Responsible Finance Forum

Eastern Europe and Central Asia: Measuring Over-Indebtedness


In 2009, questions regarding the potential over-indebtedness of microfinance clients arose in the Kyrgyz Republic and Bosnia and Herzegovina. Regulators, MFIs, and the general public expressed their concerns about industry practices that contributed to high levels of client debt. Microfinance institutions needed to determine the depth and pervasiveness of the problem, respond to the current crisis, and determine how to be most effective in implementing responsible finance measures for the future.

In Bosnia and Herzegovina, over-indebtedness became a serious problem, as expressed through a rise in non-performing loans and a 40 percent equity loss compared with 2008. The first issue was how to measure client over-indebtedness to assess the degree of the problem. Portfolio at risk and multiple loans were possible proxies, but neither was directly correlated to client indebtedness and thus not a direct measure.

To test the level of over-indebtedness in the market, IFC developed a survey tool and an analytical approach it has further refined over the past three years. The tool includes subjective and objective means of verifying the level of borrower distress. Subjective questions allow the tool to map clients on a risk matrix based on their responses to personal vulnerability questions. The objective axis maps clients according to the portion of their income used for essential expenditures and for service debt. The tool provides a more complete picture by combining debtor concern and inability to meet financial commitments with hard data on the percentage of income used for household basics and debt repayment.


Use of the tool resulted in segmentation of 4,000 respondents in the Bosnia and Herzegovina representative sample, of which 80 percent were credit borrowers.

To address the needs of vulnerable and high-risk clients (the orange and red segments of Figure 3.1), IFC worked with Plus, the Association for Responsible Personal Finance Management, formerly the Centre for Financial and Credit Counseling, a local organization established by several MFIs as a response to the crisis. (See case study on Bosnia and Herzegovina for more on U-Plusu.) Since the founding of Plus in 2010, with the support of the European Fund for Southeast Europe (EFSE) and IFC, more than 6,000 individuals have participated in financial education and personal money management counseling, which represents more than 2 percent of the country’s microfinance clients.  In addition to onsite training, one-on-one debt advice services are offered. In 2012, 882 Bosnia and Herzegovina citizens who had specific questions regarding repayment used the service. In the most recent six-month period, the debt resolution success rate for clients who were experiencing repayment problems grew to 42 percent.


Putting Principles Into Practice

In the Kyrgyz Republic, IFC supported a responsible finance roundtable in March 2012 that attracted more than 100 participants. The topic of over-indebtedness was introduced, and experiences were shared among colleagues from other countries. In July, the Smart Campaign held a training session on the principles of consumer protection in microfinance. By January 2013, two Kyrgyz Republic MFIs had undergone Smart assessments and several others were in the pipeline.

Meanwhile, IFC continued support at the client level. A screenplay with personal finance messages was developed into a 21-series radio soap opera. To deepen financial literacy levels, the MFI association developed cartoons, brochures, and posters. To test the impact of various approaches, a survey was designed and implemented in January 2013. The next steps will be to design additional means of communicating messages about personal finance to specific target groups.

In Bosnia and Herzegovina, the Smart Campaign was launched with a workshop on responsible financing within the microfinance sector in February 2012. The workshop results were enhanced by the fact that several Bosnia and Herzegovina MFIs (including Partner and Mi-Bospo) had engaged with the Smart Campaign since 2009 and had undertaken assessments as part of the research pilot. They provided advice, experience, and technical knowledge to the Smart Campaign’s advisory committee and working groups. The workshop, attended by the key players from the financial sector, aimed to improve implementation of the client protection principles by enabling participants to identify weaknesses and priority areas for improvement within their organizations.

By February 2013, three Bosnia and Herzegovina microfinance institutions (EKI, Microcredit Foundation, Mi-Bospo, and Partner) were certified by the Smart Campaign (see Chapter 2) and a third MFI was undertaking the certification process. These MFIs are among the only six Smart-certified institutions in the world.