Microfinance is used as a tool worldwide to combat poverty. However, there are many arguments about the impact and contribution of microfinance programs on poverty reduction. With the commercialization of microfinance, the over-indebtedness of microfinance borrowers has become an emerging issue in many countries. Therefore, this study will investigate the problem of the over-indebtedness of the rural microfinance borrowers and the factors that drive the over-indebtedness. Based on the literature, demographic characteristics, economic characteristics, business, and loan-related characteristics, multiple borrowing and financial literacy have been identified as the drivers of borrower over-indebtedness and they are recognized as the independent variables of the study while over-indebtedness was treated as the dependent variable Data was collected from the Kurunegala district and binary logistic model was used as the analysis model
The study revealed that borrowers’ economic shocks to income, namely shut down of business and the death of the livestock, have a significant impact on the over-indebtedness. Further, this study confirmed that multiple borrowing has a significant impact on over-indebtedness. Business and loan-related factors and adverse expense shocks do not appear more likely to be associated with over-indebtedness. Recommendations were provided based on the findings of the dissertation. The findings of this research will help policy developers and other relevant stakeholders identify the drivers of over-indebtedness and develop the measure against over-indebtedness.