How health shocks and its relationship to repayments of loans from microfinance institutions can affect migrant households in Bangladesh

Abstract

Increasing the feasibility of easy loan repayment is one of the objectives of providing microcredits for income generating activities requiring relatively small loans in the developing countries. However, evidence in the developing countries suggests that microcredits are often used by households for non-income generating expenditures needed to deal with shocks such as health shocks. Health shocks in particular have severe financial implications due to the absence of health insurance programs in the developing countries and also because they reduce income generating capabilities. The objective of this paper is to examine, using a survey data from Bangladesh, whether there is an association between the health shocks and the loan repayments performance of the borrowers of microfinance institutions. When issues involving mixed distribution of the outcome variable and endogeneity of health shocks are taken care of with IV Tobit and Two-part models, the results show that the health shocks lower both the probability and the amount of repayments. In addition, since a significant portion of the households in Bangladesh represents migrant households, this hints at important policy implications.