Over-indebtedness and its welfare effect on households

Purpose Although credit plays a crucial role in modern society, the increased availability of credit is partly responsible for higher levels of debt burden and household over-indebtedness. However, despite the serious consequences of over-indebtedness on household welfare our understanding of the factors that determine over-indebtedness and the link between over-indebtedness and poverty is limited. The purpose of this paper is therefore to identify drivers of over-indebtedness at an individual level and its link with poverty. Design/methodology/approach The authors analysed the determinants of over-indebtedness and its links with poverty employing a binary logistic regression model using data on 51,359 individuals from 11 economies in the Southern Africa Development Community. Findings The results suggest that over-indebtedness is driven by, among others, lack of credit literacy, cross-borrowing and income. The results also suggest that over-indebtedness is likely to impoverish the indebted. Practical implications Policies that encourage access to financial services such as credit should be designed such that increased financial inclusion does not aggravate poverty and inequality. Originality/value The authors used a unique financial inclusion survey that reports data on financial inclusion and poverty measures to identify the determinants of over-indebtedness and its link with poverty.