Households, microenterprises, and debt

Debt can be part of a strategy for increasing current income, investing in the future, or coping with crises. Microenterprise programs offering credit introduce a new source of debt, often into an environment where the use of debt is already widespread. In order to develop a better understanding of the relationships between microenterprise credit programs, types of debt, and the welfare of microentrepreneurs and their households, the study examines the characteristics of different types of debt, the role of indebtedness in the household economic portfolio, and the use of debt in the enterprise. Following the introduction, this paper is organized into four principal sections. Section II begins with a conceptual model of the household economic portfolio. The conceptual model allows us to specify how debt enters into the economic decisions of the household and to address the issue of fungibility. In Section III, the various characteristics of debt are described. These characteristics include the purposes, sources, and terms of debt. Section IV reviews a selected set of empirical studies and considers the role of debt in household economic security and in enterprise stability and growth. This section discusses the use of debt in coping with crises, consumption smoothing, income generation, and asset accumulation. In addition, the section turns more specifically to the use of debt in the microenterprise and examines the role of debt in business start-up, stability, and growth. Section V discusses the implications for the Assessing the Impact of Microenterprise Services (AIMS) Project and provides recommendations for the AIMS field-focused research and core impact assessments. The section closes with a discussion of possible hypotheses that relate to the relationships between microenterprise finance, other forms of debt, and impacts on the household and the microenterprise.