Microfinance and Debt Trap

Abstract

This paper studies microfinance and debt trap nexus. We have used an ethnographic approach, unstructured observation and interviews, to develop scenarios with the help of which we try to explain the phenomenon. Our research was carried out in DipKalaMoral, a small village located in Shikalbaha union under Karnaphuli Upazila of Chittagong in Bangladesh. We have found that excessive leverage through multiple borrowing lead to debt trap when households face unexpected income shocks due to economic cycle, unexpected weather (like heavy monsoon), wedding expenditure or paying dowry, and unexpected healthcare expenditure. In addition to that, we have found that informal money lenders tend to exploit households when households are heavily leveraged. Interestingly, we have identified a new phenomenon, ‘borrowing for others’ when households borrow from Micro Finance Institutions (MFIs) to lend money to others. A number of policy measures have been recommended which could be beneficial for policy makers and MFIs.