Over-Indebtedness: measurement, determinants and effect on living standards

This study investigates the extent to which debt repayments pose a burden for household borrowers. We question the use of arbitrary thresholds to determine the over-indebtedness status of a household and introduce a new opportunity cost approach to provide the first objective measures of the incidence and severity of over-indebtedness in Ghana from the clients perspective. Using two waves of nationally representative survey data, we employ maximum likelihood and instrumental variable estimation techniques to determine the influence of loan amount and loan use on the probability and intensity of over-indebtedness and examine the effect of over-indebtedness on households living standards. The findings suggest that 41 per cent of household borrowers are over-indebted, and 23 per cent endure severe over-indebtedness by sacrificing food expenditures. An increase in the loan size and unproductive loan use strongly increases the probability of over-indebtedness. Other influential factors include rural residence, low education, female-headed households and insurance. In addition to small loan sizes and unproductive loan use, the risk of severe over-indebtedness is associated with low education, female-headed households, rural residence and informal employment. Over-indebtedness also reduces household living standards by 24 per cent. This research provides crucial information to aid policy decisions on households vulnerability due to sacrifices for debt repayment. Such sacrifices could ultimately affect future poverty levels and the attainment of the sustainable development goal to eradicate extreme poverty by the year 2030.