Saturday, January 14, 2012

Avoiding Overindebtedness through Consumer Info

Throughout the world, the microfinance sector is plagued by high levels of indebtedness as households rack up loan after loan from lenders. The common explanation is that lenders lack adequate information to assess borrowers’ financial situations. A less benign interpretation is that financial institutions deliberately engage in predatory lending practices, trapping poor consumers in a spiral of debt from which they can never emerge. In a webinar this week sponsored by the Consultative Group to Assist the Poor, Juan Izaguirre from the World Bank argues that this complex problem may have a simple solution—give consumers enough information to make informed decisions. He notes that in country after country, from Azerbaijan to Malawi to Nicaragua, consumers cannot obtain a copy of their loan agreement until after they have signed it or the disclosure they do receive is too obtuse to be understood or allow comparison with other financial services. Giving consumers the information they need may be the cheapest and most efficient solution. 

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