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Psychological and Cognitive

Psychological and Cognitive

Introduction:- The annual GDP growth of Bangladesh decreased by 6.953 in 2018 from 7.334 in 2017 (The World Bank, 2018). The slower and more unequal household consumption growth has gained a wider attention to mainstream media, economists, and country leaders in Bangladesh. The fall of average annual consumption growth from 1.8% to 1.4% (The World Bank, 2018) is a sign of the income distribution gap (Piketty, 2015, p.51), which increases the discrepancy between rich and poor. The microfinance sector works to reduce poverty and generate employment, and thereby, it has a great role to equalize the income distribution. According to Microfinance Regulatory Authority (2018), the sector belongs to 706 licensed MFIs as of 1st July 2018. In the annual report of 2016 related to NGO-MFIs in Bangladesh, the Microcredit Regulatory Authority (2018) claims that the microfinance activities in Bangladesh have taken already almost 3 million people under the shed of financial inclusion and improved the macro-economic growth at the same time. The microfinance activities have a great impact on every sphere of the rural financial system. Corresponding Author:-Md. Ismail Hossain. Address:-Department of Banking and Insurance, University of Dhaka, Bangladesh ISSN: 2320-5407 Int. J. Adv. Res. 6(10), 6-16 7 According to the Microcredit Regulatory Authority Act 2006, section 2 (22), “microcredit means loan facilities offered by microcredit organization certified under the act of poverty alleviation, employment generation, and facilitate a small entrepreneur and under the Act section no. 24 (20 (a) microcredit institution shall have the authority to accept deposit from members of the institution” (Microcredit Regulatory Authority, 2018, p.6). Employment generation, and poverty alleviation are two important purposes of providing micro credit in Bangladesh (Microcredit Regulatory Authority, 2018, p.6). Some critics argue that the increasing demand of micro-credit in Bangladesh is vulnerable to overlapping (Microcredit Regulatory Authority, 2018). This means that the majority of microcredit clients tend to receive loans from one MFI to repay the outstanding loans of another MFI. In 2016, the microfinance sector accounted for BDT459 million loans outstanding and BDT787 million loan disbursement that are higher than BDT 352 million loans outstanding and BDT634 million loan disbursement in 2015 (Microcredit Regulatory Authority, 2016). In spite of having a significant contribution of MFIs in Bangladeshi economy, the sector is highly criticized by unchanging level of poverty, and high interest rate, while at the same time, the issues of exploitation of women borrowers, ineffective micro-finance provision of the target group, and loan repayment structure have highlighted this sector negatively. Gurein (2013) depicts that little economies of scale, high administrative cost, and staff cost compared to formal financial institution leads MFIs to charge high interest rate, which leads to loan default. When clients are unable or struggling to pay debt, they fall under over-indebtedness (Schicks, 2010; Gonzalez, 2008, p.29). Through victimizing over-indebtedness, many microfinance clients are losing their valuable assets or properties (Van Bastealer, 2000, p.12). This not only harms the clients financially, but also deteriorates physically, psychologically, and socially. However, this is contradicted by the MFIs and its regulatory authorities who claim that MFIs are improving the living standard of clients through providing financial services, and creating employment opportunity. This point is contradicted by several critics who urge that MFIs are provoking clients to receive loan rather than justifying their real credit worthiness. This leads microfinance clients to suffer from over-indebtedness. This opens up as to the question what are the causes and consequences of over-indebtedness of microfinance clients? Literature Review:- Over-indebtedness:- The concept „over-indebtedness‟ is still a subject of debate due to its complexities in the context of micro-finance. Scholars often consider either the prospective of borrowers or lenders to define over-indebtedness. In micro-finance sector, the MFIs tend to employ portfolio at risk value (PAR value), developed by Albeit to measure the overindebtedness of their clients. The term “liquidity and strategic default” have been used by Guerin (2013) to define over-indebtedness. When clients fail to repay the loan, they fall under liquidity defaulters. The strategic default occurs when clients take shelter of family, friends, money leaders, pawnbrokers, and other MFIs to avoid liquidity default. The current study views client perspective to define over-indebtedness. If clients have to struggle and sacrifice to repay the loan, they are over-indebtedness. This is confirmed by