Can Consumer Protection Practices Help Microfinance Clients Avoid the Perils of Debt?

A means to help low-income individuals gain access to credit, microfinance has been met with mixed results, sometimes increasing clients’ over-indebtedness and threatening their financial welfare. A growing industry solution is the implementation of a set of “consumer protection policies,” one of which is a simple fact sheet that fully discloses a loan’s interest rates and terms. This study provides one of the few systematic tests of the effectiveness of such policies. The Capstone team used detailed data from the microfinance database MIX Market, which tracks the write-off ratios for loans, a useful proxy for over-indebtedness. Using various statistical methods to address selection bias and delayed effects, the team found that on average, full disclosure policy is robustly associated with lower write-off ratios. The fact that the team detected policy effects with write-off ratios, a distant and conservative estimate of actual over-indebtedness, suggests a clear policy recommendation: the provision of fact sheets and general consumer protection policies prior to engaging in microfinance can significantly mitigate its negative effects