Socioeconomic Determinants of Over-Indebtedness of Microfinance Borrowers: Insights for Client Protection against Modern Financial Challenges

Understanding the socioeconomic challenges faced by poor and vulnerable populations is crucial, as these groups are disproportionately affected by financial instability, inequality, and limited access to finance. Over-indebtedness remains a pressing concern, as excessive borrowing can lead to financial distress, reduced well-being, and long-term economic instability among low-income borrowers. This research examines the issue of borrowers' over-indebtedness in Nepal's microfinance institutions from the standpoint of client protection against the backdrop of global socioeconomic challenges such as rising inequality and increasing vulnerability of marginalized people. A questionnaire survey was administered among 180 MFI borrowers between August and September 2021, focusing on the sacrifices reported by borrowers as a result of their loans. Over-indebtedness is assessed using a subjective indicator based on reported loan-related sacrifices across 12 dimensions. These sacrifices are evaluated in terms of both acceptability and frequency. Using binary logistic regression, the study found that financial literacy, income level, multiple borrowing, and loan utilization are major predictors of over-indebtedness. The number of dependents in a household was found to be significant only in terms of acceptability, highlighting the role of family burden in financial distress. However, factors such as the type of business, the borrower’s age, and income volatility were not significant predictors of over-indebtedness. The findings suggest that financial literacy programs, improved income-generating opportunities, and responsible loan usage can mitigate over-indebtedness and promote sustainable financial inclusion. The results provide critical insights for microfinance institutions, policymakers, and regulators, emphasizing the need for strengthened client protection mechanisms. By addressing over-indebtedness, microfinance institutions can contribute to long-term financial stability and economic empowerment, ensuring that borrowers benefit from financial services without falling into debt traps. These findings contribute to the broader discourse on responsible microfinance practices, reinforcing the necessity for balanced policies that safeguard both financial inclusion and borrower well-being.