Multiple Borrowing among Microfinance ClientsResults from an Area Study

Prepared by Ronald T. Chua and Erwin R. Tiongson

July 2012

BACKGROUND AND INTRODUCTIONOverview and Research Objectives

Introduction

This PPT provides a summary of the findings from a study of multiple borrowing in an urban community.

As a pilot effort that draws information from a variety of sources, it potentially enriches our understanding of the dimensions, the prevalence, and correlates of multiple borrowing.

As a pilot effort, however, it is also suffers from several technical weaknesses. As explained in the following slides, the results should be interpreted with caution.

An accompanying report describes details of the methodology and the analyses conducted.

Background: Notes from 2009-2011 consultations

Multiple borrowing = “Over-indebtedness”“Over-borrowing”“Multiple indebtedness”“Loan recycling”“Client poaching”“Loan pushing”“Credit pollution”“Over-supply of loans"

Background: Notes from 2009-2011 consultations

There are several dimensions of multiple borrowing • Different notions of “multiple borrowing”• Borrowing from multiple MFIs? Or from multiple sources, both formal and

informal? Or multiple loans from the same MFI? All of the above?

The incidence of multiple borrowing is not clear• How prevalent is multiple borrowing?

The causes and consequences also unclear• On one hand

• Loans used to pay off other loans• Multiple borrowing may lead to rising levels of delinquency and default

• On the other hand• Households may need multiple sources of credit • Households may be perfectly able to manage their finances

Research Objectives

1. Clarify dimensions of multiple borrowing• Multiple borrowing across MFIs, within MFIs, across

loan sources (MFI, non-MFI, informal)

2. Estimate the incidence of multiple borrowing• Multiple borrowers in percent of MFI clients, in

percent of all households, etc.

3. Understand the correlates of multiple borrowing• Statistical profile• Repayment record

RESEARCH DESIGNData Sources: Key Features

Research Design

Commonwealth area of Quezon City as the area of study, including the following barangays: Commonwealth, Payatas, Holy Spirit, Bagong Silangan, Fairview, Batasan Hills1. Based on a series of consultations in 2009-20112. Several MFIs are known to operate in this

community3. Anecdotal evidence suggested the existence of

multiple borrowing

Sources: Google Maps; TNS-Global Methodological Report

Research Design

• Technical considerationso Credibility of household-level information: How

reliable are self-reported levels of indebtedness?o The sources of multiple loans: Should we include

both formal and informal sources of finance? o The unit of measurement: How do we treat

individuals in the same household?

Research Design

Sources of Information1. Household Survey• Random sample, geographically representative• 800 households• Patterned after FIES, APIS, and credit modules• Comprehensive credit information: MFI, bank, informal,

government, etc.

2. Branch Client Data from MFIs Operating in the Commonwealth Area• Consolidated information using search algorithm based on name

and address and/or birth date

3. Focus Group Discussions (FGDs)

Research Design

Sources of Information Dimensions of Multiple Borrowing1. Borrowing from several MFIs (branch client data)2. Multiple loans from the same MFI (branch client

data)3. Multiple loans from several sources of finance,

including formal and informal sources (household survey)

4. Sequential versus simultaneous multiple borrowing (FGD)

Research Design

Sources of Information: Caveat1. They are analyzed separately and cannot be consolidated.2. They vary in representativeness

• e.g., FGD participants not representative of general population

3. They vary in scope and comprehensiveness• e.g., branch client data do not provide information on other sources of financing

4. They are subject to error• Errors include misreporting, sampling errors, encoding errors, etc.

5. They are cross-sectional (from a single point in time) and provide little information about • dynamics (i.e., how things evolve over time) and • causality (e.g., if multiple borrowing is correlated with financial distress: did

multiple borrowing cause distress or was it distress that initially led to multiple borrowing?)

Research Design

Additional features: Branch Client Data1. As agreed with partners, sources of branch client data

are not publicly revealed2. Restricted access to branch client data (principal

researchers)

SELECTED RESEARCH FINDINGS1. Household Survey

3.1

23.8

24.5

7.3

16.6

0.8

1.9

9.3

6.4

2.5

6.8

57.0

Credit card

Store

Family, friends

Employer

SSS

Government banks

Pawnshop

Private moneylender

Lending investor

Private commercial banks

MFIs

All

Percent of Indebted Households(By source, in percent of all households)

Household Survey: Selected Findings57 percent of

households: at least one

outstanding loan

Only 6.8 percent of

households are MFI clients

Household Survey: Selected Findings

No debt43%

Single debt25%

Multiple debt32%

Distribution of Households (By level of indebtedness)

This chart refers to all households. Of the MFI client households alone, 77 percent are “multiple borrowers”, all sources of finance considered.

Household Survey: Selected Findings

2 loans29%

3 loans38%

4 loans9%

5+ loans24%

Multiple Borrowers among MFI Clients(By number of loans)

2 loans47%

3 loans25%

4 loans16%

5+ loans12%

Multiple Borrowers(By number of loans)

These charts show multiple borrowers by number of loans (all sources of finance considered)• For multiple borrowers as a group, 52 percent have 3 or more loans.• For multiple borrowers MFI clients as a group, 71 percent have 3 or more loans

Household Survey: Selected Findings

One loan is insufficient to start or expand business.

11%

A recent shock (illness, death, job

loss)16%

Part of the loan was used to pay for

tuition8%Part of the loan

used to pay off existing debt

19%

One loan is insufficient to pay

for a major consumption

expenditure, etc.46%

Multiple Borrowing:Self-Reported Loan Use

Household Survey: Selected FindingsHow Many Times Did You Miss Payments

The Last 3 Months?

