Is over-indebtedness a hidden problem in Africa?

Nov 04, 2011 | Cynthia Mukwasa

The term over-indebtedness is uncommon in most African financial sectors even as more financial institutions increase the number of loans to borrowers despite some being unable to repay them.

In September, this topic did not go unnoticed during the 2011 Making Finance Work for Africa Partnership Forum in Addis Ababa Ethiopia. Currently, there is growing market demand for financial services across the continent. While some consumers manage to service their debts, during times of economic difficulty some borrowers cannot. When a loan borrower begins to fall behind on their repayments due to insufficient income and the debt becomes a burden, then this describes over-indebtedness.
There are indications of over-indebtedness with many consumers aware of the risks, said Aboubacrine Date, an Ombudsman at the Observatory of Financial Services Quality in Senegal.
In Mr. Date’s experience, financial education, especially debt literacy, helps consumers make prudent choices.
During the session discussing Consumer Protection, delegates questioned whether over-indebtedness is a concern for African financial sector practitioners and government regulators. The Consultative Group to Assist the Poor (CGAP) say they have developed partnerships to research the issue of over-indebtedness.
“We currently do not have sufficient information to determine whether or not over-indebtedness is a problem though there is some information leading to that” said Corinne Riquet, CGAP’s regional representative for Francophone Africa. “Certainly this is something we need to look at,” she added.

It would appear difficult for financial sector developers and financial regulators in Africa to ignore over-indebtedness given its negative consequences such as social exclusion, financial exclusion and poverty. “In the case of Kenya we are still hearing whispers [of over-indebtedness]. There has not been well-grounded research to actually understand the magnitude,” said Moses Ochieng, regional representative of DFID-CGAP for Eastern and Southern Africa. “Blue Financial Services of South Africa has rapidly made inroads to other African markets to progressively provide salaried employees with high interest bearing loans,” Ochieng noted.
Despite the absence of research, salaried employees “are being targeted by cooperatives, banks and the Blue Financial Services of this world,” which leads to disquiet regarding the extent of over-indebtedness within certain segments of the population, Ocheing observed.
“While African countries implement measures to protect the consumer, prevent and combat financial exclusion, there is need to reflect on how understand the relationship between debt literacy and financial decision-making,” Mr. Date said. Cynthia Mukwasa