not reach the ultra-poor people and eradicate poverty (Banerjee et al.,2019)), created adverse impacts on the physical and mental conditions of borrowers (Mahmud et al., 2019), and increased inequality and misery (Banerjee & Jackson, 2017; Bylander et al., 2019).

The growing literature shows that the success of microfinance in not unanimous. There could be many reasons for differences in their findings but mostly it is due to methodological differences, i.e., different measures of impact, different time frames, and different means of data collection. It is also true that microfinance does not have the same results everywhere around the world. Its impact varies according to microfinance institutions’ (MFIs) individual lending practices and the broader historic, geographic, economic, political, and cultural conditions in which it is disbursed (Chester, Alam & Haase, 2017). However, there are only a few works which study how microfinance actually contributes in vicious debt cycle as well as how money lenders are becoming even more exploitative in this situation. This study is motivated by recent papers on over indebtedness where a number of researchers argued that many micro borrowers are found in debt trap due to multiple borrowing (Chester, Alam & Haase, 2017; Chichaibelu & Waibel, 2017), income shock (Zhang et al., 2018; Chichaibelu& Waibel, 2017), unexpected weather (Zhang et al., 2018), lack of financial literacy (Bylander et al., 2019), and exorbitant interest rates (Misra, 2019).

We have adopted an ethnographic approach to develop scenarios with the help of which we try to explain the debt trap phenomenon. Our research was carried out in DipKalaMoral, a small village located in Shikalbaha union under KarnaphuliUpazila of Chattogram in Bangladesh.It is observed that excessive leverage through multiple borrowing leads to debt trap when households face unexpected income shock due to economic cycle, unexpected weather, wedding expenditure or paying dowry, and unexpected healthcare expenditure. Moreover, we have found that informal money lenders tend to exploit households when they are heavily leveraged¹. Interestingly, we have observed an interesting phenomenon which is not reported in earlier studies, some households borrow from MFIs to lend money to others. MFIs tend to aim for financial sustainability through targeting more credit worthy borrowers. It is observed that most households are not financially literate and they borrow for non-productive activities. Moreover, it is evident that households take loan for boat repairing, working capital financing for small shop, sending son to abroad (mostly Middle Eastern countries and Malaysia), agriculture financing, and borrowing for cow fattening. We have recommended a number of policy measures which could be beneficial for policy makers and MFIs.

The rest of the paper is organized as follows. Section 2 highlights the important literatures. Methodology is discussed in the section 3. Findings and Analysis are presented in the section 4. Conclusions and implications are drawn in the final section.