Zero83%

Once7%

Twice or more10%

All Indebted Households

Zero78%

Once9%

Twice or more13%

Multiple Borrowers

There is no evidence that multiple borrowing is associated with higher delinquency, compared with average indebted household.• Caveat: based on self-reported information• This is from cross-sectional information or information from a single point in time

Selected Cross-Checks

Source: Commonwealth survey; World Bank Global Findex database; authors’ calculations.

Compare with the Consumer

Finance Survey:4 percent of

households own credit cards

SELECTED RESEARCH FINDINGS2. Branch Client Data

The Framework

MFI1

Database

Client 1

Client 2

…

Client 2000

MFI2

Database

MFI3

Database

MFI4

Database

MFI5

Database

MFI6

Database

MFI7

Database

MFI8

Database

MFI9

Database

MFI10

Database

MFI11

Database

MFI12

Database

MFI13

Database

Branch Client Data: Selected Results

14 percent

Incidence of Multiple Borrowing•On average, 14 percent of MFI clients•Substantial variation across MFIs (4-26

percent)

Branch Client Data: Selected Results

Incidence: Within-MFI Multiple Borrowing• “Within-MFI” multiple borrowing also exists, i.e.,

multiple loans from the same MFI• Most cases appear to be known to the MFI• Some may not be known (borrowing from several

branches)• On average, where they exist, within-MFI multiple

borrowers represent 5 percent of all MFI clients• Some overlap with multiple borrowing as defined

previously (14 percent)

Branch Client Data: Selected Results

Number of Loans•Most multiple borrowers have loans from only

2 MFIs•About 15 percent of multiple borrowers have

loans from 3 or more MFIs

Branch Client Data: Selected Results

Share of Outstanding Loans• Loan sizes tend to be uniform. As a result, the

share of loans accounted for by multiple borrowers tend to be proportional to the incidence of multiple borrowing (14 percent)

• However, among multiple borrowers who also take out multiple loans from the same MFI (within-MFI multiple borrowing), their share of all outstanding 2nd or 3rd loans within the same MFI tends to be large (40 percent).

Branch Client Data: Selected Results

Correlates• In general, no strong evidence linking multiple

borrowing to specific lengths of membership, loan cycles, client age, and other demographic patterns.

• There are some suggestive patterns. • Multiple borrowers with two or three loans tend to

be on longer loan cycles. • Multiple borrowers also tend to be somewhat older

Branch Client Data: Selected Results

Delinquency• There is no evidence that multiple borrowing is associated with

delinquent payment, at least not among the active clients. • This should be interpreted with caution. This indicates the

average observable outcome to date and does not at all address the possible impact of economic or income shocks and whether multiple borrowers can fall into delinquency as a result.

• There are large differences in the availability of information on missing payments. The data are not recorded consistently across MFIs.

• May reflect business opportunities in a particular urban community. The economics may differ in other communities, including rural communities.

SELECTED RESEARCH FINDINGS3. Focus Group Discussions

FGDs: Selected Findings

• Participants consisted of:o MFI members known or who have admitted to having

loans from at least one other MFIo Branch staff

• MFI clients were selected by MFI staff. Only criterion was that they have borrowed or have current loans from at least two MFIs

• Each group consisted of 8 to 12 discussants

FGDs: Selected Findings

Profiles of FGD participants• A number of participants are center chiefs or group leaders

in the MFIs• Have had many years of borrowing experience• Long time residents of Commonwealth (one had been

resident in area for 30 years)

Borrowing behavior reported• Borrowed sequentially from several MFIs • Borrowed simultaneously several MFIs

FGDs: Selected Findings

On proliferation of lending sources• Clients observed that there has been an increase in the number of

lenders in the area recently, as recent as the past year (2010-2011)• Clients appreciated the availability of more choices• Some cited concerns about their own inability to repay so

expressed preference to stay with one MFI

Reasons for borrowing from multiple sources• To maximize benefits. No one single MFI offers a whole range of• Obtain sufficiently large consolidated loan from several MFIs as one

MFI loan is not sufficient for their needs• To meet emergency needs• To try out other sources• To stagger payments (multiple loans from the same MFI are paid on

the same day; multiple loans from multiple loans can be staggered)

SUMMARYThis is a heroic attempt at a summary

Caveat

• This is not nationally representative• This is from cross-sectional data that mask the

changes over time• The data are subject to error• Data are from multiple sources and not fully

consistent

Summary and Concluding Observations

• Multiple borrowing exists, it exists in various forms, and is not small. Though the data sources cannot be fully consolidated, they suggest the following incidence, along several dimensions:o 5 percent if multiple borrowing means taking out multiple

loans from the same MFIo 14 percent if multiple borrowing means borrowing from

several MFIs, though there is substantial variation across MFIs

o 77 percent if multiple borrowing means borrowing from one MFI as well as from any other source of finance

Summary and Concluding Observations

• Multiple borrowers take out multiple loans for a variety of reasons. Some report that a single loan is insufficient to pay for a major consumption expenditure or to invest in a business activity. Some are after the auxiliary services attached to various loans.

• We are unable to find a distinctive statistical profile of multiple borrowers. There is some evidence to suggest that they are older and are on longer loan cycles, but otherwise there is (to date) no strong statistical links between multiple borrowing and individual demographic characteristics as well as characteristics of the loan itself (size, loan cycle, reported loan use).

Summary and Concluding Observations

• There is no evidence that multiple borrowing is associated with delinquent payment, at least not among the active clients.

• This should be interpreted with caution. This indicates the average observable outcome to date. We are unable to say anything meaningful about the likelihood of falling into delinquency. There are large differences in the availability of information on missing payments and the data are not fully consistent across MFIs. Furthermore, the sample represents a particular urban community. It is not clear whether this relationship holds more generally.