previous studies (Schicks, 2010, p.6; Gonzalez, 2008, p.). The economic theories and concepts are widely applicable in identifying the causes and consequences of overindebtedness of individuals, especially the microfinance clients (Schicks, 2010). The life cycle permanent income theory (Hall, 1978), the behavioral life cycle theory (Shefrin & Thaler, 1988), and the projection bias theory (Loewenstein et al., 2003). The lifecycle permanent income theory assumes that people tend to lead a stable life, and thereby, they divide consumption into present and future, while at the same time, do the fraction of their consumption. Although the theory has mass application in economics, Shefrin & Thaler (1988, p.971) argue that people cannot make ration decision in all of the cases due to perceived self-control, mental accounting, and framing that are presented by the behavioral life-cycle their of consumption. This concept was used by Blundell et al., (2015, p.60) to perform studies on labor income dynamics, and Li et al., (2016, p.13) to examine the housing over time and over the life cycle. The projection bias theory (Lowenestein et al., 2003, p.4) assumes that people underappreciate their own behavior and other exogenous variables, and therefore, they cannot create a balance between their future and the current preference of consumption. This theory employs endowment effect, mental accounting, and perceived control that are the core concepts behavioral economics (Thaler & Benartzi, 2004, p.165). As the behavioral economics (Thaler & Benartzi, 2004) have gained the replacement of the life cycle permanent income theory, and the projection bias theory, the concept of behavioral economics is highly relevant to our study in ISSN: 2320-5407 Int. J. Adv. Res. 6(10), 6-16 8 measuring the causes and consequences of over-indebtedness of micro-finance clients at individual level. However, only a few of the studies have applied the behavioral life cycle theory to investigate the causes and consequences of over-indebtedness of Microfinance clients in the context of Bangladesh. Therefore, the theory has been used as a theoretical underpinning of the research. Figure 1:-Research Model Causes of Over-indebtedness:- Psychological and cognitive bias:- The concept „psychological and cognitive bias‟ is an utmost cause of over-indebtedness, as mentioned in the behavioral life cycle of consumption (Thaler & Benartzi, 2004, p.165). The author argue that people tend to highly focus on addressing the immediate needs rather than considering the future demand. In most of the cases, the individual receives micro-credit for addressing the immediate demand, but they do not consider the future consequences (Thaler & Benartzi, 2004). This concept is highly supported by the theory of projection bias (Lowenestein et al., 2003, p.4). The authors show that people tend to underestimate their behavior in terms of resembling between the current and future preference. In the context of micro-finance clients, the lack of poor selfcontrol, and endowment effects lead to increasing over-indebtedness. Through the aforementioned discussion, the study proposes the following hypothesis. H1: Psychological and cognitive biases lead to higher risk of over-indebtedness among micro-finance clients Sociological:- The current study is confined within the individual context in terms of identifying the causes and consequences of over-indebtedness of micro-finance clients. Schicks (2010) argue that people often take a multiple loan, when they experience scarcity of money. In some of the cases, they are highly criticized by their neighbors, friends, and peer groups. In addressing the financial demand, people often engage in multiple borrowing. The concept “economic socialization‟ whereby individual has poor ability to manage money and debt properly (Schicks, 2011). Disney (2008) claims that people often engage in over-indebtedness due to supporting the family members. Through the aforementioned discussion, the study proposes the following hypothesis. H2: sociological factors lead to higher risk of over-indebtedness among micro-finance Economic:- Anderloni and Vandone (2008, p. 15) show that poor income, unemployment, poor working condition, and fluctuating income are the most important economic factors that causes over-indebtedness by performing a systematic literature review. This observation has been supported by Brown et al., (2005, p.23), who argue that when people suffer from financial scarcity, they tend to receive multiple borrowing and loan. This leads to increasing the over-indebtedness of microfinance client. Hossain (2013) employs a case study of Andhra Pradesh Crisis to conclude that the lack of sufficient income, lack of knowledge in managing money, and fluctuated income ISSN: 2320-5407 Int. J. Adv. Res. 6(10), 6-16 9 increase the over-indebtedness of the individual. Through the afor





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